RBC Capital Markets tagged First Quantum Minerals Ltd., Hudbay Minerals Inc., Teck Resources Ltd., Labrador Iron Ore Royalty Corp., Ivanhoe Mines Ltd. and Arizona Mining Inc. as preferred picks among North American base metals miners amid expectations of a multiyear copper rally.
Based on a positive outlook for base metals stocks, the team assessed growth potential for all six companies.
"First Quantum offers excellent growth and has rerating potential as Cobre Panama ramps up later this year," analyst Sam Crittenden wrote March 7. "Hudbay is trading at a 20% discount to [net asset value per share] and has near-term copper and zinc leverage. Teck offers exposure to strong metallurgical coal fundamentals while Labrador Iron Ore has a 9% implied yield. Ivanhoe Mines and Arizona Mining have world class preproduction projects."
Year-to-date, the bank's covered North American base metals equities are down 5% on average, widely in line with a 4% drop in copper. However, individual performances over the same period saw stocks gain as much as 20% in some cases, while others lost up to 30%.
Despite a drop in copper prices, RBC retained a positive outlook for the sector, not least because copper stocks within its coverage are trading at a 13% discount to net asset value per share and at a discount to the broader market and historic levels.
According to the bank, stocks are pricing in copper at US$2.80/lb, while RBC forecasts prices rising to US$3.75/lb in 2021 amid expectations that a lack of investment will restrain supply growth and lead to growing deficits in the copper market.
"We maintain our constructive outlook for base metals stocks in 2018 as global economic indicators remain positive despite the emergence of some recent macro headwinds," Crittenden said. "We view this as a good entry point with stocks pulling back in recent weeks and the North American base metals stocks remain undervalued compared to historic levels."
"The current pullback in copper prices is not surprising given the strong move in the second half of 2017 driven in part by increased investment interest. However, we believe we are in year two of a multiyear copper rally. The previous six copper market rallies since 1970 lasted for five years on average," Crittenden added.
