20140109-Cormark_Securities-Base_Metals_Quarterly_Q4_13_Results_Preview___Themes_For_2014_45页_783kb

Base Metals Quarterly Summary: Q4/13 Results Preview & Themes for 2014

Core Content Overview

This document outlines the key themes and outlook for base metals and bulk commodities in 2014, with a focus on demand fundamentals, supply-side challenges, and equity performance. It provides a preview of Q4/13 results and sets expectations for the coming year based on market conditions and investor sentiment.

Main Points and Key Themes

1. Demand Fundamentals Supportive, Supply Uncertainty Lingers

• Global Growth: A period of synchronous global growth is expected to support commodity demand, with China, the US, and Europe showing resilience.
• China's Role: China remains a key driver of demand, with economic indicators suggesting stabilization at or above the official GDP target of 7.5% for 2014.
• Supply Risks: Low inventories and project delays, especially in copper, pose a risk of underperformance. Indonesia's export rules will significantly impact nickel and copper in 2014.
• Zinc: Zinc has the strongest fundamentals, with high inventory levels expected to be drawn down, leading to modest price increases.

2. Price Outlook for 2014

• Copper: Prices are expected to remain robust in both the short and long term, with a modest increase to $2.75/lb long-term due to normalized costs and reduced supply growth.
• Nickel: Prices are likely to remain range-bound unless Indonesia implements export restrictions, which could reduce supply and support prices.
• Zinc: Prices will trend slowly upward as inventory levels decrease, with potential for stronger performance in 2015.
• Bulks (Iron Ore & Coking Coal): Iron ore prices are expected to moderate but remain elevated, while coking coal may see modest price increases due to reduced supply and demand stabilization.

3. Equity Valuations and Investment Opportunities

• Market Focus: Investors are primarily focused on large and liquid names, which are trading at a premium to mid-caps and small-caps.
• Favoured Names:
  • Large-Cap: Teck Resources (Buy), Capstone Mining (Buy)
  • Mid-Cap: Mawson West (Top Pick), Copper Mountain (Buy), Nevsun Resources (Buy)
  • Developer: NovaCopper (Buy), NGEx (Buy), Augusta (Buy)
• M&A Activity: The M&A cycle is expected to pick up in 2014 due to limited access to capital and weak investor appetite for development-stage equities.

4. Key Market Dynamics

• Capital Spending Reduction: Major diversified producers have reduced capital budgets, which could lead to supply deficits in the long term.
• Liquidity Constraints: Access to equity remains tight, and small-cap development stocks are underperforming due to lack of capital.
• Steel Production: Steel demand and production are expected to recover, which should support demand for iron ore and coking coal.
• Volatility Risk: Prices may be volatile, especially for nickel and zinc, due to their proximity to marginal costs and the potential for short-term restocking cycles.

Main Viewpoints

• Investor Sentiment: Investors remain cautious and are valuing equities based on near-term commodity price movements rather than long-term fundamentals.
• Supply Constraints: The slow ramp-up of new mines and underperformance of existing supply have kept the market tight, especially for copper and zinc.
• Cost Inflation: While costs have increased, the rate of inflation is slowing, which could lead to improved profitability for producers.
• China's Impact: China's economic recovery is a critical factor in global commodity demand, and its continued growth should support higher prices for base metals.
• Market Balance: The base metals market is expected to remain in balance but with upside potential as long-term supply deficits regain attention.

Key Information

• Copper: Expected to remain in surplus but could shift to deficit with a mine shutdown or stronger demand.
• Nickel: Likely to remain oversupplied unless Indonesia implements export restrictions.
• Zinc: Strong fundamentals with inventory drawdown expected to lead to price increases.
• Iron Ore & Coking Coal: Prices are expected to stabilize, with coking coal showing a slow upward trend.
• Equity Performance: Large-cap names are favored due to liquidity and strong balance sheets, while developers are under pressure due to limited capital access.
• M&A Outlook: Consolidation is expected in both the mid-tier and small-cap development space due to capital constraints and project delays.

Conclusion

The base metals market is entering a phase of recovery, supported by global growth and China's economic stability. While supply-side challenges and capital constraints persist, the long-term fundamentals for copper and zinc remain strong. Investors are advised to focus on larger, more liquid names and consider development-stage opportunities with a longer time horizon. The outlook for 2014 is cautiously optimistic, with potential for price increases and market consolidation.