Equity analysts see lots of potential in beaten-up base-metal miners. The bond market begs to differ.
Many producers of basic industrial materials – including Freeport McMoRan Inc. of the United States, and First Quantum Minerals Ltd., HudBay Minerals Inc., Sherritt International Corp. and Teck Resources Ltd. of Canada – have seen their bonds hit by a stampede of selling in recent months as prices for copper, nickel, iron ore and other key raw materials have ground relentlessly lower.
The yield of a bond moves in the opposite direction to its price, so the outburst of selling has driven the expected payoff on the sector’s bonds into the stratosphere. Nearly all of Teck’s bonds now offer yields-to-maturity north of 10 per cent, while the corresponding payouts for issues from First Quantum, Freeport, HudBay and Sherritt have shot even higher – above 20 per cent in some cases.
Such eye-popping yields typically go hand in hand with a high risk of default. The generous payout serves as compensation for the possibility that bondholders won’t get all of their money back.
But despite the nail-biting levels of anxiety indicated by soaring yields, most equity analysts say there is little to worry about. Their “buy” and “hold” recommendations on the sector’s shares far outweigh a few scattered “sells.”
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