RBC Analyst: Not Yet the Bottom for Mining Stocks

Is this the bottom for the beaten-down mining stocks? Maybe not, according to RBC Capital Markets analysts Fraser Phillips and Adam Schatzker.

In a note to clients, they pointed out that mining shares are demonstrating typical "end-of-cycle" behavior: the stocks are down 49% from their peak in July of 2007, a much bigger correction than any other one seen in the past five years. They are now trading at a whopping 49% discount to net asset value at the forward curve.

That looks like a pretty compelling buying opportunity. But the analysts are not convinced that is the case. They wrote that "fundamental risks" to commodity prices remain, including rising metal inventories that could continue to grow amid concerns about global economic growth.

They also said that current cash cost curves and historic behavior suggest there is further downside risk for the metals. While high costs provide a floor for prices, it tends to take producers a long time to shut down mines that are not profitable.

"There has been much discussion of increased industry discipline this cycle. This new discipline looks set to be tested," they wrote.

Ultimately, their views are mixed. They noted that seasonality could support a mining stock rally before the end of the year. But at the same time, it will be tough to sustain any rally until global economic and commodity demand prospects start to look better.

Mr. Phillips and Mr. Schatzker wrote:

We believe investors should focus on large, liquid, diversified companies and remain underweight. We continue to prefer the bulk commodities - coal and iron ore - and uranium to the metals.

Comments

[specks:]

Bang on. We're in for a tumble along with the rest of the world!!

2008 Oct 05 03:29 PM