Mining for Metals

S&P's Leo Larkin says the recent spike in gold and other metals prices is "unsustainable," but he still likes a trio of stocks

Investors have taken quite a shine to metals stocks lately, as the prices of gold, silver, and copper rally on reports of strong demand and supply disruptions. Political tensions, such as this week's news that Iran is pressing ahead with its nuclear-enrichment plans, have also sparked safe-haven buying of commodities.

The gains have been eye-popping. The cash price of gold ran up to $598 an ounce in mid-April, from $517 at the start of the year, while gold futures spiked to $602 before pulling back a bit. There has even been market talk of the yellow metal heading to fresh records of around $800 -- or even higher. Meanwhile, copper futures have also shot up to record highs (see BW Online, 3/30/06, "Metals Are Burning Up the Market").


  Along with underlying strong global economic growth, heavy flows into commodities funds are driving metals stocks higher, says Leo Larkin, analyst at Standard & Poor's Equity Research who has followed metals companies for the last 11 years. "It's feeding itself -- as more money goes in, the prices go up," he says.

Among the stocks he covers, Larkin has buy recommendations on gold producers Newmont Mining (NEM) and Barrick Gold (ABX), as well as steel company U.S. Steel (X).

BusinessWeek Online's Karyn McCormack recently spoke with Larkin about the rally in metals. Edited excerpts of their conversation follow:

Note: Leo Larkin is a Standard & Poor's Equity Research analyst. He has no ownership interest in or affiliation with any of the companies on which he writes research. All of the views expressed here accurately reflect the analyst's personal views regarding any and all of the subject securities or issuers. No part of the analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this story.

Why are gold and other metals spiking higher lately?

The metals I follow are gold, copper, nickel, aluminum, and steel. With respect to copper, aluminum, and gold to some extent, some of what's driving the price is commodity-fund investments. In the case of aluminum and copper, the pure supply fundamentals don't support current prices.

Nickel and gold have a little more support in terms of the mine supply and consumption equation. Part of what's driving the prices is the strong global economy -- it's partly China and now also Japan, as well as continued growth in the U.S.

Do you think metals prices will keep rising? How come?

The trend is up for metals prices, but not at these rates, particularly for copper and aluminum. That's because of the reasons previously mentioned -- the supply-demand situation -- and there's a lot of money that has been shifted to commodities. It's feeding itself -- as more money goes in, the prices go up.

What about the news that Iran is pressing ahead with its nuclear program?

Even if the threat didn't exist, the trend is for higher prices. All that's doing is forcing an underlying trend.

What's your target price for gold?

For this year, we think gold will average $560 to $565. It could end the year at $600 and maybe higher. I expect gold and other metals to pull back and consolidate from current levels. These gains are just unsustainable. At some point, it will collapse as supply enters the market and commodity funds begin selling off their positions.

Which metals stocks do you like?

At this point, I'm only recommending two gold stocks: Newmont Mining and Barrick Gold are ranked buy. And I do have a buy on U.S. Steel. But I'm neutral on virtually everything else.

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