Falling base metal prices are putting major pressure on producer balance sheets, especially for those miners that are carrying a lot of debt. Canaccord Genuity analyst Peter Bures is among those cautioning investors to be very careful in this sector right now.

“With producers feeling the squeeze of over-levered balance sheets amidst a backdrop of significantly lower commodity prices, we believe investors should be considering a ‘survival of the fittest’ approach to the base metals equities, if at all, at least over the next 12 months,” he said in a note.

Canaccord cut its copper price assumptions, and now anticipates prices of US$2.08 a pound in 2016, US$2.07 in 2017, and US$2.75 over the long term. In other words, it expects no real improvement in the market over the next two years.

That is bad news for mining stocks, and, not surprisingly, Bures downgraded six of them: Capstone Mining Corp. (to hold), Copper Mountain Mining Corp. (to hold), First Quantum Minerals Ltd. (to speculative buy), HudBay Minerals Inc. (to hold), Labrador Iron Ore Royalty Corp. (to hold), and Teck Resources Ltd. (to sell).

Some of these companies have legitimate liquidity concerns, and Bures noted that bankruptcies in the base metals sector are “certainly a concern” during the current downturn. However, he expects lenders to be lenient if debt covenants are breached.

“We believe creditors (banks) will ‘extend and pretend’ as long as there is the possibility of repayment in the future. However, if a company cannot service its debt, creditors may not be so lenient,” Bures said.

His top picks in the base metals space are Lundin Mining Corp. and Nevsun Resources Ltd., which both have strong liquidity. He cited Teck, Copper Mountain, Capstone and HudBay as the most vulnerable stocks that he covers.