Metals haven't crashed this hard since the Great Recession – MINING.COM – MINING.com
For a metal like copper, its uses in everything from heavy industrial machinery to advanced electronics mean the market is tightly linked to economic shifts, and the retreat marks a signal from commodity markets that efforts to get prices back under control are having some early successes. The mood in metals has soured even as Chinese Covid-19 lockdowns start to ease, and there are signs that traders there are betting copper prices will fall further.
“Even if China recovers in the second half, it won’t be able to single-handedly boost prices back to new highs — that age has gone,” Amelia Xiao Fu, head of commodities strategy at BOCI Global Commodities, said by phone from London. “If other major economies are heading towards a recession, China won’t be growing at exceptional rates either.”
Chinese manufacturing activity is already shrinking, and S&P Global gauges on Thursday showed European manufacturing output contracting for the first time in two years, while US output hit a 23-month low. Even so, the magnitude of the accelerating selloff in copper and other industrial metals suggests that investors are betting on much steeper declines in demand in the coming weeks.
Copper hit a 16-month low of $8,122.50 a ton on the London Metal Exchange on Friday, with an 11% drop so far in June putting it on course for one of the biggest monthly losses of the past 30 years. Metals from aluminum to zinc have also plunged and the Bloomberg Industrial Metals Spot Subindex is down 26% this quarter, headed for the biggest drop since the end of 2008. Tin has more than halved from its March peak.
Metals have been harder hit than other commodities like crops and energy — where supplies and trade have been more forcefully affected by Russia’s invasion of Ukraine. The Bloomberg Energy Spot Subindex is up 10% since the end of March, while a corresponding agriculture index fell 9.7%.
Yet copper and several other metal markets are still facing some of the tightest supply conditions ever. With inventories dwindling globally and little sign of significant new supply, even staunch copper bulls like Goldman Sachs Group Inc. had warned that demand destruction may be necessary to help ease the strain.
The rout in industrial metals started earlier this month after the Federal Reserve hiked interest rates by 75 basis points, and warned that its effort to bring rampant inflation back under control risked sparking a recession. But the selloff accelerated last week even as investors in other markets start to price in an earlier end to the Fed’s rate-hike cycle.
The Federal Reserve has warned that it has little influence over the supply-side drivers that have underpinned the surge in commodities like crude oil, while demand for essential goods like gasoline and food will remain resilient as the pressure on consumers’ finances grows.
But the Fed’s rate hikes could have a much more immediate impact on discretionary spending, potentially bringing an end to boom in metals demand in areas like property, car-making and durable goods. And with manufacturers facing rising borrowing costs, there are also growing risks to demand in areas like construction and industrial machinery, which account for a major portion of overall usage.
Evidence of the bearish shift in sentiment is clearest in the Chinese market, where open interest in Shanghai Futures Exchange copper contracts has risen sharply during a steep decline in prices. That signals that traders are adding new shorts, rather than selling out of bullish positions. On the LME, exchange data suggests the recent slump has been driven more by investors bailing on bets on rising prices, while bearish positioning has been broadly flat for most of the month.
That could reflect hesitation about betting against the market at a time when exchange inventories remain near critically low levels, after a sharp decline in stockpiles helped drive a historic surge in spot copper prices late last year. Nickel bears got caught out in an even bigger short squeeze in March, while a new supply crisis is brewing in the zinc market after readily available LME inventories sunk to a record low last week.
For now, the recessionary risks around copper are driving away generalist investors, said BOCI’s Fu.
“Some of the so-called tourists have decided they want to get out for the time being, and from a trading perspective that makes sense — but fundamentally these markets are still very tight.”
(By Mark Burton, with assistance from Jack Farchy)
This London, Ont., tech firm is making e-bikes an easy alternative to cars for its workers – CBC.ca
With rising fuel prices, heavy impacts on the environment and climate change, a London-based tech firm has found a crafty solution in the form of e-bikes for its employees.
