Potash Corp. has temporarily halted production at two mines in order to reduce overall output by about 400,000 metric tonnes. Capstone Mining began laying off employees at its Minto mine in the Yukon in preparation for a shutdown. Based on the Investor’s Digest of Canada survey of stock analysts’ advice on more than 1,000 Canadian companies, analysts seem to approve of the measures. Both mining stocks are in the overall top 10 for most ‘buy’ recommendations.
At the end of February, Potash Corp. of Saskatchewan Inc. (TSX─POT; NYSE─POT) announced that it would stop potash production for four weeks at its Allan and Lanigan mines beginning on March 20 in order to reduce overall output by about 400,000 metric tonnes.
According to the company, the two mines will undergo maintenance during the shutdown period, so no employees will be laid off.
Potash Corp. says the move is meant to bring potash inventory in line with market demand. Potash prices have fallen by about two-thirds since peak prices of around US$900 a tonne in 2008, largely due to high production internationally.
The Allan and Lanigan suspensions follow two Potash Corp. mine closures in New Brunswick, one permanent and the other (more ambiguously) described as “indefinite”, since last November.
Despite these hiccups, Scotia Capital analyst Ben Isaacson reiterates a ‘sector outperform’ recommendation, albeit on a “tactical” basis. His 12-month target price of $18 a share continues as well.
The mining stock analyst explains that his recommendation is partly based on the assumption that maximum negative sentiment toward the company is already priced in. Share prices rose 10.5 per cent in February, possibly reinforcing his argument.
Any factors that could further drive shares downward have already played out, he adds.
Mr. Isaacson also argues that the potash market could show surprising demand in 2016 due to strong producer discipline.
“While some will view production cuts as an acknowledgment of a weak market, we think curtailments are the primary catalyst to tighten the market,” he says.
The analyst praises the company’s move and adds that if other major potash producers make similar cuts, it would be “great news”.
Of the 13 market watchers that we surveyed about Potash Corp., 10 assigned a ‘buy’ recommendation. Two of the analysts considered it a ‘hold’, while a ‘hold sell’ recommendation rounded out the results. Accordingly, the mining stock takes the No. 7 spot on our list of top-10 ‘buys’.
Copper and silver miner achieves strong ‘buy’ consensus
Moving to another troubled corner of the resources market, copper miner Capstone Mining Corp. (TSX─CS) is due to begin laying off employees at its Minto mine in the Yukon, about 240 kilometres from Whitehorse.
Capstone first indicated that it would end underground mining at Minto as part of its 2016 operating and capital guidance last January. Capstone plans to temporarily shut down operations at Minto altogether in mid-2017 once all the ore from Minto North and remaining stockpiles are processed.
“Future decisions will depend on a number of factors, most notably an improvement in the copper market,” the company said in a statement.
The company also operates the Pinto Valley copper mine in Arizona and the Cozamin silver and copper mine in Zacatecas state in Mexico. Capstone expressed its intent to reduce costs at those projects as well in 2016.
Although the price of copper remains weak, the miner indicated in March that hedging and price-fixing strategies would prevent it from violating its credit-related covenants in 2016, assuming average copper prices above $1.60 and $1.70 a pound, respectively, in the first and second halves of the year.
Scotia Capital’s Mark Turner described Capstone’s measures as “prudent and positive”. He notes that 75 per cent of expected 2016 first-quarter sales are price-fixed or hedged at $2.20 per pound; 90 per cent of second-quarter sales are hedged at $2.24 a pound.
Mr. Turner maintains a ‘sector outperform’, or ‘buy’, recommendation for Capstone. His $1.20 12-month target share price for the miner also remains.
We checked out Capstone with a baker’s dozen of analysts, a regular dozen of whom consider it a ‘buy’. The sole dissenting voice assigned the company a ‘hold’.
The strong consensus in favour of mining stock Capstone places it at the peak of our top-10 ‘buy’ list.
Investor’s Digest of Canada, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846