Electrfying appetite for the commodities space in the wake of June’s EU referendum should come as little surprise.
The fortunes of London’s listed drillers and diggers are very loosely correlated with the health of the British economy compared with, say, the FTSE’s banks and housebuilders. As a consequence, three of the top five FTSE 100 risers during the past three months are involved in the business of metals and energy production.
And of course raw materials producers are also major beneficiaries of the sharp — and most likely continued — decline in the value of sterling, given that reporting of earnings is carried out in US dollars.
FTSE 250 copper play Kaz Minerals (LSE: KAZ) has seen its share price explode 160% in 2016 against this backcloth. And precious metals producer Hochschild Mining (LSE: HOC) has enjoyed a stratospheric 465% stock price ascent.
Copper qualms
However, I’m concerned that these rapid rises could rise to a painful correction, particularly as demand indicators for the industrial metals complex remain shaky at best.
Latest Chinese import data showed inbound copper shipments at 340,000 tonnes in October, down 26% from the corresponding 2015 month and the lowest amount for 20 months. Metals traders responded by sending three-month red metal futures at the London Metal Exchange back towards $4,600 per tonne and within a whisker of fresh multi-month troughs.
As well as facing increased demand headwinds, a backcloth of rising supply may also heap further pressure on copper values looking ahead. Output from China is steadily gathering pace, while the world’s major mining companies are also embarking on ambitious expansion programmes to boost their own red metal output in the years ahead.
Indeed, Kaz Minerals itself saw group output up 43% during January-June, to 56,200 tonnes, as production at its Bozshakol project steadily ramped up.
All that glisters…
Silver and gold specialist Hochschild Mining is also enjoying splendid output rises of its own, and silver output leapt to a record 5m ounces during July-September thanks to improving metal recoveries at its Inmaculada and Arcata projects.
While the silver market has supply/demand problems of its own however, I reckon Hochschild’s revenues outlook is on safer footing than that of Kaz Minerals.
The ongoing political and economic turmoil facing the global economy should keep precious metal values well supported long into the future, even if prices have come off the boil more recently amid expectations of Federal Reserve rate hikes. Indeed, the London Bullion Market Association predicted last week that gold will trade at $1,347.40 per ounce in 2017, up from around $1,260 recently.
Having said that, both Kaz Minerals and Hochschild Mining deal on forward P/E ratios of 22.5 times and 25 times respectively, well above the watermark of 15 times that’s widely considered attractive value.
I reckon these figures could prompt hefty share price retracements should metal prices continue to trend lower.
