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Thursday, February 07, 2008


Analysts too low on metal price forecasts

No Decline In Sight

John Morrissy, Canwest News Service
Published: Thursday, February 07, 2008

OTTAWA - Mining analysts are getting it wrong on metals, says a new study by Ernst & Young that argues current pricing is a return to sustainable levels after a lengthy period of artificially depressed values.

"Most mining analysts are off the mark in their repeated predictions of a sharp decline in metal prices," the report said. "While analysts are wary of straying too far from the comfort zone of historic averages, the mining companies … are taking a far more realistic view."

Since 2005, analysts' estimates have been off the mark on where prices have settled -- anywhere between 20% and 200% below actual values -- resulting in most mines and mining companies being "materially undervalued."

But mining companies have been busy ignoring repeated calls for price collapses. Instead, they're acquiring competitors whose shares don't fully reflect the value of the commodity.

In the recent past, this apparent value has led to takeovers, worth more than US$100-billion, of Canadian mining icons Falconbridge, Inco and Alcan, as well as Phelps-Dodge. And mining companies are still taking advantage of the situation, as evidenced by mining giant BHP Billiton upping its bid yesterday to win control over rival Rio Tinto.

Tom Whelan, Ernst & Young's Canadian mining analyst, said the report examined the past century and discovered that what were interpreted as cycles in the mining industry were actually the result of specific events.

Weak prices in the 1990s, for example, were the result of the collapse of the Soviet Union. The event triggered the release of 50 years of accumulated stockpiles of minerals and a sharp decline in domestic demand in the former Soviet states. Such events weighed on prices, but are unlikely to be repeated in the near future, Mr. Whelan said.

The rise in metals prices over the past three years -- with bellwethers like copper trading under US$1 a pound until 2004 before rising to current prices of more than US$3 -- is representative of "the new normal," the report said.

"Our view is that we're not at the top of the cycle," Mr. Whelan added, saying it's more of "a return to sustainable prices after a period of artificially depressed prices."

He cited the report's data, which show that prices for copper, nickel and aluminum, adjusted for inflation, are much lower today than they were a century or more ago. In 1895, for example, aluminum traded at more than US$14 a pound. By 2006, the metal traded at about US$2 a pound.

The consulting firm said it expects more acquisitions to occur in the sector, "while investment analysts underprice commodities relative to the corporates themselves."


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