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Commodity prices have been rallying over the past six weeks, but the share prices of major metals producers now face a couple of significant hurdles: high valuations and a challenging earnings season.

First Quantum Minerals Ltd. FM-T and Freeport-McMoRan Inc. FCX-N are set to report their quarterly financial results on April 23. Teck Resources Ltd. will report its results on April 25, with Cameco Corp. CCO-T and Ivanhoe Mines Ltd. IVN-T reporting on April 30.

Normally, these might not be riveting events for investors if commodity prices were relatively steady over the prior three months.

This time, though, prices for everything from base metals to precious metals to energy have been on a tear as economists grow more optimistic about resilient global economic activity.

High interest rates have tamed inflation but failed to tip the U.S. economy into recession.

In China – the world’s largest commodity consumer – stimulus measures are showing early signs of turning the economy around. Factory activity exceeded economists’ predictions in March and is back in expansion territory after contracting for five months.

The continuing shift toward electrification and greener sources of energy, which requires huge quantities of copper and other metals, are buttressing commodities, while war and broader tensions in the Middle East are rattling energy markets.

The price of copper, at US$4.32 a pound on Tuesday, has risen 17 per cent since the end of February. It is now approaching a two-year high, ending a weak stretch over the past 18 months as many analysts worried that rising production and faltering demand would weigh on prices for the first half of this year at the very least.

“We believe copper’s second secular bull market this century is taking hold,” Max Layton, an analyst at Citigroup Global Markets, said in a note.

The cyclical weakness of the past 18 months is now fading, he added, “with improving manufacturing indicators in the U.S. and China hinting at a turn in the manufacturing cycle, and with looming central bank rate cuts a cushion against further economic deterioration.”

As for precious metals, gold briefly hit a fresh record high of US$2,384.50 an ounce on Tuesday, while silver has risen nearly 29 per cent over the past six weeks.

Crude oil is trading at a six-month high of US$86.20 a barrel, up nearly 20 per cent since the end of February.

Stocks are mirroring this action.

The energy and materials sectors within the S&P/TSX Composite Index have been leading the way over the past three months, with gains of 23 per cent and 16 per cent, respectively.

The stand-outs among large Canadian producers: Ivanhoe is up 34 per cent over the past three months; First Quantum, which had sold off last year after it was forced to shut down its copper mine in Panama, is up 28 per cent; and Teck is up 27 per cent.

These gains have left some stocks with high valuations that already reflect rising commodity prices.

Indeed, the share prices of large and mid-cap copper producers imply a copper price of US$5.55 a pound, on average, according to the Bank of Nova Scotia.

That’s nearly 30 per cent above the level of futures trading on the New York Mercantile Exchange.

These stocks are also expensive on other measures, according to Scotiabank. They trade, on average, at 8.4 times estimated EV/EBITDA – a ratio of enterprise value to estimated earnings before interest, taxes, depreciation and amortization for 2024. The 10-year average is just 5.9.

That puts a lot of pressure on these companies to produce profits that will justify the high share prices.

The upcoming earnings season, though, is unlikely to deliver, given that the first quarter tends to be a seasonally weak period for metals producers and the recent gains in commodity prices won’t be reflected in the results.

“It remains unclear if significantly improved investor sentiment will look through a potentially disappointing first-quarter reporting season,” Orest Wowkodaw, an analyst at Scotiabank, said in a note.

He estimates that EBITDA for the group will decline 12 per cent compared to the same quarter last year.

The commodities rally has lit a fire under stocks over the past several weeks. The payoff, in terms of profits, could take longer.

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