Resumption of interest in Copperminers and Dr. Copper.

May 19, 2023

As you know, I have opined that global economic problems have depressed the Copper market, but that I believe it’s on the cusp of recovery, tentatively slated for 4Q23-1Q24. You also know that investors must be thinking six to nine months ahead to effectively put an investment plan in motion. So now is the time to start.

Fortunately, the excellent energy and metals research team at Stifel is helping out. Today they published some extensive notes that I find valuable.

Resuming Coverage of Five Copper-Focused Miners (CS, ERO, FM, HBM, and LUN) – Alex Terentiew

Dr. Copper, one of the most reliable indicators of global economic activity, has been showing resilience despite slowing industrial activity and talks of a looming recession. We believe this is an indication of market tightness driven by strong demand and persisting supply challenges. Incorporating $4.20/lb as our new long-term copper price, a value we determined after revisiting our “price-incentive” model and evaluating the cost structure of the industry, we resume coverage on five base metals miners (CS, ERO, FM, HBM and LUN). Each of these companies has its own attributes and risks, but, we believe, also provides investors with various opportunities to invest in the sector and participate in our long-term bullish outlook for the red metal.

Canada – Base Metals & Bulk Commodities – A Portfolio Approach to Picking the Right Copper Investment – Global initiatives to de-carbonize and electrify have driven copper demand growth, while continuing supply woes on the back of a number of operational, jurisdictional, and regulatory challenges have combined to create a tight market. As a result of these converging trends, we expect increasingly robust copper prices will be needed to avoid market deficits, assuming the world stays true to its climate goals. Based on our new long-term copper price of $4.20/lb, a minimum value we determine is necessary to incentivize miners to build profitable mines, we present a rigorous benchmarking exercise of the nine producing base metal miners in our coverage (CS, CMMC, ERO, FCX, FM, HBM, LUN, TKO and TECK). This analysis showcases for investors the unique opportunities, options, and investment styles afforded by these names, including how they align with personal mandates, criteria, risk tolerances, growth expectations, and time horizons.

Key Points

Copper prices are showing resilience. Despite indications globally of slowing industrial activity and declining investor sentiment, copper prices have held ground, down 1% YTD, solidly outperforming most other industrial commodities, most of which are down >10%. In our view, copper prices may have overshot to the upside in Q1 on strong expectations of a global economic recovery, with a subsequent price retreat on weaker economic data in April. Copper’s relative outperformance, however, we view as an indication of market tightness and a robust longer-term outlook driven by both supply challenges and strong demand.

Based on our “price incentive” model, we have increased our long-term Cu price to $4.20/lb. We revisited our “Copper – The Price is NOT Right – It Needs to be Higher” analysis last conducted in November 2022 and incorporated operating and cost metrics of the most recently published copper studies into our dataset in an effort to model an “average” copper mine. Based on our incentive price model, our all-in-cost analysis for the nine copper miners now under coverage, as well as discussions with several of the world’s largest copper miners, we have arrived at a minimum incentive price of $4.20/lb for miners seeking to generate an after-tax IRR of 15%. As we firmly believe that the world needs more copper to meet its demand growth aspirations, we have accordingly raised our long-term copper price (2026 and beyond) to $4.20/lb, from $4.00/lb previously.

Resuming coverage on five base metal miners.

In this report, we provide a brief discussion of the five companies on which we are resuming coverage. The key investment thesis for each is listed below:

Capstone Copper (Rating: Buy; Target Price: C$8.70) — A Transformative Year. Following the merger of Capstone Mining and Mantos Copper in 2021, Capstone Copper has been steadily advancing on its growth ambitions. The pending completion of the Mantoverde sulphide expansion at the end of 2023 is set to fundamentally improve the company’s production and cost profile, improving margins and cash flow, and positioning it to both deleverage and pursue other avenues of growth. With sufficient liquidity to complete its growth plans, we view Capstone as one of our preferred names within the sector.

Ero Copper (Rating: Hold; Target Price: C$30.00) — High Margin, Growing Producer but with a Premium Valuation. Ero Copper is the lowest cost, highest margin producer in our coverage, despite spending on its Tucumã copper project, which will start production next year and double the company’s copper production. Beyond 2025, however, we forecast a declining production profile that may be filled by successful exploration on its promising, extensive land package, which is in the early stages of being evaluated. At the company’s current valuation, however, we believe its high-margin business is well recognized by the market. Although the return to our target price is currently favorable, we believe the recent decline in share price is largely attributable to falling copper prices, and because of this volatility, we resume coverage at Hold.

First Quantum Minerals (Rating: Buy; Target Price: C$40.00) — Copper Growth, from the Ground Up. In addition to having a portfolio of world-class assets that have recently seen their political risk improve, First Quantum hosts an industry-leading team that we believe has valuable experience building more large-scale base metal mines from the ground up than any other miner. Understanding the high level of project development expertise required, while simultaneously mitigating risks involved in successfully delivering projects from concept to commissioning, is a valuable skill we believe First Quantum brings to shareholders that are looking for growth and increased exposure to copper.

Hudbay Minerals (Rating: Buy; Target Price: C$10.70) — Gold Plated Copper Growth. Of all the copper miners in our coverage, we believe Hudbay posts some of the strongest valuation upside on near-term multiples (EV/EBITDA), with the upside driven by higher copper and gold grades at Constancia over the next three years, with higher gold grades at Lalor also pushing out nearly 200 kozpa. Longer term, however, we consider Hudbay to have more limited growth, making its P/NAV valuation relatively more expensive. And yet, we think exploration upside at both Constancia and Lalor have potential to rectify this problem over the next few years.

Lundin Mining (Rating: Buy; Target Price: C$13.00) — Consolidating and Growing in the Andes. Although many investors prefer certainty and a low-risk profile, Lundin’s growing presence in Chile and Argentina, we believe, provides substantial upside potential with a reasonable risk profile. Lundin Mining, keeping in line with its founder’s history, is actively progressing an early mover advantage to unlock substantial potential value and deliver the benefits consolidating operations in that part of the Andes can bring to stakeholders. Ultimately, we expect Lundin to be part of a consortium of companies that unlocks this potential and creates a new, world-class mining district.

Of these five Copperminers, I hold a position only in HudBay (HBM). HudBay and Teck (TECK) are Cara Core-12 Companies. I recently sold TECK as an unsolicited bid from Glencore (GLEN.L) overheated the stock. I will re-enter TECK and add to HBM over the next few months. I will consider one or more of the others as well.

Like to give your opinion? Join our Community Discussion

Related Posts