Canadian mining stocks lag metal gains

Investors wait for ‘sustained uptrend’

Industrial metals have posted their longest run of weekly gains since 2006 and gold’s had its best month since January, but the commodity- heavy equity benchmark in Toronto, the world’s mining capital, just can’t seem to gain any traction.

Chalk it up to the previous base- metal slump from 2011 to early 2016 which has shrunk the industry and scarred investors. The materials sector, dominated by miners such as Barrick Gold and Teck Resources, is about half as important as it was to Canada’s equity benchmark six years ago.

“It’s less impactful when we get a bit of a snap- back, in particular on the basemetals side,” Paul Taylor at BMO Asset Management said in a phone interview.

In addition to a smaller sector, investors are also wary. Materials s t ocks haven’t kept pace with the gains in either gold or industrial- metal prices since the beginning of August, when prices really began to take off.

“The age-old debate in the Canadian equity market is to what extent does the market need to see a sustained uptrend in commodity prices before it will start to be reflected in the price of the underlying stocks?” said Taylor, whose firm manages $55 billion. “That’s part of what we’re seeing in terms of the sloppy trading of the Canadian equity market — we need to see something that’s more sustained.”

Taylor said metals would have to experience a “multiquarter” rally before stocks start to match the gains.

Still, the S& P/ TSX would be worse off if it wasn’t for the materials sector, Craig Fehr at Edward Jones said. TMX Group Inc., which runs the Toronto Stock Exchange and TSX Venture, was home to 57 per cent of global mining financings in 2016 and had 1,224 issuers as of July.

“The gains we’ve seen from the materials index are going a long way to keeping the TSX near the flat line on the year,” Fehr said by phone. The materials sector is up 4.8 per cent year- to- date compared with a decline of 16 per cent for the energy index, the biggest drag on the benchmark.

Materials shares should continue to gain for the remainder of the year, said David Rosenberg at Gluskin Sheff & Associates Inc.

Rosenberg recommends the “double-B barbell: banks and base metals.”

Taylor, meanwhile, is “modestly overweight” Canadian equities, but not because he expects materials stocks to outperform.

“Canadian equities are cheap. At some point in time, one of two things will happen: either the earnings improvement in Canada is an illusion and that’ ll roll over, or Canadian equities will play catch- up,” Taylor said. “My guess is that we play catch-up.”

Taylor recommends going overweight financials, consumer discretionary and technology, with a slight underweight to materials.