Equity Clock

Investing in the Canadian Mining Sector

Originally Published in the February 27th edition of the Financial Post by Tech Talk author, Don Vialoux

The Canadian mining sector benefits from a series of encouraging news events during the next three months. Seasonal influences also favour the sector until May. Will events help the sector again this year?

Fundamental influences

The fundamental outlook for Canada’s mining companies is about to accelerate following the release of mildly encouraging fourth quarter results. Fourth quarter results released during the past 10 days by many of Canada’s leading gold mining companies generally were higher than consensus mainly due to higher precious metal prices and efforts to reduce costs. Look for additional encouraging news this week when remaining major gold producers announce fourth quarter results. Canada’s leading base metal producers including Inmet, Hudbay Mining, First Quantum Minerals, FNX Mining and Teck Resources are expected to report during the next two weeks. Earnings gains on a year-over-year basis of more than 25% are anticipated. Moreover, earnings gains on a year-over-year basis are expected to accelerate in the first quarter mainly due to higher prices. Metal prices bottomed in December 2008. Since then, gold, nickel and silver prices are up more than 25%, aluminum and platinum prices are up more than 50% and lead, zinc and copper prices more than doubled.

In addition, look for a series of positive events that could help share prices between now and the beginning of May including:

• Positive guidance when fourth quarter results are released. Higher base metal prices will prompt chief executive officers to offer positive earnings and cash flow guidance for the first quarter and all of 2010.
• Rising earnings estimates following the release of fourth quarter reports. Analyst estimates for the first quarter of 2010 and for all of 2010 are too low given recent precious and base metal price gains.
• Encouraging news released at the Bank of Montreal Global Metal Conference in Hollywood Florida between February 28^th and March 3^rd. Major mining companies are scheduled to present and top ranked mining analysts will be there to report.
• Positive “scuttlebutt” during the annual Prospectors & Developers Association of Canada (PDAC) convention at the Metro Toronto Convention Centre between March 7^th and March 10^th. Chief Executive officers of producing companies will have “lots to good news to talk about” after releasing positive first quarter and 2010 guidance. In addition, many producing companies are flush with cash this spring and are looking for possible takeover candidates. The “rumor factory” likely will work overtime at the Prospectors’ convention this year.
• The release of annual reports in March and April. Annual reports will be watched closely this year because they frequently are the source of annual reserve valuations. Higher precious and base metal prices will prompt an upward revision in quantity and value of proven reserves.
• Annual meetings in April and May. Annual meetings generally will be cheerful events this year.

Seasonal influences

Metal prices and mining stock prices have a history of moving higher at this time of year. Their period of seasonal strength is from the end of November to May. However, their seasonal “sweet spot” is from the beginning of March to the beginning of May. Strength during this period is tied to a seasonal upswing in demand for steel, copper, zinc and aluminum by the construction industry. Seasonal demand is expected to accelerate this spring due to infrastructure spending triggered by economic stimulus programs previously announced by the United States, Canada, Japan, China and Europe.

Technical influences

The TSX Metals and Mining Index has an improving technical profile. Intermediate trend is up. The Index recently bounced from above its 200 day moving average. Strength relative to the TSX Composite Index remains positive. Short term momentum indicators recently recovered from oversold levels. Stochastics already are short term overbought. Support is indicated at 882.35. Resistance is indicated at 1,168.83. Preferred strategy is to accumulate on weakness closer to support.

Chart courtesy of StockCharts.com www.stockcharts.com

Ways to invest

The easiest way to invest in the sector is to own Exchange Traded Funds that track the TSX Global Metals and Mining Index. The direct investment is through the Claymore Global Mining ETF (Symbol: CMW). The leveraged way to invest is through the Horizon BetaPro Global Mining Bull + ETF (Symbol: HMU). Bank of Montreal recently launched the S&P/TSX Equally Weighted Global Base Metal (Hedged) ETF (Symbol: ZMT)

Don Vialoux, Chartered Market Technician is the author of a free daily report on equity markets, sectors, commodities, equities and Exchange Traded Funds. Reports are available at www.timingthemarket.ca.

Chart courtesy of Brooke Thackray

Stocks mentioned in this post: CMW, HMU, ZMT

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