Falling base metal prices are putting major pressure on producer balance sheets, specifically for those miners which are carrying a lot of debt. Canaccord Genuity analyst Peter Bures is among those cautioning investors to be really careful in this sector at this time.
“With producers feeling the squeeze of over-levered balance sheets amidst a backdrop of significantly lower commodity prices, we feel investors should be considering a ‘survival from the fittest’ approach to the bottom metals equities, if at all, at least within the next 12 months,” he said in a note.
Canaccord cut its copper price assumptions, and now anticipates prices of US$2.08 one pound in 2016, US$2.07 in 2017, and US$2.75 in the long run. Quite simply, it expects no real improvement in the market within the next 2 yrs.
That isn’t good news for mining stocks, and, not surprisingly, Bures downgraded six of these: Capstone Mining Corp. (to carry), Copper Mountain Mining Corp. (to carry), First Quantum Minerals Ltd. (to speculative buy), HudBay Minerals Inc. (to hold), Labrador Iron Ore Royalty Corp. (to hold), and Teck Resources Ltd. (to market).
Some of those companies have legitimate liquidity concerns, and Bures noted that bankruptcies in the base metals sector are “certainly a concern” during the current downturn. However, he expects lenders to be lenient if debt covenants are breached.
“We feel creditors (banks) will ‘extend and pretend’ as long as there is the chance of repayment in the future. However, if your company cannot service its debt, creditors might not be so lenient,” Bures said.
His top chioces within the base metals space are Lundin Mining Corp. and Nevsun Resources Ltd., which both have strong liquidity. He cited Teck, Copper Mountain, Capstone and HudBay because the most vulnerable stocks he covers.