Citigroup forecasts $950 gold and a strong rebound 4Q in metal prices, mining equities

Is the bullish metals cycle over? Citigroup metals analysts say “no” and forecast a “strong rebound” in metals prices and mining stocks during the fourth quarter.

RENO, NV -

Citigroup's Australian metal analysts Tuesday urged investors and mining companies to look through the current "haze of negativity" and expect to "see a strong rebound" in metals prices and mining stock in the fourth-quarter 2008 and 2009.

"A friendless mining sector is in need of a lifeline having pulled back 25% from the May peak, Citigroup analysts Clarke Wilkins and Matthew Hope admitted, adding that global growth is "undeniably slowing."

Noting that the gold price is only down 7% in Australian dollar terms, the analysts declared, "We remain bullish on gold with a 2009 price forecast of US$950/oz driven by a return of fabrication demand after the price correction, wealth effects in developing nations and negative real interest rates."

Meanwhile, the analysts advised that "the underlying driver of commodity intensive infrastructure investment in developing countries remains unchanged. Short-term risks remain, but the opportunities are there for investors/corporates that can look through the haze of negativity."

In their research, Wilkins and Hope noted that "the Super Cycle bull market for commodity stocks that has been underway since early this decade has not been a one way street, with a number of meaningful corrections that have tested the resolve of the market. "

"Trading these spikes and troughs in the mining stocks is not without risks, but is undeniably a highly rewarding strategy for those that are nimble enough and have the courage to look through the current negative haze surrounding the sector."

The analysts suggested that "the only reason for not stepping up and buying the sector after this [recent] correction is a belief that the cycle is not well and truly over and commodity prices will fall further." Citigroup believes growth in China is still the nation's number one priority. "This point is critical as China is after all the key driver of the commodity Super Cycle."

Citigroup suggests that the Olympic Games now ongoing in Beijing are confusing China's economic picture due to curtailments of manufacturing, transport congestion, steps to ensure no interruption of power and clear skies, which in turn, distort short-term economic data. "Economic policy post the Olympics will be key. It seems likely that the government will continue to selectively stimulate," the analysts advised.

"With a number of commodities entering price levels where China has traditionally restocked, particularly copper, we expect to see a strong rebound in prices and stocks in 4Q08 and 2009."

BULLISH COMMODITY FORECASTS

"Our commodity team forecasts very bullish 2009+ commodity prices that drive very strong earnings growth for the stocks, and consequentially, very attractive PE multiples and discounts to valuation that look very appealing," Wilkins and Hope stressed.

The analysts also predicted that the upcoming reporting season will show another significant round of cost pressures for mining stocks driven by high oil prices, soaring caustic soda costs in alumina refining, and substantial cost increases in consumables. However, they noted, " A potential silver lining in the otherwise gloom cloud handing over markets could be the abatement of costs pressures" as oil prices pull back, and miners "highly exposed to the A$ will be enjoying the respite as it has fallen back below 90-cents."

Meanwhile, Wilkins and Hope also suggest that "speculative money exiting base metals/gold is amplifying volatility, but spot bulk prices reflect underlying demand and remain above contract prices and our 2009. As the Northern hemisphere awakens from its summer slumber and any real/perceived China Olympics-related weakness unwinds, we expect the stocks to rally in the 4Q."

Finally, Citigroup's research found that "the sector dichotomy is between cashed up ex-growth majors and cash starved juniors struggling to fund projects given frozen equity/debt markets. This should drive further M&A, especially as a number of stocks are trading below replacement cost with capex costs continuing to escalate."