About 50 workers at Northern Commerce based in Ontario were gifted e-bikes worth just over $3,500 each on Sunday. Joy Hagerty, who’s been a part of the team for about 10 years, was one of them.
“I’m excited to take a turn on the tern,” she said. “It’s really good for the city so we’re happy to spread this around. Any smaller thing you can do is going to help make an impact, so this allowed us to really get the word out.”
She plans to slowly phase into using her bike as often as possible, and hopes to it can serve as a replacement to her car when it comes to getting around the city.
The company’s senior vice president Andrew McClenaghan developed a love for e-bikes during the pandemic when he used them for exercise and running errands, and hasn’t looked back since.
“I was amazed at what a game changer — having a little bit of extra power when you’re pedalling — made for me and my lifestyle, and I started using it in my day to day,” he said.
While the functions of the e-bike are similar to a traditional one when it comes to the pedals, its settings can be adjusted to add more power when riding uphill or carrying groceries.
“We’re running out of room for cars, we can’t widen the roads anymore and even if we do they just fill up with cars so it’s a never ending problem. This can actually solve for it,” McClenaghan said
McClenaghan decided to gift the e-bikes to his team as a way to share his new-found passion with them, and also as a ‘thank you’ gesture for the staffers who stuck around in 2020 when the company merged with his former business, Digital Echidna.
E-bikes combating climate change
Brad Lickman drives a truck, and he says his new e-bike gives him the chance to reduce his impact on the environment.
“I think seeing more of these on the road will raise awareness that they exist,” he said. “Climate change is a very serious issue and we need to do everything we can to minimize our own impact on the environment.
Lickman also says he hopes e-bikes can also draw more action around improving bike lanes throughout the city.
McClenaghan says he believes the e-bikes can be a game changer in helping to combat climate change. He says the bikes serve as a multi-functional tool and a second-car replacement.
“It can really replace all those short car trips. Most car trips are within eight to 10 minutes and this e-bike, with the cargo capability it has, can help people change their habits,” he said.
The cargo bikes, manufactured by U.S. based company Tern, have a heavier frame which enables them to carry more weight, plus spaces to add more attachments, McClenaghan said
“I’ve seen that the more bikes that are out there, the more people are asking questions about them,” he said. “Once you try them, people instantly fall in love with them and see the possibilities that come out of them.”
A snowball effect
Matt Thompson and his family were thrilled to ride an e-bike for the first time ever. He says he believes the bikes can add some convenience to commuters challenged by construction in the city.
“It comes at a great time,” he said. “I can’t go anywhere in this city without running into construction. I think the more people who are focused on not being on the roads is a great thing.”
Northern Commerce is also working on building cages for the bikes in their parking lot to ensure a safe storage space.
“Our philosophy is that the more bikes that are out on the streets, it’s going to have a snowball effect and we’ll see more and more of these in our city,” McClenaghan said.
Monday's analyst upgrades and downgrades – The Globe and Mail
Inside the Market’s roundup of some of today’s key analyst actions
Citing its exposure to European gas prices and improving relative valuation, Scotia Capital analyst Jason Bouvier raised his recommendation for Vermilion Energy Inc. (VET-T) on Monday.
Also expecting “a nice uplift in cash flow profile going into 2023 as acquisitions are completed and hedges roll over,” he moved the Calgary-based company to “sector outperform” from “sector perform” in a research note.
“WTI prices have fallen about $14 per barrel off their recent high. During this same time frame, European gas prices have risen by 50 per cent,” he said. “VET derives about 40-45 per cent of its cash flow from European gas prices. Given VET’s share price has fallen roughly in line with its peer group over the past couple of weeks the relative valuation of VET has improved materially.”
“In 2022, we estimate VET’s hedging losses at $616-million. Currently, the company has about 40 per cent of its production hedged in 2022. This falls to 10 per cent in 2023. No oil is hedged for 2023 and North American gas is hedged at higher prices than in 2022. As a result, even though we have major commodities falling from 2022 to 2023 (strip), VET’s cash flow actually increases from $2.2-billion in 2022 to $2.4-billion in 2023 (up 10 per cent).”
