Is It Time To Start Buying Mining Stocks Again?

Following the meltdown in metals and mining stocks this month, analysts are questioning whether the bleeding has finally stopped. RBC Capital Market points out that metal prices are under pressure from technical selling, as evidenced by the large number of short positions on the London Metals Exchange. But it feels that fundamentals remain solid, with the markets in deficit and inventories at historically low levels.

"Absent a recession, we expect metal prices to remain very strong," analysts Fraser Phillips and Adam Schatzker wrote in a note to clients.

But what about the equities? In their note, the RBC analysts point out that stocks have outperformed the underlying commodities in recent months as investors started to accept the "stronger for longer" pricing.

But they wrote that the recent sell-off has brought the stocks down from an historically high premium to net asset value of 28% to just 9% (based on forward curve prices). And UBS analyst Tony Lesiak added that copper equities now trade at a 30% discount to "fair value."

So what to buy? Mr. Lesiak wrote that copper equities in particular look enticing, as they have strong balance sheets and growth profiles, and are trading below 6.5 times 2008 earnings as a group. His top picks in the large-cap, mid-cap, and junior space are Freeport-McMoRan Copper & Gold Inc. (FCX), First Quantum Minerals Ltd. [FM/TSX], and Equinox Minerals Ltd. [EQN/TSX], respectively.

Mr. Lesiak is also bullish on gold, as he believes the metal's "safe haven" value will emerge once the panic selling ends. He points out that there has also been strong fundamental buying of gold from jewelry manufacturers when the price falls to US$650.

Mr. Lesiak also points out that gold equities have greatly underperformed bullion this year, and are now trading at a 25% discount to forward curve valuations. His favorite names in the large-cap, mid-cap, and risk-averse spaces are Goldcorp Inc. (G), Yamana Gold Inc. (AUY), and Agnico-Eagle Mines Ltd. (AEM), respectively.

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[sufiy sufiy]

Subprime collapse of credit markets and its application to Gold, Silver and Commodities

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[mike]

Goldcorp Inc. (GG)