Mining shares aren't the dirt-cheap bargains they were a year ago, but still have room to rise in 2017.
A pick up in global growth coupled with less in the way of new production should support metal prices this year, observers say.
While nobody sees stock-price gains to match last year – when Barrick Gold Corp. doubled, Glencore PLC tripled and Teck Resources Ltd. quintupled – the sector still seems reasonably priced and could benefit from factors ranging from Trumponomics to momentum trading.
"We think 2017 should be a positive year for miners," Jatinder Goel and other Citigroup analysts wrote in a report this week.
"We believe most commodities are moving up the recovery curve," concurred David Gagliano and his team at Bank of Montreal.
To be sure, the gains are likelier to be spottier than last year, when just about every industrial commodity climbed in price and gold advanced as well, despite a slide late in the year.
But while some raw materials may fade from last year's peaks, "the overly bearish sentiment that plagued the entire commodity complex in late 2015 and early 2016 is behind us," Mr. Gagliano wrote in a recent report.
The Bank of Montreal team lists zinc, thermal coal and uranium among its preferred commodities. It also likes U.S. steel producers and producers of base metals and bulk commodities, such as Anglo American PLC and Rio Tinto PLC.
Gold, however, faces a challenging path ahead. Capital Economics warned in a recent report that precious metals prices could fall if Donald Trump's stimulus measures awaken inflation and cause the Federal Reserve to hike interest rates in response.
Rising rates typically make bonds and savings accounts more attractive, while reducing the appeal of gold, which pays no dividend or interest to its owners.
In contrast, industrial metals could enjoy a decent year, especially if rising Chinese output and a burst of spending on U.S. infrastructure leads to stronger growth in global output, analysts say.
One encouraging factor is a probable falloff in the pace of new supply hitting the market. It takes years to advance a mining project from planning to actual operation, so mines begun during the commodity boom of a decade ago were still moving into production long after prices collapsed after 2012.
As that tidal wave of fresh supply finally begins to ebb, some of the hardest-hit metals are beginning to show modest signs of recovery.
There were several years "of large [supply] surpluses in the nickel market as a result of all the new production, conceived before the financial crisis, finally coming online," David Pathe, chief executive of nickel producer Sherritt International Corp., said.
"But 2016 was the first year in several in which there was a balanced market and maybe even a slight deficit … [As a result,] there's a higher degree of optimism about the nickel market than there has been for several years."
Major producers of key metals remain cheaper than the overall market by some measures, the Citi analysts noted. If commodity prices continue to recover, free cash flow should rise and earnings momentum should continue its upswing across the sector.
The Citi team speculates that fund managers who missed out on the big gains last year will be reluctant to take a chance on bypassing further gains, which should help to support share prices.
Despite the big gains achieved last year, the sector remains relatively small in terms of the overall market, the Citi analysts said. The massive share price surge in 2016 took miners from less than 1 per cent of global market capitalization to about 1.5 per cent, but that is still far below the 5 per cent the sector accounted for in 2008.
The Citi team lists Barrick Gold, BHP Billiton PLC, Glencore and Teck Resources among its most preferred mining stocks.