Watch for bargains, page-4

Mining Stocks: Watch for Bargains as Metals Slide

Metals are under pressure after a massive rally, but analysts like these picks in iron ore, copper and lithium.

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By
DANIEL SHANE
March 8, 2017 11:01 p.m. ET


A truck is driven out of Western Areas NL's Tim King Pit open-cut nickel mine at Spotted Quoll, in Forrestania, Western Australia. Photographer: Ron D

Investors who sought to fortify their portfolios with industrial metals in 2016 would have been rewarded with steely returns to say the least.
Copper, iron ore and zinc were among the year’s big winners, posting solid, double-digit returns as Chinese appetite soared on the back of a booming property market. Expectations of an infrastructure splurge under newly-minted U.S. president Donald Trump has given the rally further resolve.
Gold, a popular hedge against economic and political uncertainty, also had a great run until the November ballot, when newly emboldened investors rotated back into riskier assets on the promise of tax cuts and looser regulations in the U.S. The yellow metal’s shined at times in 2017 on an undercurrent of geopolitical concerns and the possibility of a souring of relations between the U.S. and China.
A source of intrigue for investors could be the trajectory of more exotic and thinly-traded metals like lithium. Investors in that metal, which is used in electric car batteries, will be closely following the fortunes of Tesla (TSLA) this year.
Those without a periodic table handy need not fret as Barron’s Asia has done the hard work of where to invest. Read on for our outlook for metals in 2017 and which stocks offer good long term opportunities even as metals retreat from their recent highs.
Copper
The price of copper – used in everything from construction to power lines – has rebounded about 40% from its lows of January 2016. That rally has been propelled by the election of Donald Trump as U.S. president, who the market hopes will unleash a huge wave of infrastructure spending. Recovering demand from China, the world’s biggest customer for the metal, could help copper prices rise by about another third over the next couple of years, Citi predicts.




Copper supply has also been under pressure because of labor strikes at Chile’s Escondida mine – the world’s largest. Peru’s Las Bambas mine has also seen worker protests. “Disruptions in the supply of copper are boosting copper prices,” says Kim Iskyan, founder of Singapore-based research firm Truewealth Publishing. “Major mines around the world are facing challenges that could severely hamper production.”
How to invest: One of Asia’s purest copper plays is Hong Kong’s MMG (1208.HK), which derives more than four-fifths of its revenue from the metal. Shares have sky-rocketed 46% this year already. Other options are China’s Jiangxi Copper (358.HK) and China Molybdenum (3993.HK), which have both soared since New Year. Australia’s big, diversified miners like Rio Tinto (RIO.AU) and BHP Billiton (BHP.AU) also both have exposure to rising copper prices. Investors can also put their money in a copper-linked ETF, like the (JJC).
Gold
Investors like gold as a hedge against inflation and political or economic uncertainty. The price of gold is also affected by interest rates: The precious metal doesn’t pay dividends or provide any yield like a bond. Logic holds that gold should perform badly as interest rates rise and investors can get bigger yields elsewhere, although this doesn’t always happen in practice.
Gold had a great 2016 for the most part, given political uncertainty surrounding Britain’s exit from the European Union and in the run-up to the U.S. presidential election. Many pundits assumed the gold price would go gangbusters after Donald’s Trump’s win, given the ex-reality T.V. star was seen as an unknown quantity. That largely abated after the Republicans secured both Houses of Congress, giving them more leeway to pursue an agenda of tax-cutting and looser regulations. Gold fell as investors rotated back into the rallying stock market. The precious metal rallied again in early 2017 as it appeared Trump was prioritizing a more protectionist, immigration-focused agenda.




As my colleague William Pesek noted a few weeks back, gold bulls could get a boost if tensions between the U.S. and China heat up, or if there is further belligerence from wannabe nuclear state North Korea.
How to invest: Zijin Mining (2899.HK) is one China’s biggest gold miners. The shares have returned 12% since the start of the year, compared to an 8% run up in the yellow metal. Another Hong Kong-listed play on gold is the (2840.HK) ETF, up about 5% in 2017. The ETF invests in physical gold bullion stored in a London vault. Australia has several mining stocks hitched to the gold price. These include Evolution Mining (EVN.AU), which is up 19% over the past year, andOZ Minerals (OZL.AU), with the latter producing gold as part of its core copper mining operations. Both stocks expose investors to fluctuations in the Australian currency.
Zinc
Alongside the likes of copper, aluminum and iron ore, zinc is one of the top most traded base metals. One of its main uses is for galvanizing steel, which stops it from rusting. It can also be combined with copper to make brass. The biggest producers of zinc include India and China.
Like iron ore, the price of zinc has also been rallying since early 2016. Spot prices on the London Metal Exchange have about doubled to around USD2,900 a tonne. That hefty increase has been driven by dwindling supply, as major player Glencore (GLEN.UK) cut back capacity when prices were low, while tightening environmental regulations in China have pressured output there.




