Gold prices remain above $1,800 an ounce, although several drivers suggest higher prices could be in order this year. As a result, RBC Capital Markets maintains its Overweight rating on precious metals. The firm also maintains its Market Weight rating on base metals because it expects the copper price to moderate later in the year.
In a recent note, RBC Capital Markets analysts outlined their best ideas for the mining sector. They added Champion Iron CIA, Labrador Iron Ore LIF, Northern Star Resources NST and Osisko Gold Royalties OR to their list. They also removed IGO Limited IGO, Saracen Mineral Holdings SAR, SSR Mining SSRM and Torex Gold Resources TSG from their Best Ideas list.
The RBC team boosted its rating on the diversified and bulk commodities sector to Overweight from Market Weight. They believe iron ore prices will remain strong this year due to record levels of steel production in China and constrained supply. The RBC team also sees valuations in the sector as favorable with the potential for increased returns to shareholders.
The analysts explained they maintained their rating for precious metals at Overweight because Gold prices have come down from last year's highs, which they said reflects a decline in speculative investment. However, the yellow metal still has plenty of support from price drivers like real interest rates and the U.S. dollar.
The RBC team also called for rising inflation expectations, shorting the dollar, and supportive fiscal and monetary policies. In the long term, the normalization of these factors offers uncertainties. However, the RBC team believes gold equities are well-positioned and at valuations that don't favor in higher cyclical prices being sustained.
They maintained their base metals weighting at Market Weight because they expect last year's high copper prices to carry over into this year. The RBC team notes that inventories are low, and China has seen a strong recovery. However, they warned that copper prices could moderate as supply returns later this year.
For diversified and bulk commodities, RBC selected Anglo American NGLOY, Champion Iron, Glencore GLNCY, Labrador Iron Ore, South32 SOUHY, Teck Resources TECK and Vale VALE as their best ideas. They like Anglo American for its growth and balanced portfolio, which they expect to see improvements in diamonds, strong platinum-group metals prices and a possible recovery in met coal. They selected Champion because of its growing free cash flow and high-quality iron ore production in a stable jurisdiction.
RBC also highlighted Glencore because of positive changes to its coal profile and non-coal ESG positioning. They like Labrador Iron Ore because of its high-quality royalty income and South32 for its strong free cash flow, increasing margins, and capital returns. They like Teck's exposure to long-life, high-quality coking coal, copper, zinc, and bitumen production, and Vale's movement away from the Brumadinho tragedy.
In precious metals, RBC likes Barrick Gold Corp GOLD, Endeavour Mining EDVMF, Kinross Gold KGC, Kirkland Lake Gold KL, Northern Star Resources, Osisko Gold Royalties, Sibanye Stillwater SBSW and Silver Lake Resources SVLKF. They like Barrick because of its globally diversified portfolio of gold and copper assets and Endeavour's combination with Teranga, which creates a new leader in West Africa. The RBC team selected Kinross for its valuation, which they say has the potential for positive financial results offering greater capital allocation flexibility.
They chose Kirkland Lake for its favorable combination of growth, margins, and exploration at a competitive relative valuation to the rest of its peers, and they like Northern Star for its recent merger-of-equals with Saracen and an earnings growth outlook that exceeds that of its large-cap peers. The RBC team chose Osisko for its pure-play royalty business model and Sibanye for its cash generation potential. They like Silver Lake for its valuation versus peers and free cash flow generation.
In base metals, RBC prefers First Quantum Minerals Limited FQVLF and Ivanhoe Mines IVPAF. They selected First Quantum because of its projected copper production growth over the next three years and Ivanhoe Mines for the possibility of value being realized through its three main projects.
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