The coronavirus is causing near-term uncertainty for copper and iron ore, but there are reasons to be constructive on the commodities, CIBC senior equities analyst Daniel Greenspan says.
More than 79,000 people worldwide have been infected with the COVID-19 virus, which has caused more than 2,600 deaths as of early this week, according to the Associated Press.
The virus has created uncertainty in global markets and impacted commodity prices. Global stocks have fallen in recent days, along with bond yields and the price of oil, while gold has surged.
The price of copper is falling due to supply-chain disruptions, Reuters reported Monday.
“Given China’s importance to the global metal market, we’re not surprised to see recent weakness in base metal and bulk commodities,” said Greenspan, senior equities analyst, mining and materials at CIBC Asset Management, in a Jan. 28 interview .
“In the very near term, uncertainty remains high and the extension of the Lunar New Year holiday will put some pressure on the February demand numbers for commodities in China.”
However, Greenspan said that he expects the coronavirus risks will be managed and stabilize in the medium term. A stimulus package from the Chinese government to help the economy get back on track in the second half of the year would provide a potential upside to commodity demand, he added.
“Over the medium term, we really like the outlook for copper,” said Greenspan, who manages the CIBC Canadian Resource Fund and the CIBC Precious Metals Fund.
While he was speaking before concerns around the virus grew last week, he pointed to longer-term trends that favour the commodity.
“As the world transitions to lower carbon-intensive energy sources, the infrastructure required to support the production of green energy, like wind and solar and electric cars, will be hugely copper intensive,” he said.
“Much higher copper prices will be required to incentivize enough supply, and for the market to meet growing demand.”
One company Greenspan likes is Canadian-based First Quantum Minerals. It’s a “higher-risk copper name” that’s “undervalued and under-appreciated by the market,” said Greenspan.
The company recently completed construction on a large-scale copper mine in Panama and is “just getting to the positive free cash-flow point,” he noted.
“That’ll be a critical catalyst for the company in the coming months and quarters, as they deliver on the free cash flow, and use it towards the deleveraging program that we expect the re-rate on the back of.”
Greenspan expects First Quantum will deliver on the new asset and the balance sheet will improve as a result. “Those will be critical drivers for the company in 2020,” he added.
The price of iron ore has been strong over the last year, he said, partly due to a tighter market after last year’s tailings dam disaster at a mine in Brazil. Since then, there has been some recovery in Brazilian exports, but levels are still weak.
“With exports struggling, we think there remains support for the commodity price,” he said.
Meanwhile, China, which dominates demand for iron ore, is a “wild card” right now, he noted. “We’ll be watching China signals closely for some clarity on how this spring season looks. But, generally speaking, we like the outlook for iron ore.”
The list of Canadian iron ore companies is “limited,” noted Greenspan. But one he likes is small-cap miner Champion Iron, which operates the Bloom Lake Mine in Quebec.
“They’re probably producing about 7.5 million tonnes a year of high-quality iron ore fines,” he said. “The company is working on sanctioning an expansion at the mine, double output, which the previous owners in the mine have already spent a lot of capital towards.”
Greenspan added Champion has high-quality production, free cash-flow generation and solid growth prospects as it moves to phase two of the Bloom Lake project.
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