PDAC 2016: Hope for a new bull market in metals springs eternal at mining conference

March 8, 2016

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TORONTO • Veteran analysts at the world’s largest mining convention said Tuesday that the commodity bear market might be near its end.

The comments were made during a panel at the 2016 PDAC conference. Several analysts noted that there are bullish signs building up in the market, including a dearth of new projects, signs of tighter supply and the rock bottom level of capital spending in the industry.

Bullishness around mining stocks in general has certainly increased this month, as prices for metals such as copper, iron and gold have posted impressive gains.

“New capital spending has been cut, no one is building new mines, no one is looking for new mines,” said Greg Barnes, analyst at TD Newcrest. “We’ll have quite a rally by the end of the decade.”

Every year when miners gather for the industry’s biggest annual convention in Toronto, one of the biggest questions is when the current cycle will come to an end.

It’s become an existential question in the past few years as miners have been faced with a prolonged bear market for metal prices. The industry has seen billions in dollars of assets written off, projects being cancelled or delayed and companies struggling to stay afloat.

Barnes noted that investors have been rushing to sell mining stocks in the past few years, while shorting mining stocks was a popular play for hedge funds in 2015.

The past month, however, has seen an encouraging turnaround. Gold prices have risen to 13-month highs this week, while iron ore prices spiked 19 per cent on Monday alone. Copper and aluminum have also registered strong gains, with copper up 15 per cent since its January lows.

Barnes said that there are signs in various metals, including copper and gold, that supply will tighten in the coming years and prices could start moving up faster.

“Gold supply is beginning to roll over,” said Barnes. “Very few new mines are being built and it could be a supply issue in four-to-five years.”

David Davidson, senior analyst at Paradigm Capital, said that it is difficult to pin down when the current commodity cycle will end, but supply constraint will be a major story in the sector in the coming years if global demand picks up.

“I’m not sure what’s going to be the trigger, it’s probably not going to be China, but it’s going to be something,” he said.

Davidson pointed to the copper market as one area where an upturn appears inevitable. While the market is currently oversupplied, Davidson notes that it is only oversupplied by 200,000 ounces, something he calls a “rounding error” in a 24 million ounce market.

While the analysts at Tuesday’s panel were bullish, not everyone shares the same opinion about the recent price moves.

Goldman Sachs warned Tuesday that any optimism will be short-lived. The investment bank warned that this year’s surge in commodity prices is “not sustainable,” given that global demand remains weak. In particular, data from China suggests that the country, which is the world’s largest commodity consumer, will not see the kind of economic stability needed to increase commodity demand.

“We believe these rallies are also not supported by the broader financial environment in China,” Goldman analysts wrote in a note.

Category: General