Mr. Bouvier is forecasting Vermilion to reach its net debt target of $1.2-billion in the third quarter this year and sees the potential to be debt free by the end of the 2023 fiscal year.
“After hitting their debt target, the company will be in a good position to increase shareholder returns. We expect both increased dividends and SBB over the next 1-2 years,” he said.
He maintained a $36 target for the company’s shares. The current average target on the Street is $36.46, according to Refinitiv data.
With trade indicators looking “shaky,” CIBC World Markets analyst Stephanie Price downgraded Descartes Systems Group Inc. (DSGX-Q, DSG-T) to “neutral” from “outperformer,” seeing better relative return in other names elsewhere.
“We see risks to organic growth from slowing transportation volumes given that approximately 40 per cent of Descartes’ revenue is derived from transactional revenue,” said Ms. Price. “We expect that Descartes will look to offset slower organic growth with M&A (more than $200-million in net cash) and see limited risk in management’s 10-15-per-cent EBITDA growth target.
“However, Descartes’ premium to the S&P Software Index has typically narrowed during economic downturns, with the stock trading at a valuation below the S&P Software Index during the Great Financial Crisis, versus a seven-turn premium to the Index today.”
Her target for Descartes shares slid to US$71 from US$89 previously. The average on the Street is US$75.80.
Believing its business model can “outperform its basic chemical peers through a recession,” Scotia Capital analyst Ben Isaacson upgraded Chemtrade Logistics Income Fund (CHE.UN-T) to “sector outperform” from “sector perform.”
In justifying his change, he pointed to several factors, including the expectation that demand for regen acid services should increase over the coming quarters; ultrapure sulphuric acid demand is “set to soar” in North America over the mid-term; a “relatively tight” outlook on caustic soda and “fairly stable margin variability” for its water chemical business.
“Chemtrade has proactively cleaned-up both its portfolio and balance sheet, which we think could result in slight multiple expansion over time,” said Mr. Isaacson. “Initiatives include the sale of its non-core specialty chemical business, the $10-million sale of an idled facility in Augusta, Georgia, as well as the closure of a chlorate plant in Quebec, due to slower post-COVID demand growth.”
He said Chemtrade’s 7.8-per-cent distribution yield has “strong support” and sees a “decent” valuation discount.
“When compared to all equities in the S&P TSX Materials with a market cap greater than $1-billion, CHE offers the second highest yield (its market cap is slightly less than $1-billion),” he said. “As of Q1/22, the rolling four-quarter distribution payout ratio is 48 per cent. Through the end of ‘23, we do not see the rolling four-quarter distribution payout ratio exceeding 60 per cent, providing strong support for a distribution of $0.15/unit per quarter.”
“CHE is trading at 6.1 times and 6.5x ‘22 and ‘23 EBITDA of $325-million and $305-million, respectively. This compares to five- and ten-year EV/NTM EBITDA multiples of 7.2 times and 7.4 times, respectively. The lower five-year multiple is due to the acquisition of Canexus, which brought more basic chemical volatility to the portfolio. However, if we look at the first full year of CHE post Canexus, through to the end of ‘23 (using Street estimates), the average EBITDA is $300-million, with very little variability. Accordingly, we see no reason why CHE’s forward multiple shouldn’t begin to return to 7.2 times over the next year. In fact, one could argue for a premium multiple over this amount, given that leverage has improved materially.”
Mr. Isaacson raised his target to $10.25 from $9.50. The average on the Street is $10.
“While waiting for (relative) outperformance, investors can enjoy a nearly-8-per-cent yield, well-supported by a rolling four-quarter payout ratio that shouldn’t exceed 60 per cent through ‘23,” he said.
National Bank Financial analyst Vishal Shreedhar expects to see improving results from MTY Food Group Inc. (MTY-T) when it reports its second-quarter results in early July as casual dining trends rebound with an easing of pandemic-related restrictions.
