An interesting read:
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...The Globe and Mail theglobeandmail.com
Investors stumped as base metal demand rises, share
prices plunge
Analysts cite flow of money from old economy into dot-com stocks
ALLAN ROBINSON
Mining Reporter
Tuesday, March 14, 2000
Investors in Canada's base metal mining sector are flummoxed as the stock market ignores a
strong worldwide demand for the commodities.
Worse than that, the share prices of those companies have plunged this year as the money
flows away from the old, "real economy" of forestry, oil and gas and mines into the new
"virtual economy" of dot-coms and the Internet.
Just this month alone the average prices of base metals, aided by the soaring price of nickel,
rose 1.8 per cent while the Toronto Stock Exchange's metals-minerals index slumped 7.2 per
cent. Since year-end, that index has dropped 24.3 per cent, although the prices of underlying
commodities remain healthy.
The index is down 30 per cent from this year's peak level set on Jan. 7.
"Anybody will say to you, 'I've never seen anything like it,' " said Raymond Goldie, a mining
analyst for First Associates Investments Inc.
"There's a massive flow of capital away from the value sectors to the dot-coms," said Glenn
Brown, a mining analyst for Haywood Securities Inc. "I suspect this is a buying opportunity for
the value stocks."
The consensus view is that new money entering the stock market is flowing to the hot sectors
or momentum plays leaving entire sectors of the stock market trading at low share prices
relative to earnings and cash flow.
"Alternative investments are excluding any possibility for the smokestack industries," said
Terence Ortslan, a mining analyst with TSO & Associates of Montreal.
"It's the thrill of the chase, rather than the underlying fundamentals," said John Lydall, a mining
analyst with National Bank Financial. "At some time or another the focus will shift back."
The analysts continue to think that, despite the weakness during the past month in copper, lead,
zinc and aluminum, the outlook for metal prices remains positive because of global demand.
They do not think the price drop in those metals during the past month is a signal of an
approaching recession caused by rising interest rates, high oil prices or the weakening of the
Japanese economy.
Although demand remains strong for copper, it does suffer from oversupply, trading around
78 cents (U.S.) a pound, up from a 12-year low of 62 cents in early last year. Analysts suggest
significant price improvements for that market could be as much as two years away.
Aluminum is trading at 71 cents a pound, down from 79 cents earlier this year, but up
dramatically from its five-year low of about 52 cents in early 1999.
Yesterday, Reuters reported that aluminum exports from Russia's fifth-largest smelter,
Novokuznetsk, have resumed after being suspended in late January because of financial
difficulties.
The hottest base metal has been nickel. It reached what is almost a 10-year high of $4.82 a
pound on Friday, although it closed yesterday at $4.66 a pound. On a long-term basis, nickel is
expected to trade between $2.75 and $3.25 a pound.
The surge in nickel is caused by worries in the stainless steel industry -- which consumes
about two-thirds of the world's nickel -- that there could be nickel shortages resulting from
the strong demand, production problems at new mines in Australia and the possibility of a
strike at Inco's Sudbury mines. The Inco contract expires in May.
Despite the high metal prices, the shares of Inco have dropped sharply. The shares fell 65
cents (Canadian) yesterday to $23.25, down from their 52-week high of $36.65 on Jan. 6. The
shares of Inco's rival, Toronto-based Falconbridge Ltd., fell 85 cents to $18.55 yesterday,
down from their 52-week high of $27 on Jan. 5.
Mr. Goldie thinks zinc smelters and refineries such as owned and operated by
Vancouver-based Cominco Ltd. and Toronto-based Noranda Inc. should benefit from the
lack of new smelter capacity.
Some analysts also expect a sharp rise in zinc prices because of the low inventory levels
resulting from high demand, although there are concerns that new mines will soon open.
Cominco shares fell 80 cents yesterday to $20.05, down from their 52-week high of $33 on
Jan. 10. Noranda rose 60 cents to $15.15 a share yesterday, down from their 52-week high of
$22.30 a share on Aug. 24, 1999.
"I remind investors how fast things have turned in the past," Mr. Goldie said. "You have to be
there." He recommends that investors focus on nickel and zinc.
The metal mining companies are selling at extremely low levels of cash flow and earnings
multiples and that could result in share buybacks and spur merger and takeover activity, Mr.
Lydall said.
There is an increasing likelihood that holding companies such as Noranda -- with its
50-per-cent interest in Falconbridge -- and Vancouver-based Teck Corp. -- with its
40-per-cent stake in Cominco -- will restructure as the shares are trading at multiyear lows |
