Copper bulls haven't had much to celebrate this year, with prices of the red metal slipping in the past few months to around $4 (U.S.) a pound from record highs above $4.50 at the start of the year.
But Desjardins Securities Inc. analyst John Redstone believes that downward trend is about to be snapped. He expects copper to return to rallying mode this summer - and is forecasting gains of more than 50 per cent over the next year for several large North American miners.
His reasoning is tied directly to China and its physical inventories of the metal. Copper stocks as reported by the Shanghai Futures Exchange has declined to 105,000 tonnes from 178,000 tonnes only eight weeks ago, he notes, and copper held by bonded warehouses in the country are also on the decline. Meanwhile, all evidence suggests end-use demand for copper in China remains robust and is growing, he says.
This has implications for copper inventories held in London Metal Exchange warehouses - a key driver of global prices for the metal. Total copper inventories in LME warehouses has increased 117,000 tonnes since early December - and as Mr. Redstone notes, two South Korean warehouses accounted for the vast majority of the increase. Both of these are considered as "feeder" warehouses for Chinese consumption, and he believes these warehouses are about to experience significant drawdowns.
He also notes that the Chinese spot copper price has moved above the three-month futures price - a situation known as backwardation and one that usually precedes a restocking phase by copper consumers in China.
"We suggest the upcoming summer period could be a very exciting time for LME copper prices," Mr. Redstone wrote in a research report today. "The market is positioning for declining LME copper inventories during the June-July-August period. In response, we believe copper prices should move higher."
He is maintaining an average copper price forecast of $4.50 per pound in 2011 and $5 in 2012.
Upside: Mr. Redstone recommends an overweight position in the mines and metals sector and has "buy" recommendations on the following:
First Quantum (target $163.25)
Quadra FNX (target $19.70)
Teck Resources target $76)
Capstone Mining (target $5.55)
HudBay Minerals (target $20.35)
Inmet Mining (target $92.90)
Ivanhoe Mines (target $36.84)
Freeport-McMoRan (target $79.25 (U.S)
High Liner Foods Inc. reported "blow-out" first-quarter results, with earnings per share of 63 cents well ahead of forecasts, driven by strong sales in the U.S. The company continued to benefit from lower seafood and other input costs, but this trend should begin to reverse in the second quarter, said Beacon Securities Ltd. analyst Michael Mills.
Upside: Mr. Mills upgraded High Liner to a "buy" from "hold" and raised his target price by $2 to $18.
Flint Energy Services Ltd. announced a $200-million offering of senior unsecured notes due in 2019. In the near term, the proceeds will be used to repay existing debt, but further out it also positions the company to make a material acquisition without the need to issue equity, said CIBC World Markets Inc. analyst Jeff Fetterly.
Downside: Mr. Fetterly cut his price target by $2 to $17 "to reflect uncertainty around the timing, size and structure of potential acquisitions."
Canadian Natural Resources Ltd. is expecting to boost capital spending next year by $2.5-billion as it ramps up its Horizon oil sands expansion project and spends more on its thermal heavy oil interests, notes Canaccord Genuity analyst Phil Skolnick. But Mr. Skolnick believes the stock remains cheap and investors "will start to gravitate" to the company given the cash flow generation that will emerge from Horizon.
Downside: Mr. Skolnick cut his price target by 3 per cent to $56 but reiterated his "buy" rating.
Rough and polished diamond prices have continued their upward trend, albeit at a slower pace than earlier this year, noted UBS analyst Brian MacArthur. He suggests this should translate into more upside for shares of Harry Winston Diamond Corp. , whose 40-per-cent-owned Diavik mine in the Northwest Territories is expected to see higher production this year. He expects Harry Winston's retail business to benefit from strengthening demand for luxury jewellery.
Upside: Mr. MacArthur raised his 12-month price target to $17.75 from $16.50.