TD Newcrest Analyst: Ignore Poor Earnings for Base Metal Producers

With the third-quarter reporting season starting up this week for Canada's base metal producers, TD Newcrest analyst Greg Barnes asks a logical question: Given the current state of equity markets, does anybody really care?

Indeed. Thanks to lower commodity prices and provisional pricing adjustments, everyone knows the earnings and guidance numbers will fall somewhere between mediocre and horrific.

So it might be time to look beyond that. According to Mr. Barnes, the focus for investors should not be on the earnings, but what companies plan to do to weather the storm of lower prices. That means cost control and maintaining a healthy balance sheet will get more attention than growth opportunities. He also wrote that other corporate actions, such as mergers and share buybacks, could come back to the forefront now that prices are so depressed.

Unfortunately, he expects weak demand and depressed metal prices to continue for the next 12 to 24 months.

He wrote:

We continue to believe that underweighting the base metal equities is appropriate as the economy materially slows heading into 2009.

In the base metal sector, he views Cameco Corp. (CCJ) as a safe haven because of its long uranium sales contracts and relatively stable demand. For investors with more risk tolerance, he favors First Quantum Minerals Ltd. (FQVLF.PK) because of its copper exposure, strong management team and his view that the Zambian tax situation should improve following this month's presidential election.