BMO Research cuts commodity price forecasts by up to 10%

Investors should focus on producing mines, low risk country locations, and preferred commodities, BMO Research recommends in its latest Mining Quarterly Strategy.

Author: Dorothy Kosich
Posted: Thursday , 12 Jul 2012

RENO (MINEWEB) -

BMO Research had cut commodity prices by as much as 10% this year, noting, "The bear market has intensified with a vengeance, driving shares lower and providing long-term buyers with an abundance of value."

Investors should focus on producing mines; low risk country location; and preferred commodities, BMO advised in its Q3/12 Mining Quarterly Strategy.

COMMODITY OUTLOOK

Gold-The BMO Research gold price has been reduced from US$1,700/oz to US$1,600/oz for the third and fourth quarters of 2012 "to reflect the current market conditions. The prevailing economic environment remains supportive for the gold price with the European sovereign debt crisis and wealth preservation demand playing on the upside while weaker Indian jewelry demand weighs on the downside of the metal," said BMO.

Silver-BMO Research has revised second half 2012 silver prices downward to US$28/oz. "Reflecting a cautious global economic outlook for the remainder of 2012E, BMO Research continues to recommend a market weight position in silver through 2012."

Platinum-BMO Research has revised the 2012 estimated platinum price from $1,629/oz to $1,541/oz.

Copper-"Copper prices declined substantially through the second quarter, reflecting the continued weak global economic outlook and rising political risk in Europe. Sentiment overpowered the physical copper market, as production shortfalls maintained the market in a deficit position through the first half of the year," said BMO Research, which revised the 2012 copper price outlook from $3.79 to $3.51.

Nickel-Continuing political and economic uncertainties in Europe and weak stainless demand in China and the U.S. have weakened in the second quarter. BMO Research has reduced the nickel price forecasts from US$8.50/lb to US$8/lb.

Uranium-BMO Research has reduced uranium price forecast from $54/lb to $53/lb for 2012. "Although Japan has restarted its first two reactors, most utilities appear to be well covered for near-term uranium requirements and the summer is typically a quiet time in the uranium market," said BMO.

Zinc-BMO continues to anticipate higher zinc prices in the mid-term as large mines come off-line and new supply is expected to be insufficient to meet demand. "Relatively low zinc prices in the near term could exacerbate or prolong the anticipated market deficit and exploration for future zinc mines are delayed," said BMO Research, who lowered forecast zinc prices from 95-cents to 85-cents for the second half of this year.

Aluminum-"At current price levels an estimated 40-50% of global smelting capacity is making losses, ignoring regional premiums," BMO noted. "Weak market fundamentals and poor market sentiment have weighed on aluminum prices in Q2/12." Mid-term aluminum forecasts have been lowered from $1.15/lb to $1.10/lb.

Iron Ore-"BMO Research forecasts have decreased slightly in the near term as uncertainty surrounding steel production in Europe and China continue to impact iron ore trading." BMO lowered the 2012 iron ore forecast from $142.84 to $140.34.

INVESTMENTS

BMO Research's top 15 preferred investments include gold companies Argonaut, AuRico Gold, Detour Gold, Goldcorp, Osisko Mining, and Torex; silver companies Silver Wheaton and Tahoe Resources; copper company Ivanhoe Mines; iron ore company Labrador Iron Royalty; uranium company Uranium One; diversified miners Rio Tinto and Teck Resources; and coal miner Peabody Energy. Freeport-McMoRan, Aureus Mining and New Gold have been dropped from the list.

The bottom 15 list of BMO's least preferred investments include gold companies Agnico-Eagle, Gabriel Resources, Great Basin Gold, and IAMGOLD; aluminum companies Alcoa, Alumina, Century, Norsk Hydro, and UC Rusal; copper-gold miner Exeter Resources; nickel miner Mirabela; PGM miner Impala; silver company Orko Silver; uranium company Paladin Energy; and diversified miner Glencore.

"BMO Research recommends investors avoid the aluminum and nickel sectors. In addition, several PGM, silver and gold miners are overpriced relative to peers, have project problems, face high levels of political risk and/or funding issues (large capital footprints)."

"Stagnant or falling commodity prices and rising production costs are forecast to trim earnings for the metals and mining companies," BMO advised. "Many of those chosen in the Bottom 15 List show sizeable drops from Q2/11 to Q2/12 or from H1/11 to H1/12 for those that report on six monthly cycles."

BMO Research is downgrading the aluminum sector, diversified miner Anglo American, Cluff Gold and Fortuna Silver.

Meanwhile, "high mining company to exposure to third-world nations is increasing investors' risks," said BMO Research, which "recommends investors re-examine their exposures to less developed nations, as miners operating in low-risk jurisdictions offer plenty of value."

Precious metals companies perceived by BMO Research to have the highest possible jurisdictional risk include (in descending order) Avocet, SEMFO, Tahoe Resources, Guyana Goldfields, Extorre Gold Mines, Cluff, Centamin, Banro, Avion Gold, Aureus, Randgold, Centerra, Aquarius Platinum, Silver Standard, Resolute, Perseus, Dundee Precious metals, Pan American Silver, Hochschild, and IAMGOLD