Commodity prices favourable for mining stocks
Global demand and supply for the commodities these two mining stocks produce improved considerably recently. The outlook for 2021 is positive.
Iron ore prices are up, driven by high Chinese demand and lower outputs in Brazil.
Mining stocks had a nice run over the last weeks of 2020. Since the beginning of November, the S&P/TSX Global Base Metals Index rose by nearly 30 per cent by year-end, thanks to positive coronavirus vaccine news. This has investors looking forward to an economic recovery in 2021 that will likely benefit cyclical companies, such as the producers of base metals.
Yet the direction of metals stocks has not been straight up. In fact, since early December, the stocks have fallen back from their recent highs due to rising COVID-19 cases. But we would use such episodes of weakness as buying opportunities to participate in what could be a very good run for resource stocks over the next year or so.
The outlook for base metals stocks in 2021 is promising. An improving economy alone is not the only factor that favours these stocks. Investments in 'green' energy, along with infrastructure projects, are also expected to drive demand for commodities in the coming years. This has some observers talking about another commodity super-cycle after the previous cycle ended in 2011. This may prove to be an exaggeration, of course, but there will be an undoubted need for commodities in the years to come if countries are to achieve their environmental and infrastructure goals.
Supply situation should buoy prices
Meanwhile, a lack of investment in the commodity space and declining inventories should weigh on supplies, ensuring that commodity prices remain buoyant. And this will help the profitability of mining companies.
Our top recommendation in the mining sector is Teck Resources Ltd. (TSX-TECK.B).
The outlook for the commodities that Teck produces is generally positive. Global demand for copper is expected to remain strong and the company should benefit even further from this commodity once its Chilean QB2 copper project reaches completion, hopefully in late 2022. Steel-making coal prices are also improving, thanks to strong demand from China, the world's biggest steel producer, and China's decision to ban imports of Australian coal. Tighter market conditions also bode well for zinc prices in 2021, though prices should moderate in the years that follow.
Consequently, Teck's earnings are expected to rise dramatically in 2021 and its shares are reasonably valued based on forecasted earnings. Teck is a buy mostly for growth.
Chinese demand driving iron ore prices
Iron ore prices are also benefiting from Chinese demand. Teck doesn't produce this commodity but Labrador Iron Ore Royalty Corp. (TSX-LIF) benefits from its production. That's because it generates all its revenue from an equity investment in Iron Ore Canada, which is a leading North American producer and exporter of premium iron ore pellets and high-grade concentrate.
Iron ore is used in steel-making, and its price has, therefore, benefited partly from strong demand from China. But the price has been further buoyed by lower forecasted output targets by Vale SA, a major Brazilian producer.
Consequently, iron ore had the best price performance in 2020 among all the metals, rising nearly 75 per cent in US dollar terms. This should let Labrador pay higher special dividends to its shareholders. Total dividends may exceed $4.00 a share in 2021, providing a yield of about 13 per cent on the current share price. Buy for growth and income.
This is an edited version of an article that was originally published for subscribers in the January 1, 2021, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
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