Zinc, nickel Scotiabank’s top picks for investors

Government tax revenue depends on the mining sector boom
December 24, 2014
The mining sector grew by 10 percent in the first half of the year
December 28, 2014

 “Base metals were a ‘bright’ spot in 2014—largely ignored by equity markets and are among our ‘picks’ for investors in 2015,” observed Scotiabank economist Patricia Mohr in the latest edition of the Scotiabank Commodity Price Index published Thursday.

“LME nickel and zinc ranked No. 3 and 5 within the ‘Top Five’ best-performing commodities of 2014,” she said, “with price gains of 19.8% and 11.6% respectively in the year through December 15, 2014.”

“However, a focus by investors on copper, widely expected to edge down in 2015 alongside ongoing mine expansion, seems to have taken the shine away from these metals in the equity markets,” Mohr suggested.

Meanwhile spot uranium prices bottomed in June, she noted, “given Japanese approval of two nuclear reactor restarts, posting a 7.2% y/y gain. …After a recent election win, Japan’s Prime Minister is expected to push for additional reactor restarts to boost a sagging Japanese economy.”

“The base term, contract price for uranium has increased from US$45 to US$49, a positive sign for a gradual recovery in coming years,” Mohr advised. “Cameco’s Cigar Lake mine in Saskatchewan continues to ramp up towards 18 million pounds by 2018.”

“To build shareholder value in a lackluster economy, mining companies will focus on ‘divesting non-core assets’ and ‘spinning-off undervalued operations’ (e.g. Sudbury nickel),” Mohr predicted.

‘Picks’ for 2015

Mohr forecasts average prices of $1,267/oz gold, $1.25/lb zinc, $9/lb nickel, $3/lb copper, and $42/lb uranium in 2015.

Zinc and nickel are Mohr’s top picks for investors in 2015.

In her analysis, Mohr said zinc prices strengthened in the second half of this year, averaging US$1.03/lb, “with investors and commodity funds expecting zinc concentrates to move into a supply-side deficit by 2016 alongside significant depletion. Century—the world’s third-biggest zinc mine—is expected to close in 2015:Q3 and Lisheen in Eire by late 2015 or early 2016.”

“Prices remain resilient at US$0.96 in mid-December (9 US cents higher than a year ago), despite further signs that China’s economy is slowing,” she noted.

“In the first sign of a response by mining companies to the coming shortfall in zinc, Vedanta has announced its intention to proceed with developing the Gamsberg zinc mine in South Africa (250,000 t/a by 2018),” observed Mohr. “We expect interest in ‘junior mining projects’ in zinc to intensify within several years.”

“Nickel prices should also outperform in 2015, benefitting the Sudbury Basin, Thompson Manitoba, northern Quebec (Raglan) and Labrador (Voisey’s Bay),” Mohr advised. “Prices will climb from this year’s US$7.67 average to at least US$9.00 in 2015 (+17.3%) and US$11.50 per pound in 2016.”

“This largely reflects the impact of Indonesia’s ban on the export of all ‘unprocessed’ nickel-containing ore on January 12, 2014, in a bid to encourage foreign buyers to update ore in Indonesia,” she said.

‘Nickel prices are expected to soar once NPI (Nickel Pig Iron) plants in China have used up their inventory on hand—forcing Chinese stainless steel producers to turn to more costly imports of FeNi and nickel cathode,” Mohr predicted.

“The global supply & demand balance for nickel is expected to turn from ‘surplus’ to ‘deficit’ by 2015:Q2, even assuming a slower pace of stainless steel production gains in China (5.5% in 2015, after a 10% gain in 2014),” she suggested.

Meanwhile, palladium was the strongest of the precious metals in 2014 with a 12.2% y/y gain as strong demand for catalytic converters for small-engine gasoline-drive cars and supply constraints boosted prices, Mohr noted.

Nevertheless, the Scotiabank Commodity Price Metal & Mineral Index posted the worst year-over-year decline of any sub-component in 2014 with the decline centered in ferrous metals, especially iron ore and coal, she advised.