Base metals prices dent stock revival
Monday, October 26, 1998
CAROLYN LEITCH
Investment Reporter
For weeks, shares of Canada's stalwart metal miners have been slogging back from the dismal
performance of Sept. 1, when the stock of one producer after another succumbed to a 52-week
low after the price of nickel dived.
But that progress has been slowed by a new round of disappointing earnings and gloomy
prognostications as mining companies announce their third-quarter results. Many analysts
believe that prices of nickel, copper and zinc have hit bottom, but they warn there is little on the
horizon to drive a strong rally in the metals any time soon.
On Friday, Rio Algom Ltd. reported a 67-per-cent plunge in third-quarter profit, and
Falconbridge Ltd. executives provided a grim outlook last week when they reported a shortfall
for their latest quarter. Toronto-based Inco Ltd. is scheduled to report its third-quarter numbers
today.
The Toronto Stock Exchange metals and minerals index has reclaimed 1.6 per cent in the past
month, but the group is still down 18 per cent so far this year. In comparison, the benchmark TSE
300-stock composite index has given up 12.8 per cent in 1998.
Essentially, stocks of base metals miners move in lock-step with prices paid for the underlying
nickel, copper and zinc. Commodity prices have been crushed by the Asian financial debacle and
fear that further turmoil in world economies will see manufacturing decline. Meanwhile, many
nickel producers are increasing capacity.
Manford Mallory, an analyst with Research Capital Corp. in Toronto, said he is encouraged to
see that, after a bad start to October, with nickel prices hitting their weakest prices in 11 years
on the London Metal Exchange, the price has managed to stay above those lows.
For 1999, some forecasters predict global nickel consumption will drop by almost 1 per cent to
one million tons, leaving the nickel market in surplus for a third consecutive year.
Wayne Atwell, an analyst with Morgan Stanley Dean Witter & Co. in New York, foresees nickel
stuck at prices between $1.70 (U.S.) and $1.95 a pound for the foreseeable future.
Clarence Morrison, an analyst with Prudential Securities Inc. in New York, recently lowered his
earnings estimates for Inco. Mr. Morrison predicts the nickel giant will report a loss of 13 cents
(U.S.) a share in the third quarter. Previously, he had been forecasting a shortfall of 6 cents a
share.
Inco has an added burden in the form of the uncertainty surrounding its megaproject at Voisey's
Bay. Negotiations with the government of Newfoundland and Labrador have stalled.
Inco shares have fallen so far that some analysts have been speculating that the company is a
takeover target. Last month, the company revised its expiring poison pill, but denied there was
any imminent danger of a takeover.
Inco shares, trading at their 52-week high of $33 (Canadian) one year ago, have lost 46 per cent
since then, closing Friday at $17 on the TSE. The stock dipped to a 52-week low of $12.50 on
Sept. 1, sliding with the price of nickel.
Several U.S. analysts have a "neutral" rating on Inco shares.
Shares in Toronto-based Falconbridge also hit their 52-week low on Sept. 1, closing at $11.25
on the TSE that day. Friday marked one year since they achieved their 52-week high of $25.40.
Falconbridge blamed low nickel, copper and zinc prices for its $10.5-million third-quarter loss,
which equals 7 cents a share. The shortfall compared with a profit of $23.5-million or 13 cents a
share in the same period last year.
Vahid Fathi, an analyst with ABN Amro in Chicago, rates shares of Falconbridge a "hold". He
said Falconbridge's operations are well diversified and low-cost relative to its global
competitors.
The analyst said the company has high potential for production growth, compared with other
miners, but earnings will likely be held down by the current depressed commodity prices.
Copper prices have fallen 24 per cent in the past year as weak demand from consumers in Asia
caused stockpiles to surge. Analysts say that demand for copper by the U.S. manufacturing and
construction industries also appears to be waning.
Last week, Phoenix-based Phelps Dodge Corp., the largest U.S. producer, said it will close
mines in New Mexico and Chile and revise its plan for a third mine.
On Friday, Toronto-based Rio Algom reported that its profit for the third quarter was dragged
down 67 per cent by lower copper prices. Its profit of $6-million or 2 cents a share fell below
analysts' estimates of 10 cents.
Shares of the producer, which mines copper, uranium and zinc, swooned from a 52-week high of
$29.50 on the TSE in April to a low for the past year of $15 on Sept. 1., but have regained part
of the lost ground since then. The stock lost 25 cents Friday to end the week at $21.50.
Montreal-based Alcan Aluminium Ltd., which reached the low-water mark of $28.30 on Sept.
1, closed at $39.50 on the TSE on Friday. Vancouver-based Cominco Ltd., which slipped to a
52-week low of $13.50 on Sept. 2, ended last week at $16.55 on the TSE. |
