Panmure Gordon’s Kieron Hodgson’s update on the mining sector – 6th September 2016 – We may need to pause and reflect!
Following the strong run in gold equities ave +50% vs. bullion c10%, but also coincided with a multi month high of $1,366/oz immediately following the Brexit decision, we believe considerably disparity has opened up between the value of gold equities and the commodity.
A number of the gold names, Randgold and Acacia in particular, are trading on valuations that suggest far higher gold prices than spot (RRS assuming $2,100/oz & ACA $1,650/oz). We recently downgraded RRS, CEY and CMCL to Hold, and as such, we are cautious towards the prospects of further share price appreciation and suggest investors continue take some profits off the table, particularly with uncertainty yet consensus view of interest rate increases before the end of the year.
Iron ore prices remain relatively will underpinned, despite the continued thesis of lower prices, the Chinese continue to be comfortable with record high inventory levels whilst manufacturing data continues to improve. This week saw expansion indicators at their highest levels since 2014 setting the scene for steady Q4 from the diversified miners.
Copper prices will remain under pressure in our view despite positive developments out of China mainly due global copper demand growth of 2.8% versus supply growth of 4.5% led by low cost production in Chile and Peru whose operations have reduced costs to the level where they are profitable at less than $1.00/lb, thus reducing the likelihood of a concerted reduction in global supply growth anytime soon.
Zinc’s stellar run continues and frustrates UK only investors with a lack of appropriate investable options. As prices continue to rise on market imbalance, we are cautious of producers, particularly those such as Glencore sticking to their promise of curtailing supplies.