(Kitco News) - Mining equities are finally garnering attention as one bank sees growing potential as higher commodity prices create some value within the sector.
In its latest research note, equity analysts at Société Générale recommended that investors start looking at the mining sector as it plays catch-up with raw commodities. The French bank also said it prefers mining companies connected to the global green energy transition, preferring base metals over energy producers.
SocGen has been bullish on copper for more than a year; however, it recommends that investors take their profits now that the rally has run its course.
“Since early April, the copper price has hit an all-time high, and the Brent price has gotten lower. Our trade idea turned in a gain of 8.4% in less than five weeks and even 9.7% based on COMEX rather than LME copper prices. As risks gather on the long copper leg of the trade with futures prices now overstretched by investor positionings, we think it is the right moment to close the trade and take profit,” the analysts said.
The analysts noted that stubbornly high inflation worldwide has helped drive commodity prices higher; they added that 79% of the commodities the bank tracks are trading in positive territory so far this year.
However, SocGen said that equity markets don’t reflect this rally in commodities and see an opportunity for the sector to play catch-up. The bank said it sees opportunities for base metal producers versus oil and energy companies.
“In equities, the global energy sector (+7% ytd) is outperforming global mining equities (+3% ytd) despite the relative underperformance of oil within commodities. While copper is the poster child of the energy transition on secular trends, cyclically, our demand driver indicators, such as SG Global Cycle and SG Asian Exports, continue to show improvement, suggesting strong returns ahead for being overweight miners and underweight energy. The current rise in metal prices suggests an inflection in EPS momentum ahead for the mining sector,” the analysts said in the report.
But it’s not just copper that SocGen is looking at. The bank sees opportunities in a basket of base metals, specifically any that has a connection to the ongoing green energy evolution.
“Our Greenflation basket consists of stocks that are primed to gain from surging demand or reduced supply of 24 critical metals needed in climate technology and from stepped-up investment by mining companies. The recent US and UK sanctions on Russian aluminium,copper, and nickel yet again, point to geopolitical challenges in the supply of key metals. This should bode well for our Greenflation companies. Improving bottom-up corporate newsflow and mining sector M&A activity at a 12-year high are also positive signs,” the analysts said.
SocGen’s transition into equity markets comes as copper prices see some technical selling pressure after hitting an all-time high of $5.20 per pound last week. High-grade July copper futures last traded at $4.786 per pound, down more than 1% on the day.
Looking ahead, SocGen expects to see lower prices in the near term.
“Since early March, when the most recent copper rally began, investors have been securing long positions, while producers have been ramping up their hedging activities, effectively securing lucrative selling prices for the future. Both groups are now positioned at unusually high levels, but the rise in long positioning was much sharper for long investors than short producers. This leaves the copper future price very exposed to long liquidations from investors,” the analysts said.
While copper could see further profit taking, the analysts said that other base metals are less exposed.
“The copper futures market is at risk of investors liquidating their longs, but this is much less of a problem with other base metals. This means that bearish news triggering a healthy purge on copper would not affect other metals prices as much, and thus suggests resilience for diversified miners,” the analysts said.
