The cycle of strong metal prices should continue in 2008 and beyond, according to mining analysts at BMO Capital Markets. In their quarterly sector viewpoints for the first quarter of the year, they are upgrading long-term prices for all the major base metals and holding their gold forecast at a bullish US$800/ox for 2008 and US$600/oz long-term.

In the base metal sector, they expect prices to weaken somewhat next year because of a slowing U.S. economy and slower demand growth from China. But more consolidation looms.

"As miners continue to benefit from strong cash flows and have healthy balance sheets, relatively low equity prices may continue to stimulate the current appetite for corporate activity. With the BHP Billiton takeover offer putting Rio Tinto in play, other contenders are likely to follow," they wrote in a note to clients.

In the precious metals sector, the analysts are maintaining a positive outlook for gold because of continued market volatility, potentially lower U.S. interest rates, and a weak U.S. dollar.

They cite four trends that support their outlook: rising costs supporting long-term prices, high costs and political issues potentially delaying projects, strong jewelry and "store of wealth" demand, and continued closure of forward sales contracts, which suggests producers see plenty of upside to gold.

That leaves the junior exploration plays. The analysts note that junior companies continue to find it relatively easy to raise capital to invest in exploration, and that concerns over asset-backed commercial paper have apparently not dampened investor enthusiasm for risk in the commodity sector.

The analysts expect a lot more takeovers in the junior space as the intermediate and senior companies search for growth opportunities. They prefer exploration companies with projects in politically stable areas that have a large and growing resource and are capable of producing a "meaningful amount" of precious metals and base metals. That include names such as Detour Gold Corp. and Osisko Exploration Ltd.