The global economic conditions are likely to continue deteriorating at least through 1H2013. We expect the slowing global trade and weaker demand from China, consumer of 40% of global copper output, to drive the copper price further down. The price of gold may see a moderate rally toward the end of 2012, but its scale will be limited due to projected supply surplus over the next two years.

Based on our revised commodity price forecasts, we reduced 12-month target prices for Kazakhmys, ENRC, Ivanhoe Mines, Centerra Gold, Frontier Mining and Hambledon, but maintained our stock recommendations on all six names.

Global macro uncertainty and declining economic activity is highly likely to persist in 2H2012 putting copper prices under further pressure and making our previous forecasts for 2012-2015 too optimistic. Given high Chinese warehouse stocks of the red metal and the slowing growth of country’s economy, we expect China’s support to the price of copper to weaken. In the long-term, declining ore grades and labor disputes at large mines resulting in tight supply of the metal make copper less vulnerable to the economic downturn than other base metals.

In the case of gold, we believe that the current price already reflects expectations of further deterioration of global economy and increased demand for the metal. The gold price may be supported by demand for the precious metal as a hedge against inflation if the QE3 is implemented later this year. Fundamentally, the expanding supply from mines and lower jewellery and coin demand will limit growth of the gold price, we believe.

Figure 1. Revised commodity price forecasts 
  2012 2013 2014 2015 LT price
Copper          
-previous 8500 9200 8200 7500 6400
-new 8100 7800 7500 7100 6400
-% change -5% -15% -9% -5% 0%
Zinc          
-previous 2121 2266,7 2450 2329 2072
-new 2050 2000 2200 2300 2050
-% change -3% -12% -10% -1% -1%
Aluminium          
-previous 2200 2300 2350 2400 2400
-new 2000 2000 2100 2200 2200
-% change -9% -13% -11% -8% -8%
Gold          
-previous 2075 2010 1890 1750 1300
-new 1700 1700 1650 1600 1300
-% change -18% -15% -13% -9% 0%
Silver          
-previous 44 42 35 32 29
-new 33 34 30 25 23
-% change -25% -19% -14% -22% -21%
Source: HF Research estimates   

We see a limited downside risk to the current iron ore prices and maintain our iron ore concentrate forecast at $95.6/t in 2012 and at $90/t in the long term. Although fears of a hard landing in China seem not to be materializing, we expect a further deterioration of demand for the metal due to the global economic slowdown and had already had this scenario in our previous forecast.

Our aluminum and zinc price forecasts are reduced due to a lack of fundamental support factors against deterioration of global demand.

In our coverage universe, FML remains the top pick, with an important stock catalyst - production of the first copper cathode at Benkala - just weeks away. The commercial discovery at Baitemir, expected to be officially announced by the end of the year, will provide an additional upside to our valuation.

We marginally reduced our target price of ENRC because our model had already included the current iron ore price dynamics and because the firm has a limited exposure to aluminum and copper. A possible spin-off of ENRC’s international assets separating the higher-risk greenfield projects in Africa and Brazil from mature high-quality assets in Kazakhstan may help bring the market valuation price closer to intrinsic value of the company.

Even with the TP reduced on lower base metal price forecasts, Kazakhmys valuation implies a 27% upside to the current price. We leave our ‘Hold’ recommendation on the stock, as over the 12-month investment horizon it lacks catalysts necessary for the stock price to converge to our estimate. Launch of large Bozhakol and Aktogay projects, expected in 2015 and 2017, respectively, and the potential divestiture of 26% stake in ENRC remain key catalysts for the company.

We maintain our ‘Hold’ recommendations on Ivanhoe Mines and Centerra Gold due to the high regulatory risks in Mongolia and, in the case of CG, in Kyrgyzstan. Kyrgyz Parliament pushing for a revision of the 2009 Kumtor Investment Agreement creates room for a downward revision of our TP of Centerra.

Hambledon Mining is likely to underperform peers until receipt of a government approval of Akmola Gold acquisition, now expected in 2H2012. Therefore, despite an upside of over 100%, we leave our recommendation on HMB at ‘Hold’.

Figure 2. Summary of TP revisions      
Ticker Company Current price Previous TP New TP % change Rating Upside potential
ENRC ENRC 396 GBp 700 GBp 680 GBp -2,9% Buy 71,7%
KAZ Kazakhmys 692 GBp 980 GBp 853 GBp -11,5% Hold 23,3%
IVN Ivanhoe Mines 9.5 CAD 14.4 CAD 10.3 CAD -28,5% Hold 8,4%
CG Centerra Gold 9.9 CAD 10.0 CAD 8.8 CAD -12,0% Hold -11,1%
FML Frontier Mining 5.1 GBp 10.0 GBp 8.7 GBp -13,0% Buy 70,6%
HMB Hambledon Mining 1.5 GBp 3.3 GBp 3.2 GBp -3,3% Hold 113,3%
Sources: Bloomberg, HF Research estimates     

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