Copper likely to be first metal to recover from corona sell-off

A heightened aversion to risk dominates the thinking of most investors as fear of the coronavirus and its impact on the global economy drives money into gold, but if there’s one base metal well placed to ride out this burst of uncertainty it’s Dr Copper.
28th February 2020
Tim Treadgold

A heightened aversion to risk dominates the thinking of most investors as fear of the coronavirus and its impact on the global economy drives money into gold, but if there’s one base metal well placed to ride out this burst of uncertainty it’s Dr Copper.

That nickname for copper says a lot about the metal itself because it goes to the secret of its success as a commodity with a vast range of uses, from electronics to construction and transport – especially in electric vehicles, which use three-times the amount of copper as conventional vehicles.

The problem for believers in copper as a metal with a brilliant future is that the future seems to be taking an awful long time to arrive, not aided by the virus-induced US30 cents per pound plunge in the price since mid-January, knocking copper back to where it was six months ago at around $US2.56/lb.

A lot of what happens next depends on how the world handles the coronavirus and to what extent governments are prepared to try to isolate their country, potentially at the risk of severe economic damage.

But, assuming protective measures work (as they have with earlier virus outbreaks and are working in Singapore), followed by the development of a vaccine, then the latest scare will pass with the industrial metal likely to recover first being copper, given its combination of deep-seated demand and indications of a future supply shortage.

BHP, Rio Tinto and Anglo American, already three of the world’s biggest copper producers, are keen to expand production with copper described as a “forward-looking” metal. Independence Group chief executive, Peter Bradford, includes copper in his forecast that base metals face a “perfect storm” – high demand, low supply growth and lack of discovery.

A hint of what needs to happen in copper came late last year when analysts at the well-regarded London-based commodities research group, CRU, produced some startling numbers that started with a claim that by 2035 (not that far away) the world will need an extra 10 million tonnes of copper a year.

However, that’s not the real demand number because over the next 15 years production of copper from existing mines will decline by about 6m/t a year through natural depletion of orebodies – so, the real number for 2035 is an extra 16m/t a year, or 12 new mines the size of today’s biggest, Escondida in Chile.

Whether CRU’s numbers are precisely correct is irrelevant because even with a wide allowance of error the message remains intact – the world needs an awful lot more copper.

That leads to a question: Who’s in the race to deliver the copper the world will need?

Obviously, it’s the major producers who will continue to dominate supply but there will be plenty of room for new players, and strong interest in exploration situations, either as future producers or as takeover targets.

To help with thinking about copper investment opportunities, here are six of the best on the Australian stock market today, starting with:

 

OZ Minerals – (OZL):

A mid-sized copper producer courtesy of its Prominent Hill mine in South Australia, OZ is in the process of bringing its next big mine in SA, Carrapateena, into production as well as expanding production at a small mine in Brazil.

Current production guidance is for annual output of up to 111,500 tonnes of copper at a cash cost of up to US80 cents a pound, comfortably below today’s virus-depleted copper price of around $US2.56/lb.

By the end of 2020, OZ should have three high-quality copper mines in production, Prominent Hill, which has just had its life extended to 2031, Carrapateena, and the Antas project in Brazil – with all three also contributing meaningful amounts of gold.

Earlier this month, OZ surprised investors with a better-than-expected result for calendar 2019 with earnings, free cash flow and dividend beating predictions. This year could be tougher as Carrapateena ramps up and the dividend could be trimmed, but the groundwork has been laid for a string of good years.

Like most miners, OZ has suffered a sharp sell-off as concerns have grown about the potential impact of the coronavirus, shedding $1.10 to trade around $9.37, back to where it was in October.

Most investment banks are yet to update their views on OZ in the wake of the virus sell-off but the latest consensus view is for the stock to trade at around $10.65 which is an indication of the potential future share-price upside.

 

Sandfire Resources – (SFR):

Strong profit flows over the past few years from the De Grussa copper and gold mine in WA have provided Sandfire with the financial firepower to shift up a gear with new projects emerging in Botswana and the US which complement a major exploration program close to De Grussa.

In the half-year to December 31, Sandfire produced 34,988 tonnes of copper and 19,370 ounces of gold which contributed the lion’s share of group sales revenue of $313.1 million, helping build the company’s cash balance to $201.7 million.

It’s the cash in the bank which is as important to Sandfire as the metal left in De Grussa because the company is moving into a new phase of mine development and it’s those next mines which make Sandfire an especially interesting mid-tier copper stock to watch.

Top of the new projects list are the T3 copper discovery in the Kalahari copper belt of Botswana, one of the more mining-friendly jurisdictions in Africa, and the Black Butte project in Montana. Sandfire also has an interesting range of investments, including a handy slice of Adriatic Metals, an emerging European-based zinc and copper project developer.

Like most other mining stocks Sandfire has been sold down over the past few weeks, but at its latest price of $4.50 it is almost 38% below the price tip of $6.30 from Credit Suisse.

 

Stavely Minerals (SVY):

Discovery is the best way to create value in a bear market and that’s just what Stavely is doing at its Thursday’s Gossan project in Victoria where a drill hit reported earlier this week led to a 9c (13%) increase in Stavely’s share price to 76c at a time when everything else was falling.

The stock has slipped back more recently to around 69.5c but the assays reported a few days ago of up to 26.8% copper (plus 8.48 grams of gold and 201g/t of silver) from the Cayley Lode are the latest indication that Thursday’s Gossan is on the way to becoming a discovery of national significance.

A steady flow of news from Stavely is expected in coming weeks with a four-rig drilling program underway making it an essential stock to watch over the rest of 2020.

 

Orion Minerals (ORN): 

Three years of exploration and project design work are coming to a head for Orion at its Prieska copper and zinc re-development in South Africa.

A partnering process led by Macquarie Bank is underway and an optimised definitive feasibility study is expected in the second quarter with capital and operating cost savings expected in the plan to bring one of the world’s once great base metal mines back to life.

Securing an equity partner is seen as the key to Prieska and once that’s done Orion shares should be re-rated from their current low level of 1.9c.

Developing a mine in South Africa is not easy, but the well-connected Orion could be the company to show how it can be done.

 

Bougainville Copper (BOC):

Another copper project re-development story which could deliver strong returns if the cards fall the right way.

Older readers might remember that the Pacific island of Bougainville was once home to the giant Panguna mine operated by Rio Tinto, until a civil war forced its closure.

A political settlement has cleared the way for a return to Panguna and while the old workings are of no value much of the orebody remains and if Bougainville Copper can clear residual ownership issues and win local support it could be a big winner later this year.

At 25c Bougainville Copper is trading at half the 50c it reached late last year as interest in Panguna grew after a vote by islanders to restructure their relationship with PNG.

 

Venturex Resources (VXR):

Backed by leading goldminer Northern Star and with a copper offtake agreement signed with Trafigura, a global metals trader, Venturex has moved to with sight of developing its Sulphur Springs copper project.

Located in the Pilbara region of WA Sulphur Springs is expected to start life as a 10-year mine based on a resource of 13.9 million tonnes of material assaying 1.47% copper and 3.77% zinc.

With a definitive feasibility study completed and the $100 million funding arrangement secured with Trafigura all that remains is for receipt of final environmental approvals, which are expected soon.

A stock to watch as the approvals process move through government processes – everything else is ready to go.

 

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