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Strong rebound in metals likely on the way: Desjardins

Euro zone debt woes are dampening sentiment in the base metals sector, as investors fret that a possible default by Greece will throw the world economy - and thereby demand for raw materials - into a tailspin.

But Desjardins Securities Inc. analysts believe that those risks may be overstated, suggesting metals markets could be in for a surprisingly strong rebound once there's some resolution to the credit crisis in Europe.

Desjardins is partly basing its thinking on recent conversations it's had with miners in the region. "Metal producers that we spoke to reported full order books and good underlying demand," analysts John Redstone and John Hughes said in a research report today. They note that metal premiums - what's paid above the publicly traded price for physical metal - in Europe remain strong. Copper premiums in particular have been surging since early March.

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Meanwhile, discounts for copper scrap in Europe have narrowed, indicating a tightening secondary market.

"At present, we would suggest that metal prices are affected more by uncertainty over the future financial stability of Europe rather than by the relatively strong current underlying metal demand in the region," the analysts wrote. "If, as seems likely, a solution to the European debt crisis can be found in the near term, the metal markets should then focus on robust European metal demand - which should translate into higher prices."

Upside: Desjardins has "buy" ratings on the majority of mining companies it covers. Its "top pick" - or highest rating - goes to Thompson Creek Metals Co. Inc. , with a one-year price target of $21. Among miners it's also fond of is Teck Resources Ltd. , with a price target of $76, and First Quantum Minerals Ltd. , with a target of $163.25.

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Republic Airways has tentatively agreed to order up to 80 Airbus A320neo single-aisle jets, a similar aircraft to Bombardier Inc.'s C Series.

National Bank Financial analyst Cameron Doerksen finds the order "a bit perplexing," given that the new Airbus aircraft are intended for Republic's Frontier Airlines, which is also where the C Series are intended to be placed.

"We do not believe that this news necessarily means that the C Series order is at risk (although a cancellation is certainly a possibility), but there is clearly greater uncertainty. Fortunately, Bombardier has diversified its C Series order book in recent weeks so it is less exposed to any single customer."

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He noted that there is also some uncertainty around the future of Frontier's corporate ownership, as Republic recently announced its intention to reduce its stake in the airline to a minority stake.

Upside: Mr. Doerksen affirmed his "outperform" rating and $8.50 price target.

Related: C Series wins its first Asian customer

Related: Rivals’ woes put crimp in Bombardier’s order book

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Canaccord Genuity analyst Richard Davis reiterated a "buy" rating for Oracle Corp. ahead of the company's fourth-quarter results on Thursday, which he expects to be "solid." He cautioned that the company may provide conservative second-half guidance for fiscal 2012 amid the soft patch in the economy and some sales structure changes.

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Upside: Mr. Davis kept his price target at $37 (U.S.)

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TD Newcrest has upgraded CML Healthcare Inc. to a "hold" from "reduce" to reflect improvements in the stock's risk/reward profile following recent price weakness. "That said, we have not seen any improvement in the multiple challenges facing the company," commented TD analyst Lennox Gibbs.

Upside: TD maintained a $10 price target.

Related: Despite headwinds, all signs point to a stronger Oracle

Related: Oracle: Cheap and lovely

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The government of Belize has issued an order to expropriate Fortis Inc.'s 70 per cent stake in Belize Electricity Ltd., the main distributor of power in the country. The earnings contribution from the utility was about $2-million a year, according to TD Newcrest analyst Linda Ezergailis. "We view the expropriation as largely immaterial, as Fortis' investments in Belize are relatively small and have never been a part of our core investment thesis," she commented.

Upside: Ms. Ezergailis maintained a "buy" rating and $36 price target.

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About the Author
Investment Editor

Darcy Keith is The Globe and Mail's Investment Editor. He has been a business journalist since 1992 and joined the Report on Business in 2010 from Yahoo! Canada, where he was the senior editor of finance. More

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