How to invest: Slim pickings among zinc stocks. Rajasthan’s Hindustan Zinc(500188.IN) is one of the world’s biggest zinc miners and its shares are up 16% in 2017 already. The stock, however, looks expensive at a historically toppy 12 times forward earnings. Zinc smelter Korea Zinc(010130.KR) is currently having a hard time of it. Its shares have plunged 12% this year after the prices miners pay it to treat unrefined zinc slumped. Goa-based Vedanta (500295.IN), which also mines lead and copper, has risen by a massive 180% in the last year. Some analysts see another 30% upside and the shares aren’t egregiously valued at 10 times next 12 months’ earnings.
Aluminum
The best-known uses for aluminum are probably car parts and soft drink cans. Prices for the metal slumped in 2015 but began steadily rising throughout the second half of 2016. The metal, which is refined from bauxite ore, is mostly produced out of China, which accounts for more than half of global output these days.
Part of the rally at least has been driven by concerns over future supply constraints. Refining aluminum is very energy intensive, and the Chinese government is eager to cut unhealthily high levels of pollution in the world’s second-biggest economy. That could mean trimming output. But that could lead to overcapacity in the short-term as high prices and fear of future cuts encourage Chinese producers to supply more of the metal. A recent poll of analysts by Reuters concluded that prices for aluminum will probably fall later this year.




How to invest: China has a few giant aluminum stocks, like Aluminum Corporation of China (2600.HK), China Hongqiao Group (1378.HK) and China Zhongwang (1333.HK). They’ve got various interests in different parts of the supply chain, from mining of bauxite ore, to smelting, to finished products. Access to cheap electricity and financing has helped Chinese aluminum companies ramp up capacity and challenge peers in the U.S. and Russia. Shares in all three stocks are up between 15% and 30% since the start of January. However, Hongqiao Group and Zhongwang have drawn the attention of short-sellers in the recent past. Zhongwang faced allegations it routed sales through firms it controls to inflate sales, while Hongqiao was alleged to be not entirely forthcoming about how much debt it holds. Both companies have denied these allegations.
Nickel
Nickel’s main use is in the production of stainless steel, meaning steel-hungry China is one of the biggest customers for the metal. Big nickel exporting countries include the Philippines, Russia and Canada. Prices have spiked since early February after the Philippines mothballed more than 20 mines – or about half its nickel output – as part of an environmental push by authorities.
The trajectory of nickel prices for the rest of 2017 could depend on nearby Indonesia, which is ramping up production to compensate for lower output from the Philippines. Bank of America Merrill Lynch strategists say investors should target metals where supply is being cut, a category nickel falls into provided Indonesia doesn’t open the floodgates on production. “We believe the global nickel market will remain tight in the near future,” says the investment bank’s metals strategist Michael Widmer.




How to invest: A couple of Australian miners offer exposure to nickel prices. Perth-based Western Areas (WSA.AU) has slumped nearly 27% since the start of the year, while nickel, gold and zinc minerIndependence Group (IGO.AU) is down 19%. Another related stock is Jakarta’sVale Indonesia (INCO. ID), majority-owned by Brazil’s Vale (VALE) and Japan’sSumitomo Metal Mining (5713.JP). The stock’s returned 22% in the last year. Vale Indonesia could have more than 10% upside.
Iron ore
Prices for iron ore have more than doubled since early 2016. That’s been supported by a soaring Chinese property market and infrastructure spending in the Middle Kingdom. A planned splurge on U.S. infrastructure under Donald Trump has also helped. Iron ore is the main ingredient in making steel.




Some reckon this rally is overcooked, though. At a recent conference in China, a top industry official said he saw the average price for iron ore falling back down to an average of $65 a ton for the rest of 2017. It’s currently at about $90. One explanation for the spike in prices is that Chinese steel mills are overstuffing their inventories. There’s further gloom: The Australian government has forecast iron ore averaging around $52 a tonne this year. BHP Billiton seemed wary about the sustainability of prices, warning in it half-year results in February that prices were “likely to come under pressure”. Investors beware, in other words.
How to invest: Perth’s Fortescue Metals (FMG.AU) has been on an tear, surging more than 132% over the last 12 months. Some bullish analysts see another 30% upside in that stock, too. Rising iron ore prices have also been great for big, diversified miners like Rio Tinto and BHP Billiton, with the former up a good 10% or so since the start of the year.
Lithium
Demand for lithium-ion batteries such as those used in Tesla’s electric vehicles has seen lithium prices surge over the last couple of years. Prices for the metal, which is extracted either from salt brine pools or hard-rock projects, are hard to forecast as they’re determined by individual contracts and not traded on liquid exchanges.



Some analysts argue lithium is in bubble territory and there are concerns that the market could become oversupplied as new projects gradually start producing.
How to invest: Be warned: Lithium stocks are bubbly. Australia has a number of listed miners whose shares are exposed to fluctuations in the lithium price. Barron’s Asia has written positively on Perth’sGalaxy Resources (GXY.AU) in the past. The shares are up a blistering 112% in the last year. Other similar plays are Orocobre(ORE.AU), up 14% in a year, and Pilbara Minerals (PLS.AU), up 36%.