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Time to get overweight in base metals, Desjardins urges

Desjardins Securities Inc. analysts are out today with a bullish view on the base metals markets, recommending investors start an overweight position in the sector in anticipation of a run-up in prices later this year.

They concede that the first half of 2012 may not hold a lot of promise, as the European financial crisis and slowing economic growth in major economies such as China continue to dampen market sentiment. But the analysts, led by John Hughes, see positive supply and demand fundamentals in most metals returning to the focus of major fund managers in the second half of this year and into 2013.

"We view 2013 as the next period of potential peak metal prices. Fund flows should follow the improving market fundamentals as metals regain prominence as a viable asset class," the analysts wrote.

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Although jitters over Europe have hindered progress in metals prices since last summer, Desjardins notes that the market fundamentals for metals have actually remained strong, or even improved. They point to the physical markets for copper and other metals that have seen encouraging trends in exchange inventory drawdowns, Chinese net imports and high premiums for delivered product.

"We expect 2012 will be the reverse of 2011, with average metal prices starting at lower levels but finishing at higher levels," Desjardins said. It sees demand exceeding supply through 2013, as the present lack of risk-taking in financial markets is hindering mine project financing and construction.

Desjardins lowered its 2012 targets for most metals as a result of their weakness in the second half of last year, which left prices at a lower starting point for this year. But it raised forecasts for next year, and is now using its 2013 price forecasts to determine its financial outlook and targets for the stocks it follows, resulting in several revisions.

Here's a look at its new price forecasts for metals:

And its new forecasts for the equities in the sector it follows:

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Canaccord Genuity analyst Aravinda Galappatthige now sees little upside potential this year for Postmedia Network Canada Corp. stock following the newspaper publisher's grim fiscal first quarter, which saw print advertising trends weaken significantly. But Mr. Galappatthige recommends investors hold on to their shares. "While we are projecting a period of revenue declines due to secular pressure on print, we expect that the declines will be relatively mild over the longer run due to still strong readership data for print newspapers in Canada and online growth."

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Downside: Mr. Galappatthige cut his price target to $6.75 from $10.

Related: Postmedia calls for new ownership rules

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Dundee Securities Corp. analyst Grant Daunheimer had nothing but praise for Poseidon Concepts Corp. after the energy services firm Wednesday bolstered its 2012 earnings guidance, driven by strong growth in its North American fluid handing business. "Poseidon continues to grow beyond our expectations, has maintained momentum at penetrating the U.S., has secured material committed revenue through 2012, and for those previously concerned about the sustainability of the dividend or payout ratio has put that to bed with (Wednesday's) announcement," he said.

Upside: Mr. Daunheimer raised his 12-month price target to $15.50 from $13.25 and maintained a "buy, high risk" rating.

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Safety regulators have ordered Hecla Mining Co. to shut down the Lucky Friday mine in Idaho until built-up waste material is removed, which will take about a year to complete. Hecla now expects 2012 silver production of 7 million ounces from 9.5 million, and the news prompted CIBC World Markets Inc. analyst Brian Quast to slash his net asset value for the company by 9 per cent.

Downside: Mr. Quast cut his price target by $2 to $5 (U.S.) and maintained a "sector underperformer."

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Canaccord Genuity analyst John Gerdes is downgrading his recommendation on Continental Resources to a "hold" from a "buy," commenting that the shares - which have outperformed the exploration and production sector by over 30 per cent since late September - now appear near fair value.

Downside: Mr. Gerdes also cut his price target by $2 to $79 (U.S.) due to minor adjustments to his financial model.

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Guyana Goldfields Inc. has announced some key design parameters for its Aurora gold project ahead of the release of a feasibility study near the end of February, including plans for a mill with a daily capacity of 8,000 tonnes. That was 1,500 tonnes short of expectations from UBS analyst Dan Rollins, who reduced his net asset value for the company by 15 per cent.

Downside: Mr. Rollins cut his price target by $2 to $11.25 (U.S.) and maintained a "buy" rating.

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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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