Others on his list were: Atalaya Mining (upside: 89%) Central Asia Metals (70%), Petra Diamonds (72%), and Gemfields (94%).

One of the biggest changes in the last month or so, Potts told Mining Journal, was the volume of short position covering.

“Hedge funds that were shorting the mining sector, are now neutral, that’s been the big move, that’s why I published this note [a moderately upbeat quarterly sector review].

“That doesn’t mean mining is going to immediately recover; but it does suggest the market may have stopped being actively negative about mining. We still need a lot more mine closures and for mined commodity stockpiles to fall. Then we will start to see a supply squeeze and off we go again.

“The call is you could make a lot of money if you get in now,” said Potts. Significant upside was on the cards, he suggested, although as always, a strong stomach might still be de rigueur.

With three diamond companies among his top five, Potts said he had been impressed how global heavyweights Alrosa and De Beers had adjusted supply in the teeth of softer market conditions last year.

Said Potts: “I particularly like diamonds as they have been among the least affected mined commodities by the negative part of the cycle.
“And yet they have been sold off along with the rest of the sector. The reality is ‘peak diamonds’ in terms of global production happened more than a decade ago, and there have been no major new diamond discoveries in nearly two decades.”

Potts said Atalaya (copper) was “a very good outfit” which had just reached commercial production at its reopened Rio Tinto mine in Spain.

Also, Central Asia Metals (copper, gold, molybdenum) “makes a lot of cash in Kazakhstan".

Gemfields makes lots of money from its high quality diamonds and has just paid a dividend. Potts rated the company as a growth opportunity as a niche coloured gemstone business.

He then moved on to Petra, which was “profitable with lots of growth over the next three years”.

Potts also mentioned Firestone Diamonds, which is “building a very good mine in Lesotho”.

How does he go about selecting his stock picks?

“I just do DCF valuations. Others adjust them by weighting with two years out earnings. The DCF valuation is what you own. It’s the break-up value. These companies are cheap. Go back to 2011 and I couldn’t find much that was good value. Now you don’t have to push very hard because everything has been so aggressively sold off … these diamond miners in particular offer good value.”

He added: “I do a bit of risk adjustment, if something has not been built yet, I will reduce the target a bit; do a bit of risk adjustment, usually for technical risks.”

Potts said at some stage the cycle had to recover to the point where the next set of mines were worth building. Commodity price recoveries were probably a year or two out, mostly two years out.

FinnCap’s mining quarterly sector note said the firm would like to see more signs of improving fundamentals. Looking at the base metals, nickel in particular was said to be suffering from unusually high London Metal Exchange stocks and an obstinate refusal on the part of the miners to close or mothball higher cost operations.

Zinc may have got ahead of itself with prices up in anticipation of mine closures on exhaustion of economic reserves. The Lisheen zinc mine in Ireland finally ended production in January after an operating life of around 16 years.

But looking further out, the necessary replacement mines had not been built, so zinc was set to perform strongly over the next few years, said FinnCap.

Gold had recently had a good run, driven by an increasing aversion to risk. Platinum, on the other hand, continued to be extremely weak, for the most part because of chronic oversupply from South African mines. Much more capacity had to be taken out of the platinum industry.

“In summary, we want to see more definite signs that oversupply from chronically unprofitable mines has ended, stockpiles are reducing and that commodity prices are reacting positively. We suspect this point may be reached later in 2016.”

Turning to stocks to watch, FinnCap cautioned it wasn’t fully convinced the cycle had bottomed.

“With excellent value still apparent across the sector, we recommend staying with the higher quality companies that have been sold off along with the dross. The gemstone miners appear to be the first to have benefited from improving commodity prices, though we also like copper and gold.

Copper was “well positioned” for a price recovery with LME stocks now falling steadily. Some loss-making capacity had been closed but this would be offset by new projects being commissioned.