Investing in metals and mining remains a very tricky and risky proposition, but there are some promising indicators that the risk is becoming manageable, a new UBS bulletin suggests.
UBS Investment analyst Brian MacArthur said in a note to clients Wednesday:
Commodity prices and base metal equities have aggresively responded to selective leading indicators of economic stabilization and Chinese re-stocking.
In particular, copper and nickel equities are up 94% and 68% respectively, he said.
Weak conditions in North American industrial production could prove a problem. However, Mr. MacArthur sees the potential of a re-stocking event in the West, improving macro indicators (oil and steel prices, a rising purchasing managers' index and inflation expectations) and earnings per share momentum as "supportive elements" that limit the risk of a pullback in equities.
With that in mind, Mr. MacArthur has raised his base target multiples by about 20%, towards 5.5x for enterprise value/earnings before interest, tax, depreciation and amortization (EV/EBITDA) and 1.1x for price/net asset value (P/NAV) ratios. This has produced an accordant 22% increase in target prices.
UBS is maintaining "Buy" ratings on Equinox Minerals (OTC:EQXMF), First Quantum Minerals (OTCPK:FQVLF), Freeport McMoRan (NYSE:FCX), HudBay Minerals (HBMFF.PK), Lundin Mining (LMC), Mirabela Nickel (OTC:MRBAF), and Teck Resources (NYSEMKT:TCX).