‘Winter’ approaches for base metals equities, warns Haywood report

A metaphorical winter approaches for base metals equities, says Haywood Capital Markets in a new report published on Sunday.

Analyst Pierre Vaillancourt expects the constellation of base metals companies under coverage’s second quarter results to fall below expectations when they start reporting results from month-end.

“Overall, we look for most base metals producers to reflect weakening metals prices, as negative provisional price adjustments will impact results,” wrote the analyst in a note to clients.

Haywood also expects ongoing inflation pressure to impact costs materially, which continued at an annualized 8.7% rate (CPI) for the June quarter, including WTI crude oil (up 14% quarter-on-quarter) and diesel (US Gulf Coast Ultra Low Sulfur Diesel Prompt Spot index) up 32% q-o-q.

“As a result, we believe operating mine costs will continue to increase in the quarter. On the other hand, we note that operating conditions were more favourable for some companies, which will help mitigate the impact of inflation and metals prices,” said the analyst.

Average prices improved sequentially in the June quarter for zinc, closing at US$1.78 per lb. versus US$1.49 per lb. in the first quarter, and nickel gained to US$13.16 per lb. versus US$12.15 per lb. three months earlier.

However, the copper price declined 21% over the prior three months to US$3.71 per lb. The zinc price fell 13% q-o-q to US$1.38 per lb.

“Since the end of 2Q22, the price deterioration has intensified. So far in 3Q22, copper is down -10% to US$3.34 per lb. – the lowest level since late 2020, zinc is down 12% to US$1.21 per lb., and nickel is down 13% to US$9.27 per lb.

The softer metal prices weighed heavily on the underlying equities.

“Base metals equities gave back their gains from previous quarters, as the Global X Copper Miners ETF fell 35% q-o-q, the S&P/TSX Global Metals index fell 34% q-o-q, compared to the S&P 500, which fell 17% q-o-q, and the S&P composite index, which dropped 14%,” said the analyst.

Notable underperformers included Lundin Mining (TSX: LUN) which is down 36% q-o-q, Hudbay Minerals (TSX: HBM), down 47% q-o-q, and Copper Mountain Mining (TSX: CMMC), which is down 55% q-o-q.

Since the end of the quarter, base metals equities have fallen further as the dollar has strengthened, with the S&P/TSX Global metals index down another 6.7% in the current quarter, according to Haywood.

Softer metals price outlook

Haywood has also lowered a range of metal price forecasts citing the close relationship commodities have in relation to global GDP and economic forecasts for a global growth slowdown and recession, prompting adjustments to the price deck in recognizing the headwinds for the markets.

Haywood’s copper price forecast decreased to US$3.90 per lb. from US$4.50 per lb. in 2022, reflecting a price of US$3.40/lb in the second half. For 2023 the analyst lowered the price forecast to US$4.25 from US$4.40, which remains unchanged at US$4.30/lb in 2024 and beyond.

For zinc, Haywood lowered the price forecast to US$1.45 per lb. from $1.60 in 2022, reflecting a price of US$1.30 for the remainder of 2022, and unchanged at US$1.40 per lb. in 2023 and US$1.30 per lb. in 2024 and beyond.

For nickel, the analyst has lowered metal prices to US$11 per lb. from US$12 in 2022, reflecting a price of US$9.30 in the second half, and unchanged at US$10 per lb. from 2023 onwards.

“In light of the risk of a recession and a more subdued outlook for growth this year, we recognize prices may moderate more sharply in 2H22,” wrote Vaillancourt.

“We believe commodity prices will continue to be supported by China as the world’s leading commodity consumer, however, in a much more muted fashion as future interest rate hikes, ongoing Covid issues, and the effects of the Russia-Ukraine war take a toll on the global economy.

“In the longer term, we believe fundamentals remain supported by growing metals demand driven by decarbonization, electrification and alternative power sources, as well as the lack of supply growth driven by an insufficient pipeline of projects and length of time to development,” wrote the analyst.