However, he did warn a “solid” recovery in Canada could be partially offset by “tapering performance” from its Papa Murphy’s pizza chain.
“Investors will focus on evolving consumer behaviour as economies continue to reopen (year-over-year), particularly amid pervasive inflation, supply chain challenges, constrained labour conditions and concerns regarding slowing consumer spending,” said Mr. Shreedhar.
He’s forecasting adjusted earnings before interest, taxes, depreciation and amortization for the quarter of $46.6-million, above the consensus estimate of $45-million and up 7.2 per cent year-over-year from $43.5-million. Revenue is expected to grow to $154-million from $136-million, also topping the Street ($136-million).
“During the quarter, OpenTable data suggests a sharp recovery in seated diners in Canada as restrictions were gradually lifted. Solid recovery in Canada is anticipated to be partially offset by tapering demand at Papa Murphy’s (pent-up demand for dining out),” said Mr. Shreedhar.
Citing its “attractive valuation, operational progress and supportive capital allocation outcomes,” he said he remains “constructive” on MTY, though he did acknowledge “heightened risk related to inflation, supply chain, labour and macroeconomic conditions.”
Maintaining an “outperform” rating for its shares, Mr. Shreedhar cut his target to $63 from $70 in order to reflect a decrease in his valuation multiple “due to heightened uncertainty with the macroeconomic backdrop.” The average on the Street is $68.14.
When Alimentation Couche-Tard Inc. (ATD-T) reports its fourth-quarter financial results after the bell on Tuesday, Desjardins Securities analyst Chris Li expects to see “strong fuel margins and solid merchandise sales and margin, offset by elevated opex, sluggish fuel volume and higher volatility in Europe.”
However, he expects investor attention to centre on the outlook and trends in the current first quarter given the spike in gas prices.
“While industry fuel margins have moderated from mid- to high US30cpg (January–April) to an average of US28–29cpg in May and June, we believe our low-US30cpg forecast is achievable in 1Q and FY23, supported by company-specific initiatives (fuel rebranding to Circle K, enhanced procurement through partnership with Musket, pricing optimization, and other sourcing and logistics capabilities). All else equal, a one-cent change in U.S. fuel margin impacts our FY23 EPS by US$0.08 (3 per cent). Fuel volume will be weighed down by high prices. While SG&A expenses will remain elevated in the near term due to higher labour costs and credit card fees, the pressures should start to ease in 2Q. We expect c-store sales and margins to remain solid, supported by cost pass-through and positive mix shift (single serve, private label, etc), partly offset by higher commodity costs (foodservice) and reduction in discretionary (ie carwash).”
With that change to his fuel margin estimate, Mr. Li raised his full-year earnings per share forecast for 2022 to $2.57 from $2.41 and 2023 to $2.56 from $2.51.
He maintained a “buy” rating and $60 target for Couche-Tard shares. The average on the Street is $62.72.
“While we expect earnings to remain volatile near-term due to macro uncertainties, we remain positive on ATD’s longer-term growth potential, supported by a strong pipeline of growth initiatives. Its strong balance sheet is valuable, especially in the current market, supporting capital return,” he said.
CIBC World Markets analyst Scott Fromson, Sumayya Syed, Dean Wilkinson reduced their target prices for real estate equities on Monday.
Their changes included:
- Allied Properties Real Estate Investment Trust (AP.UN-T, “outperformer”) to $47.50 from $50. The average on the Street is $49.35.
- American Hotel Income Properties REIT (HOT.U-T/HOT.UN-T, “neutral”) to US$3.80 from US$4. Average: US$3.84.
- Automotive Properties REIT (APR.UN-T, “neutral”) to $14.25 from $15. Average: $14.76.
- Boardwalk REIT (BEI.UN-T, “neutral”) to $58 from $60. Average: $60.95.
- Brookfield Asset Management Inc. (BAM-N/BAM.A-T, “outperformer”) to US$68 from US$75. Average: US$70.55.
