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Stronger than expected economic data from China, specifically new orders for manufactured goods, suggest a tradeable rally in copper miners may be on the horizon.
The HSBC/Markit Flash China Manufacturing Purchasing Managers’ Index is designed to predict the government manufacturing report due for release on June 30. Released Monday, the Flash PMI came in well above expectations and provided a clear positive indicator for official numbers.
The reading of 50.8 for overall Chinese manufacturing activity, significantly above the 50 mark that signals business expansion, represented the first positive data point since December and hints that government efforts to loosen credit conditions are helping boost economic growth.
Manufacturing New Orders, a sub-component of the report, and is the most forward-looking part of the report because it indicates the future level of economic activity. As a result, it can also be used to forecast profits for resource-related companies that benefit from rising levels of Chinese manufacturing. The manufacturing new orders result released Monday was extremely encouraging. At 51.8, the survey result was the strongest in 15 months.
China is the world’s largest consumer of copper and for this reason, copper prices have closely followed the course of Chinese manufacturing new orders. If the HSBC/Markit report is prescient and Chinese manufacturing activity is accelerating, copper prices should rise and increase profits for domestic copper miners.
Attractive valuation levels in the depressed Canadian mining sector are another reason for investor optimism. In terms of price to cash flow – the preferred measure for mining stocks for its ability to cut through the accounting complexities in the sector – mining stocks are far cheaper than the post-crisis heyday in the fall of 2010.
HudBay Minerals Inc., for instance, now trades at 6.1 times trailing cash flow, compared with December, 2010, when investors were forced to pay almost 14 times. Imperial Metals Corp. was 19.2 times trailing cash flow in December, 2010, and now trades at 13.6 times. In the case of Imperial Metals, the average analyst target price of $18.84 suggests a 20-per-cent investment return for the next 12 months.
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