Canadian mining stocks have performed extremely well in recent weeks despite widespread carnage in the stock market. Surprisingly, many domestic miners remain undervalued relative to underlying commodity prices.
With 37 of 63 companies in the basic-materials sector having reported earnings this quarter, profits are showing a disappointing 28.9-per-cent quarter-over-quarter decline. But at the same time, the S&P/TSX diversified mining index has performed extremely well, jumping 8 per cent since Oct. 1. The divergence between earnings and share prices demands explanation.
So does the divergence between the mining and energy sectors. Energy stocks, which are reporting a 33-per-cent fall in profits – roughly similar to the downturn in mining earnings – have declined 4 per cent for the same period, rather than rising as miners have. Both sectors are sensitive to the global economy, so why is mining outperforming energy by 12 percentage points?
To probe this conundrum, it's helpful to compare the share price of industry heavyweight Teck Resources to changes in the commodity prices that underlie Teck's revenues. The chart at left shows Teck's stock price against a blended benchmark of commodity prices – 47 per cent coal, 27 per cent copper, and 24 per cent zinc – that matches where the company derives its revenue.
It appears that Teck stock has fallen far further since January of this year than underlying commodity prices. Given that, the strength in the company's recent stock performance may be only the beginning of a climb back to levels matching commodity prices.
There are clearly other factors at work in both Teck's stock price and commodity levels, including the Fed's QE3 initiative, which some analysts argue is artificially supporting commodity prices.
Nonetheless, the data are encouraging. They suggest that the recent strength in the share prices of Teck and other miners is not misplaced and the sector's share price gains may have further to run.
Scott Barlow