- CAP REIT (CAR.UN-T, “neutral”) to $55 from $60. Average: US$63.22.
- Chartwell Retirement Residences (CSH.UN-T, “outperformer”) to $14.25 from $15. Average: $14.38.
- Colliers International Group Inc. (CIGI-Q/CIGI-T, “outperformer”) to US$150 from US$170. Average: US$162.
- Crombie REIT (CRR.UN-T, “outperformer”) to $18.25 from $19. Average: $19.42.
- CT REIT (CRT.UN-T, “neutral”) to $18 from $19. Average: $18.79.
- Dream Industrial REIT (DIR.UN-T, “outperformer”) to $17 from $18. Average: $18.44.
- Dream Office REIT (D.UN-T, “outperformer”) to $27 from $28.50. Average: $27.08.
- Dream Unlimited Corp. (DRM-T, “outperformer”) to $53 from $56. Average: $55.33.
- European Residential REIT (ERE.UN-T, “outperformer”) to $5.35 from $6. Average: $5.74.
- Extendicare Inc. (EXE-T, “neutral”) to $8 from $8.50. Average: $8.15.
- First Capital REIT (FCR.UN-T, “outperformer”) to $19.50 from $21. Average: $20.54.
- FirstService Corp. (FSV-Q/FSV-T, “neutral”) to US$140 from US$145. Average: US$160.
- Granite REIT (GRT.UN-T, “outperformer”) to $102 from $106. Average: $107.90.
- H&R REIT (HR.UN-T, “outperformer”) to $16.50 from $17.50. Average: $17.07.
- InterRent REIT (IIP.UN-T, “neutral”) to $15.50 from $17. Average: $18.15.
- Killam Apartment REIT (KMP.UN-T, “outperformer”) to $22.50 from $25. Average: $24.10.
- Minto Apartment REIT (MI.UN-T, “outperformer”) to $23 from $24.50. Average: $25.05.
- Morguard Corp. (MRC-T, “outperformer”) to $150 from $165. Average: $180.
- Morguard North American Residential REIT (MRG.UN-T, “outperformer”) to $21.75 from $23. Average: $21.70.
- Northwest Healthcare Properties REIT (NWH.UN-T, “outperformer”) to $14.75 from $15.50. Average: $15.22.
- Pro REIT (PRV.UN-T, “outperformer”) to $7.75 from $8.25. Average: $7.93.
- RioCan REIT (REI.UN-T, “outperformer”) to $25 from $26.50. Average: $26.25.
- Sienna Senior Living Inc. (SIA-T, “neutral”) to $15.75 from $16.75. Average: $16.69.
- Slate Office REIT (SOT.UN-T, “neutral”) to $5 from $5.25. Average: $5.19.
- SmartCentres REIT (SRU.UN-T, “outperformer”) to $32.75 from $34.50. Average: $33.
- Storagevault Canada Inc. (SVI-T, “outperformer”) to $7 from $8. Average: $7.86.
- Summit Industrial Income REIT (SMU.UN-T, “neutral”) to $21 from $22.50. Average: $23.65.
- Tricon Residential Inc. (TCN-T, “outperformer”) to $20.50 from $22. Average: $20.35.
- True North Commercial REIT (TNT.UN-T, “neutral”) to $6.75 from $7. Average: $6.95.
Citing “permitting uncertainty” at its Fenix Gold Project after the Chilean Environmental Assessment Service recommended a rejection of its Environmental Impact Assessment report, Raymond James analyst Craig Stanley downgraded Rio2 Ltd. (RIO-X) by two levels to “market perform” from “strong buy.”
“The Consolidated Evaluation Report notes that Fenix ‘fulfills all the applicable environmental regulations and meets the environmental requirements for the granting of applicable sectorial environmental permits’ however, the company ‘has not provided enough information during the evaluation process to eliminate adverse impacts over the chinchilla, guanaco, and vicuña,’” he said.
“We note Gold Fields Salares Norte Gold Project was permitted but subsequently sanctioned over a botched relocation of 20 chinchillas.”
