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Base metal miners trading ‘well below’ historical averages

Fears of an unravelling global economy took most stocks lower in the fourth quarter of 2011, but base metals miners were particularly hard hit because their performance is so closely tied to economic growth.

Many of these names have now started to recover, and new estimates put out by CIBC World Markets peg the latest trend as the early stages of a big run. According to analyst Alec Kodatsky, these miners are trading at valuations that are 'well below' historical average price-to-net asset value multiples, so there's bound to be some more recovery.

His main point: these names are bouncing around because people are still nervous, but their near-term movement isn't tied very tightly to the long-term fundamentals of a growing China and a recovering U.S. economy that is expanding, albeit slowly.

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"Short-term price adjustments continue to trade on news flow rather than fundamentals and investors seem keen on investing in companies with upcoming catalysts," Mr. Kodatsky noted. "We believe our long-term thesis and commodity forecasts remain intact and are perhaps conservative."

As for precious metals, the emerging story is something quite different: rising costs.

After looking through some recent 2012 production guidance releases, CIBC analyst Barry Cooper noticed a common theme of elevated capital that he believes is "plaguing the industry." "Whereas only a few years ago a rough number for sustaining capital for projects worked out to about $50 per ounce, that figure now seems to sit at in excess of $200 per ounce."

Higher costs, obviously, have pushed valuations down, with Iamgold being one of the hardest hit after being hurt by higher costs associated with throughput expansions that did not materialize into output growth.

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About the Author
Reporter and Streetwise columnist

Tim Kiladze is a business reporter with The Globe and Mail. Before crossing over to journalism, he worked in equity capital markets at National Bank Financial and in fixed-income sales and trading at RBC Dominion Securities. Tim graduated from Columbia University's Graduate School of Journalism and also earned a Bachelor in Commerce in finance from McGill University. More

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