Several recent reviews from leading investment banks argue the outlook is finally brightening for raw materials.Carla Gottgens/Bloomberg
Metal prices are at the start of a long upswing and investors can profit by loading up on miners, according to a sweeping new analysis by research firm Sanford C. Bernstein & Co.
Its report is one of several recent reviews from leading investment banks that argue the outlook is finally brightening for raw materials. Over the past few months, Citigroup Inc. and Credit Suisse AG have both upgraded their outlooks for metal prices, although those banks have also cautioned that many stocks in the sector are generously valued.
The Bernstein report is notable for its grand size – a hefty 236 pages – as well as its grand ambition. "Global metals and mining: The end of a golden century of growth" attempts to present a unified field theory of metal investing that is at odds with the more conventional notion that commodity prices are in long-term decline.
The report, written by a team of analysts headed by Paul Gait, is also unusual in its enthusiasm for debt-heavy copper producers. First Quantum Minerals Ltd., Glencore PLC and Anglo American PLC are among its favourites.
Investors who don't like risk may want to treat those recommendations gingerly. However, the stock picks are in keeping with Mr. Gait's bullish outlook on the world's mining scene.
He and his team are optimistic precisely because their research shows that mine economics are deteriorating. The world's richest, most accessible deposits of many metals have been depleted, leading to lower returns as miners must go further and do more to strike pay dirt.
Miners have fought back in recent decades with heroic efforts to boost productivity. They have invested huge amounts in machines and equipment as a way to offset fading deposits. They have also sought economies of scale by increasing the size of mines. However, productivity gains have now slowed to a crawl, according to the Bernstein team.
That leaves higher prices as the only lever by which miners' returns can be boosted – and better returns are necessary if companies are to keep on producing the quantities of raw materials the developing world demands.
"We have enjoyed a golden century of growth based on tremendous productivity gains in mining, but this is unlikely to be repeated," Mr. Gait and his team say. "The conclusion is unequivocal to us: The only way by which future output can be secured is via an appreciation in commodity prices."
Skeptics may not be entirely convinced. China's breakneck growth drove demand for many metals in recent years and the fate of its economy is likely to continue to dominate the market, at least for the next decade.
The Bernstein team acknowledges that a sustained downturn in the Asian giant would create a glut of many metals. However, it argues the country's current slowdown has been self-induced as a way to contain food inflation and as a result of political infighting.
The report lists other worries as well, ranging from possible inflation in miners' operating costs to countries' desire to nationalize more of the profits from mine production. Ultimately, though, the Bernstein analysts come down on the side of higher commodity prices as the most likely scenario in the years ahead.
"All miners in our coverage should benefit, especially the levered names and copper players, namely Anglo American, First Quantum and Glencore," they write.
It's a view that will appeal to many investors who have been bruised by the sector's decline since 2011. But, even if Bernstein's analysis is right, one big question is how much of the sector's new optimism is already reflected in the market.
The sector's upswing this year has lifted many producers' shares. Anglo American's stock price has gained 115 per cent, First Quantum's is ahead 72 per cent while Glencore's has advanced 53 per cent. Those gains suggest that investors may want to think twice before betting that the long commodity slump is definitely over.
Ian McGugan