Smelling the mining roses

JPMorgan Cazenove, which describes itself as one of the UK’s leading investment banks...

JPMorgan Cazenove, which describes itself as one of the UK’s leading investment banks, has raised mining shares to "overweight" from "neutral", according to a report on Bloomberg, and also said that "commodity prices probably have bottomed".It’s clear that the so-called global financial markets crisis has rattled the minds of investment bankers, with the UK’s cadres ranking as one of the worst hit, but what influence it’s had on useful investment research remains unclear. Market data shows that while the broad based MSCI Barra dollar index for all global equities has bounced by 26% from multi year lows seen early in March this year, the world’s Top 100 miners, measured by market value, have risen by an average of nearly 100%, on a weighted average basis, from lows, typically seen in the closing months of 2008. The world’s Top 100 "hottest" mining stocks, measured by performance, have risen by an average of 375%, on a weighed basis. While cynics may suspect that this would necessarily be a bunch of penny stocks, companies with values below USD 10m have been excluded. One of the best performers, Ivanhoe Australia, has a market value of USD 450m, and has bounced by 1,240% from its lows. Centerra, which displays a market value of USD 1.1bn, has also scored well, with a 592% bounce. There are scores and scores of others. Mining stocks continue to lead the attempted recovery in global stock markets.

BHP Billiton, described as "the world’s biggest mining company", but which should more correctly be classified as "the world’s biggest diversified resources group", was apparently cut by JPMorgan Cazenove to "in-line" from "outperform" after its stock climbed. BHP Billiton’s (London) stock price has bounced by 90% from its recent lows. It’s not clear what time frame JPMorgan Cazenove is applying, but, measured over the past 12-months, BHP Billiton ranks as the 58^th best performing stock among the world’s Top 100 mining stocks, measured by value. The implication is that this would leave the door open to lots of other cuts by JPMorgan Cazenove; it has, instead, raised mining shares generally to "overweight" from "neutral".JPMorgan Cazenove apparently also raised Kazakhmys to "outperform" from "in- line," calling the stock "the cheapest for a copper producer". Kazakhmys ranks as one of the top 10 global copper producers, but as its 2008 annual report shows, while it in that year produced 343,000 tons of copper in cathode, it also produced 137,000 tons of zinc in concentrate, 16.7m ounces of silver, and 180,000 ounces of gold. Kazakhmys also runs a substantial downstream copper business, and ranks as Kazakhstan’s biggest power supplier.In terms of stock price performance, Kazakhmys has been outperformed by any number of stocks in the copper stable, such as KGHM Polska Miedź, Jiangxi Copper, Yunnan Copper, Tongling, First Quantum, Quadra, Pan Australian, Mercator, Northern Dynasty, Corriente, Chariot, Frontera, Seabridge, and so on. Equinox, a copper-only miner, ranks as one of the most debt-leveraged mining stocks, given its relative debt burden.JPMorgan Cazenove was also quoted as stating that "economic stabilization evidenced in an array of global lead indicators and the remarkably robust Chinese economy suggest that commodity pricing has probably seen its lows". Cazenove analysts David Butler and Amos Fletcher predict a "modest" recovery in commodity prices next year. Current numbers from the markets show that base metals have so far recovered from lows seen late in 2008, ranging from a 13% gain for aluminium to a 72% leap for lead. Among the precious metals, platinum, palladium and silver have soared, somewhat, and gold is 34% higher than lows seen over the past 12 months. Why wait until next year for a "modest" recovery?

The sustainability of these increases remains an interesting point of discussion. The Reuters/Jefferies CRB measure, an index, is only currently 10% above its lows; the Dow Jones AIG Commodity index is up 8%. Similarly, the Baltic Dry Shipping index may have bounced 189% from its lows, but it remains 84% below its 12-month highs.

JPMorgan Cazenove apparently raised estimates for this year’s prices of gold, platinum, silver, copper and zinc. The brokerage firm reduced predictions for aluminum, coking coal and thermal coal. Gold will average USD 850 an ounce this year, up 21% from the earlier estimate of USD700, JPMorgan Cazenove said.