August 29, 2008 / 9:28 PM / 12 years ago

Bay Street Week Ahead-Base metals a bargain, but how safe?

TORONTO, Aug 29 (Reuters) - Investors looking for Canadian stock bargains will find cut-rate prices in the base metals space, but analysts caution that a rebound may take a while, as sluggish demand could continue pressure metal prices.

Mining stocks have been a key driver behind the S&P/TSX composite index's .GSPTSE 140 percent rise over the past six years. The index rose 2.4 percent this past week to close at 13,771.25.

But the issues have largely been in the red this year, particularly on the industrial — or base — metals side, where the meteoric rise of nickel and zinc to all-time highs in the past two years has finally come back to earth. Copper has fared better, but is still down sharply from its mid-year highs.

“This is the natural reaction after the prices have run up for quite a while. You tend to see a softness period coming in,” said Joe Ismail, a technical analyst at Maison Placements Canada.

Top base metals player Teck Cominco TCKb.TO has been a beacon of strength for the sector, with a nearly flat performance this year due to its strong copper production and to its heavy exposure to metallurgical coal, which has risen sharply.

But recently hot names such as HudBay Minerals (HBM.TO), Lundin Mining (LUN.TO), and FNX Mining FNX.TO are all down more than 40 percent in 2008, while First Quantum (FM.TO) and Inmet Mining IMN.TO are down about 20 percent.


With the stock market about to exit the sluggish late summer period, analysts have been trying to gauge which sectors might be ripe for a rebound.

For base metals, investors may want to leave them on the shelf a bit longer.

“The ‘stronger for longer’ commodity cycle looks set to continue,” RBC analyst Fraser Phillips said in a recent research note. “But in the near term we believe there is a risk of further commodity price correction as global economic and demand growth continue to slow.”

Concerns about slowing demand and growing supply have pulled zinc down 42 percent year-over-year, while nickel is down 24 percent. Copper is up 3 percent year-over-year, but down 13 percent since spiking to a new high in early July.

The falling prices have already prompted some companies to cut higher-cost operations. HudBay recently announced it will close its Balmat zinc mine in New York due to higher costs and falling prices, while Lundin has said it is examining options at its Aljustrel zinc mine in Portugal.

Compounding the price troubles have been other company-specific difficulties.

First Quantum has faced the imposition of a new tax regime at its Zambian operations, while Inmet as had to deal with spiraling costs at its Petaquilla project in Panama, permitting problems at its Las Cruces mine in Spain, and legal troubles that have frozen its Cerattepe project in Turkey.

While this has weighed on the shares, it is the commodity turnaround that will fuel the stock rebound, analysts say. The trick will be gauging when that’s about to happen.

“Of the base metals, nickel is the one that is most likely to have formed a base. I would not expect to see a lot of downside in nickel. I’d be more cautious about copper in particular,” said Bob Gorman, chief portfolio strategist at TD Waterhouse.

Ismail is bullish on prices in the longer term, but says as long as worries about a global economic slowdown persist, the sector will not be a safe bet.

“Everybody is sort of shying away from testing the waters on the metals side,” he said.

$1=$1.06 Canadian Reporting by Cameron French, additional reporting by Jennifer Kwan; editing by Rob Wilson

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