MINING FINANCE / INVESTMENT
Citigroup looks to stronger outlook for gold, copper, aluminum, steel and bulks in battered mining and metals sector
Despite being battered in the crude oil and China slowdown, Citigroup analysts feel some metals/mining “gems have been left by the roadside.”
Posted: Tuesday , 19 Aug 2008
RENO, NV -
In an analysis published Monday, Citigroup mining analysts John H. Hill, Graham Wark and Paul Cheng noted that mining and metals "have been battered amid the broader crude oil and China-slowdown induced carnage in materials and cyclical."
Nevertheless, the analysts advised that investors should differentiate between mining and metals sub-groups, such as copper, steel and coal, and focus on micro-indicators, particularly in areas of structural change or M&A, to guide stock picking.
"This favors tight supply chains in bulks (iron ore, coal) and select industrial metals (copper, aluminum, steel)," they explained. "In general, metals micro-indicators (inventories, scrap prices, merchant premia, and smelter charges) have proven to be clear and effective guideposts during macro-driven ‘end-cycle, burst-bubble' jitters which tend to recur.
The analysts asserted that copper micro-indicators are mixed. "Inventories remain down in China but are creeping up in Korea, local premiums have cratered in China to just $15/T and are slipping in Europe, while spot TC/RCs are barely bouncing above zero as acid byproducts boost profitability," they said.
Meanwhile, the analysts noted that the pace of copper imports to China was at two-year lows in June and barely up in July.
Nevertheless, Citigroup forecasts that a higher copper import volume will "prove a catalyst for LME [copper] prices in 2H/08."
Citigroup predicts that Chinese restocking, mine shortfalls and project stretch-outs will drive copper prices higher next year. "We see it as best-positioned among base metals, with replacement costs more deterministic than the operating cost curve."
While gold is suffering during this time of a rallying U.S. dollar, nevertheless, Citigroup advised, "We would be aggressive buyers at current levels."
While Citigroup finds that gold "has been punished amid a broad-based correction in commodities," the analysts assert that the floor in the U.S. dollar "is likely a short-term blip for gold, as it underscores the frailty of fiat currency globally."
"We see gold as attractive, heading into a period of seasonally strong physical out-take, which tends to tighten the market and allow any negative macro catalysts to be rapidly transmitted to prices. ...Gold will likely shine over time. Long-term drivers remain intact; falling mine production especially in S. Africa, competitive currency devaluations, wealth creation on India/China, and petrodollar flows."
Despite the battering in mining and metals stocks, Citigroup declared it remains focused on "names with superior in-ground assets, margins, and growth/yields, as top pick Freeport in copper, Nucor in steel, Peabody in coal, and Barrick in gold." Citigroup's favorite mining/metals stocks also Alcoa in aluminum, Nucor in steel, and Newmont in gold, as well as Arch in coal.