UBS raises forecast metal prices for 2011

OTTAWA — Investment firm UBS raised its outlook for metal prices in 2011 on Tuesday as it predicted Chinese inflation worries will ease and demand will pick up in the spring.

OTTAWA — Investment firm UBS raised its outlook for metal prices in 2011 on Tuesday as it predicted Chinese inflation worries will ease and demand will pick up in the spring.

The move also prompted the investment firm to raise its target prices for the base metals and diversified mining companies it covers by an average of about seven per cent.

“UBS believes that the reacceleration of cost inflation through wage pressure, grade declines, energy costs, environmental costs and new taxes and political risk will continue to support base metals at elevated levels,” analysts for the firm wrote in a report.

“While concerns about China’s monetary policy and European debt pose a near-term risk, we believe that the anticipated Chinese restock in February-May 2011, possibly supplemented by a growth recovery in the U.S., provides a seasonal opportunity for the metal equities.”

Despite the increase in expectations, UBS downgraded its recommendations for diversified producers Lundin Mining (TSX:LUN) and Teck Resources (TSX:TCK.B) and for uranium miner Uranium One (TSX:UUU) from “buy” to “neutral” based on their implied returns.

All three companies have seen their shares gain more than 50 per cent from the beginning of the year.

UBS raised its rating on Quadra FNX Mining (TSX:QUX), a major producer of copper in the Sudbury, Ont., region, from “neutral” to “buy” with a 12-month price target of $20, up from $17.

Quadra FNX shares were up 30 cents at $16.34 on the Toronto Stock Exchange on Tuesday.

The base metals sector has led the Toronto market this year, up about 45 per cent, helped by a gain in the price of copper on demand from China and the other developing countries.

The investment firm raised its 2011 copper price forecast by 13 per cent to $4.15 per pound with smaller increases of 10 per cent for zinc, five per cent for nickel and one per cent for aluminium.

The forecast for uranium was increased 24 per cent to $56 per pound in 2011, up from $45 in 2010, while lead is expected to go for $1.12 per pound next year, up from 97 cents this year.