Canada’s raw-materials stocks are forecast to extend their longest losing streak in more than 20 years, as companies such as Banro Corp. (BAA) and Teck Resources Ltd. (TCK/B) struggle with falling metals prices and concern China’s growth will slow.
The Standard & Poor’s/TSX Materials Index of 60 stocks posted its fifth monthly drop in March, the longest string of declines since April 1990. The index has plunged 18 percent over that period, led by a 62 percent slump in gold miner Banro. Teck, the country’s largest diversified miner, has tumbled 22 percent this year.
Producers of raw materials from copper to coal and gold have slid amid concerns China is settling into a slower growth path, mining companies face escalating costs and gold’s status as a safe haven is diminishing as the U.S. economy gains momentum.
“China’s economy is growing, just not fast enough, and it’s hard to see a lot of upside for mining and materials companies,” John Stephenson, a fund manager with First Asset Management, said April 1 by phone from Toronto. Stephenson helps manage C$2.8 billion ($2.8 billion), including Teck shares.
Growth in China, Canada’s second-biggest trading partner, grew at an average quarterly pace of 8.5 percent from 2011 to 2012, down from 9.4 percent in the previous eight quarters. Growth fell to a three-year low of 7.4 percent in September, before rebounding to 7.9 percent in the fourth quarter of 2012.
Commodity prices, as measured by the S&P GSCI index, have declined 6.8 percent in the past 12 months. The gauge, which tracks prices for a basket of materials, has tumbled 27 percent since reaching an all-time high in 2008.
The slide in the materials index has dragged on the broad S&P/TSX Composite index. Its 1.5 percent advance in the 12 months through yesterday is the smallest gain among major equity benchmarks for the world’s 10 biggest markets, according to data compiled by Bloomberg.
Raw-material producers make up 16 percent of the MSCI Canada Index, the highest weighting among the world’s five biggest equity markets.
“People’s views have dimmed on the attractiveness of commodities, of Canada as a proxy for playing China and the commodity cycle,” said Michael O’Brien, a fund manager with TD Asset Management in Toronto. He manages about C$3 billion. “China’s economy will slow a bit. People are making their peace with that and its impact on commodity demand.”
Gold producers have weighed most on the S&P/TSX materials index (STMATR) during its five-month losing streak, as nine of the 10 worst performers in that period mine for the precious metal. The S&P/TSX Gold Index of 30 stocks lost 27 percent in the five months from November to March.
The price of gold retreated 4.8 percent in the first quarter as U.S. data on housing, employment and output have improved, bolstering confidence that the world’s largest economy will extend its recovery. The bull market for U.S. equities entered its fifth year last month, reducing the appeal of gold as protection against stock declines.
“The world isn’t as bad as it was five years ago, so why do I need gold, which has no purpose but as a hedge?” Stephenson said.
Barrick Gold Corp. (ABX), the world’s biggest producer of the metal, fell 14 percent in the first quarter. The Toronto-based firm has suffered more than $9 billion in writedowns and cost overruns in the past two years on projects from the Andes to Zambia.
Andy Lloyd, a spokesman for Barrick, didn’t immediately return a call for comment yesterday from Bloomberg outside of normal business hours.
Banro, the worst performer in both the gold and materials indexes in the past two quarters, has dealt with a series of setbacks that culminated in the unexpected exit of Chief Executive Officer Simon Village on March 7. The Toronto-based company operates in the Democratic Republic of Congo which is facing an armed rebellion. Cost overruns of as much as 15 percent and production delays have hampered mining at the company.
The stock has two buys, three holds and one sell and a 12 month consensus target price of C$3.90, according to analyst ratings compiled by Bloomberg. It closed unchanged at C$1.74 yesterday.
Naomi Nemeth, a spokeswoman for Banro, didn’t return a phone call seeking comment on the company’s stock price.
“The gold miners are fighting geology,” Stephenson said. “The grades have fallen precipitously and we’re going farther afield to places like Africa. It’s getting harder to find stuff worth mining.”
The materials index’s losing streak has damped performance in the broader S&P/TSX index, (MXCA) making U.S. equities more attractive as Canadian investors turn their attention to an accelerating economic recovery south of the border.
“The place to be is not in Canada,” said John O’Connell, chief executive officer and fund manager with Davis Rea Ltd. in Toronto, which manages C$600 million. “The Canadian market will continue to underperform the U.S. market.”
The Canadian gauge outperformed the S&P 500 for a seven- year period from 2003 to 2010, fueled by a commodity boom.
“Over the last couple of years the theme has flipped on its head,” TD’s O’Brien said, pointing to Canada’s underperformance in 2012 and 2011. “The U.S. economy has turned the corner, and that’s where the money is flowing.”
Concerns about slower industrial growth in China have weighed on Canada’s base metals producers, including Teck Resources. Copper futures slumped to the lowest in almost eight months yesterday after China’s Purchasing Managers’ Index grew slower than analyst estimates in March.
Marcia Smith, a spokeswoman for Teck, didn’t immediately respond to a request for comment.
Turquoise Hill Resources Ltd. (TRQ), based in Vancouver, has fallen 16 percent in 2013 amid a dispute with the Mongolian government over a copper-and-gold project. Tony Shaffer, a company spokesman, declined to comment in an e-mail yesterday. Turquoise Hill is a unit of Rio Tinto Plc. (RIO)
China’s slower growth won’t hurt all raw-materials producers. The economy is still expanding, and John Tsagarelis, a fund manager with Manulife Asset Management in Toronto, says the country’s increasing food needs bode well for fertilizer producers. He bought shares of Calgary-based Agrium Inc. (AGU) and Potash Corp. of Saskatchewan Inc., based in Saskatoon, last year.
“We’re banking on the agricultural business,” said Tsagarelis, who oversees C$550 million. “Wheat and corn have to be grown, and the best way to accelerate that is to add potash.”
Agrium has lost 1.3 percent to C$97.81 this year, and Potash Corp., the world’s largest fertilizer producer, is down 0.5 percent to C$40.29.
Tsagarelis is keeping an eye on Canada’s gold producers, saying there is some potential for the metal to rally in the coming months if the euro-area crisis flares up again. “If the banking crisis in Cyprus hits the mainland, I suspect in the next month or so there may be more demand for gold,” he said.
Tsagarelis said he is not buying any gold equities.
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