Downturn means tough year ahead for metals - RBC

OTTAWA, Dec 3 (Reuters) - A significant, sustained rebound in commodity prices is unlikely before the second half of 2010 due to excess inventory, a protracted global recession and weakening demand in China, RBC Capital Markets said in a note on Wednesday.

"It all adds up to a tough year for metals and bulk commodities in 2009," said the research note, written by several mining analysts.

"The industry appears to have responded with production cuts more quickly than in previous cycles. However, the announced reductions will take some time to take effect."

RBC has modestly lowered commodity price forecasts for 2009 and 2010 to reflect lower global growth assumptions.

"Commodity prices may rebound from their lows over the next 12 to 18 months as the economic outlook stabilizes and begins to improve," analysts wrote.

"However, significant sustained increases in commodity prices will likely not occur until excess inventory has been eliminated and idled capacity is restarted."

Investors are recommended to enter 2009 with an underweight position in non-precious-metal miners, which are seen as underperformers next year, and focus on large, liquid, diversified operators with strong balance sheets and cash flow.

The analysts pick uranium as their preferred commodity and believe coal and iron will outperform other metals over the next 12 months. Over the longer term, zinc and molybdenum could outperform based on mine closures and project delays.

They recommend shares of uranium producers Cameco Corp (CCO.TO), First Uranium (FIU.TO), Uranium One (UUU.TO) and UR Energy (URG.A), along with bulk commodities operators Labrador Iron Ore Royalty Income Fund (LIF_u.TO) and Teck Cominco (TCKb.TO).

Analysts recommend metals producers Antofagasta Plc (ANTO.L), Inmet Mining (IMN.TO), First Quantum (FM.TO), HudBay Minerals (HBM.TO), Anvil Mining (AVM.TO) and Katanga Mining (KAT.TO) .

A bear market rally is possible in the near term, supported by a major selloff of stocks, slumping valuations and seasonal buying, the note said.

Balance sheets will remain under pressure from deteriorating commodity markets and restricted refinancing options. (Reporting by Susan Taylor; editing by Rob Wilson)