Copper bulls have been charging full speed ahead, with the price of the red metal gaining more than 20 per cent this year and striking a record high above $9,000 (U.S.) per tonne earlier today in London. While that may have some thinking a pullback is looming, especially with the global economic picture still looking uncertain, that's not the case with TD Newcrest. It suggests we may not have seen anything yet.
TD Newcrest hiked its copper forecasts this morning as well as price targets on several equities in the sector, predicting an average price for copper of $4.10 (U.S.) per pound in 2011 in New York. Previously, it forecast a price of $3.50, and its forecast for 2012 was raised to $4.25 from $3.75.
But TD analysts believe there is potential for a super spike in the price of copper, a period in which "scarcity pricing" takes hold. This could mean a price exceeding $5 a pound ($13,200 per tonne) for at least a short period.
So what would be the required ingredients for such a super rally? According to TD, it could be either a co-ordinated global recovery or a supply crisis, or a combination of both. On the supply side, widespread labour action in Chile, major mine production problems, or unusually large physical copper demand from new exchange-traded funds could be the catalysts. "We see the possibility that global copper stocks could decline below 40 days of consumption within the next two years, which would be the lowest level in approximately 30 years," TD said in a research note.
Even if such a super spike doesn't materialize, copper prices should remain elevated over the next two years, TD said. There's been little new mine supply over the past five years, and this undersupply should be particularly acute during 2011 and 2012. Within the next 12 months, the copper market should see only about 300,000 tonnes of incremental mine supply entering production, according to TD calculations.
Low interest rates, a weak U.S. dollar, and sustainable demand growth from the developing world should also support higher prices, analysts Greg Barnes and Craig Miller wrote. There is a risk, however, end users will substitute other material for copper if prices rise further, which will dampen demand, they said.
Upside: TD Newcrest hiked its 12-month price forecasts for several copper producers, including Capstone Mining Corp. ($5.50 from $4.50); First Quantum Minerals Ltd. ($122 from $94); Imperial Metals Corp. ($31 from $25); and Northern Dynasty Minerals Ltd. ($15.50 from $12).
Latest market indications suggest Teck Resources Ltd. will secure an average realized metallurgical coal price of $210 (U.S.) per tonne in 2011, up from earlier expectations of $185, said Desjardins Securities analyst John Hughes. Weather-related supply constraints in Australia and strong Chinese imports are supporting prices, he said, and Teck's coal division accounts for about half of the company's operating profits.
Upside: Mr. Hughes increased his target price to $64.25 (Canadian) from $56.10 and maintained a "buy-average risk" rating.
Rodinia Oil Corp. "is the epitome of a high risk-reward investment," with enormous upside potential if coming oil drilling proves successful, said RBC analyst Nathan Piper. The company has secured rights to an extensive land position in Australia and plans four wells in 2011 on prospects that have potential resources ranging from one billion to 12 billion barrels each.
Upside: Mr. Piper initiated coverage of the stock with a price target of $5.50 and an "outperform, speculative risk" rating.
BlackPearl Resources Inc., which is developing heavy oil projects in North America, has raised $50-million through the issuance of new shares to help fund development of its core properties. But the stock is already up 80 per cent since late September and is becoming fairly valued, said Canaccord Genuity analyst Steve Toth.
Upside: Mr. Toth hiked his target price by 50 cents to $6 but his rating was revised to "hold" from "buy."
Wescast Industries Inc., which develops products for automotive OEMs, has announced more than $100-million in new annual business across all of its units and will expand its European and Asian facilities. But Canaccord Genuity analyst David Tyerman believes the impact won't be felt until at least 2012 and the company is facing ongoing execution risk.
Downside: Mr. Tyerman lowered his rating on the stock to "hold" from "buy" and maintained an $8 target price.
Darcy Keith