brokers metal upgrades

You need to read this:

UBS Warburg have a report on a “basic materials” visit to China. Main conclusions are that the Chinese economy “remains strong with a positive 10 year outlook” and a stockmarket correction “should not impact raw materials demand”. They are particularly positive on the the outlook for iron ore prices saying “Steel production growth and slowing domestic iron ore production should continue to have a strong impact on seaborne iron ore pricing”. They are also more positive on the aluminium outlook. They also list their “Standout Equity Conclusions” as “Rio Tinto commented that its order books are full and supply cannot meet demand. We expect this is true for most material suppliers into China”.

Add to this the Goldman Sachs JB Were yesterday – they upped copper price forecasts significantly. You might have noticed Oxiana and Newcrest up yesterday. Forget the short term….their forecasts if correct leave some stocks significantly undervalued with the risk that consensus forecasts are significantly too low. Of particular note is that Were’s 2009 forecasts for Oxiana are 124% above consensus. For PNA they are 92% above consensus. Newcrest 98%. KZL 31%. BHP 18% and RIO 30%. They say all these stocks are stand out buys if the copper price forecasts are right.

Also worth noting the comment at the end of the UBS Warburg research that says Aditya Birla Minerals (ABY) “looks to be the cheapest copper play in the Australian market”. Goldman Sachs JB Were initiated research coverage on ABY yesterday with an OUTPERFORM/BUY recommendation. They say the stock is “priced for disappointment” after 12 months of poor production and that this is an opportunity. They have a 341c valuation against a price at 283c. They say it is the “most inexpensive stock in our coverage”. PE 3.8x and 2.3x.

You can add to this resources sentiment the comments from Southern Cross Equities this week about an aggressive re-rating of the entire resources sector led by BHP. They put target prices on BHP of $37 in the next three to six months, RIO $105, Fortescue $50, WPL $50, STO $15, OXR $4, MRE $11, AWC $9, ZFX $20, KZL $8, AWE $4, OSH $4.50, WSA $7, WES$42.

Add to this the comments from CVRD CEO Fabio Barbosa – “It's not obvious that this cycle is going to end in 2009 or even 2010. We don't have this view. This is a cycle of prosperity much longer than we previously imagined….If China continues at this pace, it could lead to a strong shortage in the iron-ore market this year….We don't have the conditions to put an additional 20mt into the market this year".

Add to this a uranium price at $137 with Macquarie suggesting it could peak at $200/lb and average $125/lb for the next two years. In addition we saw SXR Uranium One (SXR) in Canada offering US$1.5bn for Canadian Energy Metals Corp (EMC) at a 27% premium to the market price. SXR will become the second biggest uranium player in the world (after Cameco). We have seen Paladin bid for Summit Resources. There is consolidation in the sector which will continue if the uranium price holds up as looks likely.

Copper, iron ore, uranium…another wave of positive sentiment is here…for the whole resources sector.

It is clear – we are in a very strong upgrade cycle for resources stocks, the strongest in any sector in decades. You simply have to keep playing this game.