The mining sector will enjoy a positive year of growth in 2017 following a strong performance in 2016, an industry analysis by Citi suggested Monday.
Mining stocks will have a strong 2017, thanks to industry-wide trends toward increased free cash flow, upward earnings momentum and the potential to return excess capital to shareholders, Citi said.
However, it added, they are unlikely to see the same percentage increases in share prices as they did in 2016. The odds of mining overperforming the rest of the market are weak.
Last year’s strong mining and commodities performance follows five straight years of underperformance.
“Outside of the super cycle (2003-2007), the sector has outperformed for two or more successive years only twice in past two decades, i.e. during tech bubble burst when the sector declined less than others, and Chinese stimulus led recovery post the crisis.”
Citi believes 2017 could unfold for the sector similarly to 2010, when momentum from the post-recession bounce in 2009 continued. The mining sector outperformed the markets by 49 per cent last year, just marginally lower than the industry’s 51 per cent showing in 2009.
“Mining remained the best-performing sector throughout 2016 barring a poor start to the year. The momentum slowed down during the last quarter driven by relatively poor performance in December as investors probably booked some profits,” Citi analysts wrote in the note.
“The fear of missing out on another year of outperformance is more likely to win and draw more investors into the sector, in our view.”
The outlook said bankruptcies in the sector have peaked and projects an increase in capital expenditures and exploration activity, “which should provide some sense on how was cut into the bone during downturn.” But it doesn’t expect a pick up in mergers and acquisitions in the sector until commodity prices show a longer run of stable growth.
However, there are also some risks hanging over the market that could hamper growth in mining stocks including a depreciation in the Chinese yuan, which has yet to flow through to commodity markets, rising oil prices adding to costs and tough-to-beat year-over-year comparisons in the second half of the year, it added.
Canadian stocks that Citi favours include Barrick Gold Corp., Teck Resources Ltd. and Lundin Mining Corp.
Original Article from Financial Post