In this excerpt from TWST’s interview with Deutsche Bank Securities Analyst Jorge Beristain, who is the Head of the firm’s Americas metals and mining equity research, Beristain discusses his favorite names and ongoing trends within bulk and LME metals.
TWST: Which of the metals or commodities will have the most trouble in 2010? Are there any you would tell investors to stay away from altogether?
Mr. Beristain: With the caveat that I have a fairly narrow metal focus now, I would say that there are metals that are more developed market-exposed and hence may be more over-supplied, like nickel. Nickel is not one where we are taking a particularly strong view on pricing, sort of prices will be flat. There is a strike that’s potentially going to get resolved shortly up in Canada, which is a facility owned by Vale (VALE). The dynamics for the nickel market overall are you’re just having a lot of supply coming online in the next two to three years, still having very weak end-market demand. Again, nickel projects, they tend to get green-lighted three to four years ahead of schedule. So it’s just that projects which are being delivered now were authorized in much better times years ago, and you just can’t shut them down. I mean they’re multi, multibillion-dollar commitments. So that is probably a metal that looks relatively weaker.
TWST: Among the stocks you follow, which two to three are your top picks and why?
Mr. Beristain: Near term I would highlight Cliffs (CLF) because of their iron ore and coal exposure, so they are well positioned in the two top commodities that we think will have the best price performance in 2010, which are still subject to be set. But they are negotiated and once those prices are set, they will last a year. So that gives the company good pricing leverage under an up cycle, like we are seeing right now. I would actually characterize it as a catch-up cycle. In the case of Freeport (FCX), I like the stock because of the company’s free cash flow story based on circa $3 copper prices for 2010. The company is generating a 10% free cash flow yield. Now it’s a question of what do they do with that excess cash, and I believe that any sign that management is willing to return some of this excess cash to shareholders sooner rather than later would be positively received by the market. As a longer-term holding, I would recommend Alcoa (AA), and that’s based on the view that aluminum has not really had its day in the sun as a metal yet. While it has rallied proportionally to other commodities, it has lagged. And if and when it starts to recover, either because of near-term shortage of the metal or longer-term the Chinese ration back because of energy concerns, under either of these scenarios, if you get a rise in aluminum, Alcoa is very levered to an outcome.
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