Barlow’s Research Roundup: Top picks in copper miners as commodity price hits new highs

Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow

Copper soars

RBC Capital Markets analyst Sam Crittenden provided top picks in copper mining as the commodity price hit new highs,

“Copper prices surged to new highs in Q3, averaging $6.41/lb for the quarter; a 6-per-cent quarterly increase and 44-per-cent year-over-year gain. The rally culminated in a record close of $6.74/lb on September 8, catalyzed by continued physical market tightness. Contributing to this strength, Chilean production contracted sharply in August, ~700kt of copper remains idle in US inventories, and demand has demonstrated resilience despite ongoing geopolitical uncertainty, a strong dollar, and an elevated interest rate environment. For our North American producer coverage, we are generally expecting a strong quarter and will be testing if Q3 supports prevailing guidance for a “stronger second half”. In our view, record prices and no new major mine disruptions should support operations, however we’d flag that storms in Chile (and heavy rainfall in Arizona), elevated diesel/sulphuric acid prices, and the commissioning of several brownfield expansions could make the quarter noisier than we might have originally hoped … Equity valuations screen attractive by historical standards: RBCe P/NAV at 0.9 times/0.6 times at spot (Deck 3-year average 1.0 times), NTM [next 12-months] consensus EV/EBITDA at 6.3 times (3Y avg of 6.7 times), producer implied price $5.03/lb (23-per-cent discount vs 11-per-cent historical average). In the quarter, copper equities underperformed the commodity (North American producer coverage up 6.3 per cent vs copper up 8.3 per cent). Our preferred names are Hudbay as it generates strong FCF and de-risks Copper World, Capstone, as we believe its operations can improve into 2027, and First Quantum where we see upside in on a potential restart in Panama”.

PM survey results

Scotiabank strategist Hugo Ste-Marie summarized the results of his quarterly survey of North American portfolio managers,

“OUR TAKE: Mixed. Fed jitters are rising, but risk appetite remains resilient. Our latest survey confirms what we have been hearing on the ground: many investors fear the Fed, but it remains difficult to turn outright bearish on Equities at this juncture. Investors are building a modest Cash cushion and have turned decidedly more bearish on Treasuries, with nearly 60 per cent expecting U.S. 10-year yields to rise. At the same time, positioning remains firmly geared toward growth and cyclicality: investors were net buyers of Canadian and EM equities, while Technology, Energy, and Materials rank as the sectors most likely to outperform. Overall, investors appear to be hedging against tighter policy, not abandoning the equity story.

Strong U.S. profits

The one word answer for why U.S. equities continue higher is earnings, which remain extremely strong despite rate-related headwinds. Deutsche Bank strategist Binky Chadha previewed upcoming reporting season,

“Will the confluence of tailwinds that drove Q2 earnings growth for the S&P 500 to a record 34 per cent year-over-year continue in Q3 or growth begin to decelerate? In our reading, the drivers of outsized growth remained as strong. We see no signs of a deceleration in AI demand, cyclical growth picking up further, lower but still strong growth in oil & commodity prices helping Energy & Materials earnings, while the lagged negative effects are still modest and concentrated in certain sectors, and a continued modest boost from tariff refunds. Putting it all together, we see earnings growth sustaining at record levels in Q3 (34 per cent). The consensus (27 per cent), in contrast, expects a broad deceleration, setting up for another quarter of above-average beats.

“Earnings seasons have historically been positive for equities and even more prominently so over the last year. While this season features an FOMC meeting and the US mid-term elections which could introduce additional volatility, the risk-reward in our view remains favorable”.

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