BAY STREET-Base metals share rally seen having room to go

By Cameron French

TORONTO, May 24 (Reuters) - Canadian base metals stocks took it on the chin last year, losing more than two-thirds of their value after getting drop-kicked by plunging materials demand and a wave of panic selling on stock markets.

Now, they are back with a vengeance, more than doubling since early March.

Despite the speedy ascent and some doubts about demand, analysts said stock fundamentals and the longer-term prospects for economic recovery suggest there's plenty more upside in the sector.

"Exiting this year and into 2010 you want to be overweight the metals for sure, and in fact we could have quite an exciting summer," said John Hughes, a mining analyst at Desjardins Securities in Toronto,

Hughes said he favors base metal stocks over gold miners despite a 103 percent rise in the base metals-heavy S&P/TSX mining subgroup in just over 10 weeks, a gain that would seem overheated compared to the steadier 20 percent rise of golds over the same period.

While base metal shares may be due for brief period of flat trading, or even a pullback, Hughes said the sector will get a further boost as metals demand ramps up later this year. As well, valuations are still reasonable.

"Relative to a historical earnings multiple basis, these stocks are reasonably inexpensive," he said.

Hughes said a normal longer-term price-to-earnings ratio for the sector would be in the 7 to 9 range.