Base metal stocks cheap, but no bargain

Sat Feb 14, 2009 12:15am EST
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By Cameron French

TORONTO (Reuters) - Rock-bottom valuations and a huge investment by China would seem to bode well for the future of Canadian base metals stocks, but market pros are still wary of wading into the hard-hit sector.

The investment -- state miner Chinalco said this week it is investing $19.5 billion in Australian mining giant Rio Tinto -- was taken as a sign that top metals consumer China is expecting a swift recovery in materials demand.

But the news wasn't enough to shift opinion on the base metals sector, where stock losses among established names such as Teck Cominco and Lundin Mining have exceeded 90 percent from last year's highs.

"I'm not even looking at that area at the moment," said Bill Belovay, a resource fund manager at Jones Heward Investment Counsel, who has instead focused his attentions on the resurgent gold-mining sector.

"There's so many uncertainties. You don't know who owes who. Long-term commodity prices like coal and iron ore, one doesn't have a clue where they're going to settle."

As recently as last year, the sector was awash in cash, with near-record base metals prices driving rich profits, while miners in towns such as nickel-rich Sudbury, Ontario, earned as much as C$150,000 a year, courtesy of bonuses tied to metals prices.

But the industry has had a rough ride since then, with prices of nickel, zinc, and copper losing more than half their value due to slumping global demand.

This has forced mine closures, mass layoffs, and made deals such as Teck's debt-funded $13 billion takeover of Fording Canadian Coal Trust look like big mistakes.   Continued...