Mining Rally Questioned by Jefferies, Investec Amid Metal Glut

  • Fundamental outlook still `troublesome,' BMO Capital says
  • Short interest for Freeport falls as share price rises

The best two days for mining companies since the depths of the recession might be the end of the good times as the gluts across metals keep prices low.

That’s the view of analysts at Jefferies LLC and Investec Plc who predict the gains won’t last. The Bloomberg World Mining Index surged 10 percent, adding more than $44 billion to the combined market value of the 80 companies tracked by the measure. The rally was propelled by a weaker dollar that makes commodities, including copper and gold, attractive alternative investments.

Industrial-metal prices plunged 27 percent last year, the worst performance since 2008, as the market grappled with excess supplies amid cooling demand from China, the world’s biggest consumer. While miners including Freeport-McMoRan Inc. and Glencore Plc have trimmed production, the cuts haven’t been deep enough to end the glut. Goldman Sachs Group Inc. predicts copper will remain in surplus through at least 2020. A resilient U.S. economy will keep a lid on gold, which has fallen for the past three years, according to Societe Generale SA.

“The bounce may be short lived because the fundamental outlook is still troublesome and looks likely to remain that way for some time,” Tai Wong, the director of commodity products trading at BMO Capital Markets in New York, said in a telephone interview. “These short-term players will sell as quickly as they bought.”

Closing Shorts

The Bloomberg Dollar Index through Thursday posted the biggest two-day drop since March, helping to fuel the biggest two-day gain in the mining index since 2008. Freeport, the world’s largest publicly traded copper producer, and Alcoa Inc. led gains in the Standard & Poor’s 500 Index.

The mining rally may have been a function of traders closing out bets on price declines, rather than a surge of bullish sentiment. Short interest as a percentage of shares outstanding for Freeport fell to 18.79 percent on Wednesday, from 19.24 percent a day earlier, according to data from Markit Ltd. Freeport climbed 16 percent Thursday, taking the two-day gain to almost 30 percent.

“It’s been pretty wild times in the mining world for sure,” Chris LaFemina, a mining analyst at Jefferies LLC in New York, said in a telephone interview. “I’m a bit concerned that the share price rally is not completely consistent with what’s happening fundamentally. I have not seen evidence yet from my conversations of long-only stepping back in and buying.”

Adding to the gains this week was speculation that the Chinese economy will pick up steam. The country set a range for its growth target for the first time in 20 years, saying the world’s second-largest economy would expand as much as 7 percent in 2016. Analysts are skeptical. Economists surveyed by Bloomberg peg growth this year at 6.5 percent, according to the median of 57 estimates.

Still, mining shares are undervalued compared with metals prices, and that might give equities a continued short-term bounce. The ratio of the Bloomberg Americas Mining Index compared with copper futures is about 0.3, or about half of its level since 2000. The ratio of the Philadelphia Stock Exchange Gold & Silver Index of stocks compared with gold is less than half of its average over the same time.

If the rally does continue, it would be an opportunity to sell, said Hunter Hillcoat, an analyst at Investec Plc.

“There’s nothing fundamental that we are seeing that would change our views,” Hillcoat said.

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