Mr. Stanley cut his target to 40 cents from $1.50. The average on the Street is $1.64.
While he thinks Fission Uranium Corp. (FCU-T) is “likely to continue to do well on a backdrop of improving sentiment in the uranium space,” BMO Nesbitt Burns analyst Alexander Pearce downgraded its stock to “market perform” from “outperform,” seeing “better value elsewhere.”
“We believe near-term upside in uranium can be better gained through exposure to the producers and more advanced developers,” he said.
Mr. Pearce continues to see its Patterson Lake South uranium project as “attractive” with the “potential for a low-cost and large-scale uranium-producing asset.” However, he thinks its development timeframe and capex “do count against it slightly.”
“Amongst other key development projects in the Athabasca Basin, PLS is slightly behind our preferred project list due to its current development stage (FS ongoing),” he said. “Therefore, we have downgraded Fission.”
He maintained a 70-cent target for its shares. The average is $1.31.
“We would look to review this rating on any pullback in share price, given the positive outlook we have on the commodity price,” said Mr. Pearce.
In other analyst actions:
* While he sees it “on track for another strong quarter” and sees “significant upside from current levels,” BMO Nesbitt Burns analyst Fadi Chamoun reduced his Bombardier Inc. (BBD.B-T) target to $63 from $71.25 with an “outperform” rating to “reflect overall lower market multiples.” The average is $53.97.
“Bombardier in-service fleet of aircraft saw significant increases in flight activities in Q2/22,” he said. “Deliveries of mid/large cabin aircraft increased in Q2/22 and are expected to accelerate in H2/22 and 2023 supported by a strong backlog, which we believe has expanded further in Q2/22. The strength in orders has also afforded BBD the ability to retire more debt and strengthen its financial position. While macro uncertainty continues to weigh on valuation in the immediate-term, BBD is executing well against its self-help opportunities and the company is on more solid footing.”
* CIBC’s Anita Soni reduced Equinox Gold Corp. (EQX-T) to “underperformer” from “neutral” with a $5.75 target, down from $9.25 and below the $12.31 average.
“Despite the fairly low trading P/NAV multiple, which reflects some risk at the Greenstone project, we believe that the company’s higher capex weighting implies risk and we do not see how it will trade in line with peers during a build-out,” said Ms. Soni.
* In response to its decision to halt additional construction activities at its Premier Gold project in the Golden Triangle of B.C., CIBC’s Allison Carson cut Ascot Resources Ltd. (AOT-T) to “neutral” from “outperformer” with an 80-cent target, down from $1.30. The average is $1.19.
“Although we remain confident on the technical and operational aspects of this project, due to the uncertainty around the financing and development we have lowered our rating,” she said.
* Touting it as a “good pass-through of oil prices to investors,” CIBC’s Christopher Thompson initiated coverage of Cardinal Energy Ltd. (CJ-T) with a “neutral” rating and $10 target, exceeding the average on the Street by 17 cents.
“Cardinal Energy’s low-decline-rate operating model generates impressive free cash flow and a leading dividend yield in the current commodity price environment,” he said. “That being said, when stress tested at lower commodity prices, we see relatively higher risk in the model because of the company’s higher relative cash costs. While we believe a valuation premium relative to peers is warranted given Cardinal’s leading capital intensity ratio, with the stock trading at 3.5 times 2023E EV/DACF on our price deck versus a peer average of 2.7 times, we would wait for a smaller gap.”
* After meetings with its management, BMO’s Devin Dodge cut his target for Finning International Inc. (FTT-T) to $32 from $38 with a “market perform” rating. The average is $44.67.
“We came away from the meetings incrementally more positive and believe FTT is poised to deliver improved and more sustainable earnings over the cycle. However, we believe escalating concerns for a recession and moderating commodity prices (though admittedly still at elevated levels) provide a challenging backdrop for the stock. We would consider a more constructive rating on improved visibility into economic conditions and/or mining sector investment in Chile, all else equal.
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