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(Runtime: 4 min, 59 sec; size: 3.97 MB)
Daniel Greenspan with CIBC Asset Management. I’m the senior commodities and metals and mining analyst.
In terms of what our outlook is for Canadian commodity this year, we generally feel constructive on the commodity universe. There are differences between the stories that are idiosyncratic and we do have preferences and least favourite commodities within the sector. In terms of our preferences, one of the commodities we generally like this year and the outlook for is copper. We think that the copper price is currently being penalized on recent macro headline risks, specifically the Wuhan coronavirus in China. Given China’s importance to the global metal market, we’re not surprised to see recent weakness in base metal and bulk commodities.
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. But that said, over the medium term, we think that the risks of the virus will get managed and things will stabilize. And that there’s upside to commodity demand, particularly if we see a stimulus package that gets the Chinese economy back on track in the second half of the year.
Over the medium term, we really like the outlook for copper. We think it’s a great way to play the electrification in green energy theme. We think that 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. And we think a much higher copper price will be required to incentivize enough supply into the market to meet growing demand.
So with that in mind, we’re constructive on the copper price over the medium to longer term. In terms of the bulk commodities, we think iron ore is sitting in a pretty interesting position. The price has been really strong over the past year on supply side issues out of Brazil. Brazil had a significant tailings dam disaster in the country in January 2019. And given that Brazil is a major supplier of iron ore to steel making facilities all over the world, the disruption we saw in the country last year tightened the market quite considerably. There was a bit of a recovery in Brazilian exports in the middle of last year, but as of January 2020, export levels have been weak and they followed a weak December as well.
As I mentioned, Brazil is an important source of global supply for iron ore. And with exports struggling, we think there remains support for the commodity price. The wildcard right now will be Chinese demand for iron ore coming out of the lunar new year as China does dominate the demand side for iron ore. So we’ll be watching China signals closely for some clarity on how the spring season looks. But generally speaking, we like the outlook for iron ore. We think it’s a supply driven story and we’re seeing supply disruptions on Brazil exports.
For gold in 2020, we think there’s a compelling case to remain long on the commodity over the medium term. We think that there is some global economic outlook uncertainty that remains reasonably high. We do see risk for further interest rate cuts that can support global growth. And we are seeing negative real interest rates in key markets, which we think is supportive for gold in the coming quarters. In the very near term, we do see some downside risk if fears around the Coronavirus in China slow down as we think there is a bit of a premium baked into the gold price right now. But over the medium term, we think that with interest rates where they are, the gold price is fundamentally supported in the medium term.
So in terms of companies that we’re focused on in our fund, we prefer quality names in lower risk jurisdictions with exposure to themes that we think are set up to do well in 2020. In large cap gold, we like Newmont. We think the company has the potential to deliver on value on the Goldcorp assets that they acquired in January of 2019. We don’t think the market is giving them credit for integrating these assets into their portfolios yet. And we think that in the fullness of time, they’ll demonstrate the value of the acquisition that they made. The balance sheet is strong. The management team is strong. And we expect the valuation to re-rate as the company delivers on the assets.
And copper, we like First Quantum. First Quantum is a higher risk copper name for sure, but one that we feel is undervalued and underappreciated by the market. First Quantum just completed the construction of a large scale copper mine in Panama and the ramp-up progress has been good so far. The company is just getting to the positive free cash flow point, which is where we like stories. We think 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 a de-leveraging program that we expect the stock to re-rate on the back of. And we’re looking for them to deliver on the new asset and for the balance sheet to improve. And we think those will be critical drivers for the company in 2020.
For iron ore exposure, the list of Canadian companies is relatively limited, but our favourite name in the space is a smaller cap company called Champion Iron. Champion operates the Bloom Lake Mine in the Labrador trough. They’re profitably producing about seven and a half million tons a year of high quality iron ore fines. The company is working on sanctioning an expansion at the mine to double output, which the previous owners in the mine have already spent a lot of capital towards. We like Champion for the high quality production, the free cash flow generation happening right now, and for the growth in the company with the phase two project, which is moving forward.