Copper Price Nears Record High; Aussie Copper Miner's Shares Soar 29%
Introduction:
The tight supply of copper mines is expected to continue
The last remaining high-quality copper mining stocks in Australia
Opinion: Beware of potential risks such as debt
Since central banks around the world have significantly tightened monetary policy to control inflation, leading to a sharp slowdown in the industrial cycle, the latest economic data from around the world seem to indicate that a turning point in the industrial cycle has arrived.
The global manufacturing Purchasing Managers' Index (PMI) for March further improved, recording the fastest growth rate since July 2022, including the expansion of China's PMI and the US ISM manufacturing index.
The improvement in manufacturing activity in the world's second-largest economy indicates that demand for raw materials is recovering. Copper, as the most widely used non-ferrous metal in modern industry, has always been seen as a barometer of economic activity. Its price has also directly broken through the range of $8,000-9,000 per ton for many years.
Ben Cleary of Tribeca said that the rebound in copper prices is just the beginning. He expects copper prices to soar by 60% in the next few years, reaching $15,000 per ton.
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Copper mines: The tight supply situation will continueIt is noteworthy that since the end of last year, the supply issues have been causing tension in the copper spot market following the Supreme Court's decision to shut down First Quantum's Cobre Panama mine. The mine accounts for approximately 1.7% of the global supply and is expected to remain idle until mid-2025, due to factors such as the Panamanian elections.
Major producers like Rio Tinto and Anglo American have issued 2024 guidance below expectations, with cumulative production cuts leading to more than 5% of global output being halted.
MMG's Las Bambas mine may face another round of worker strikes and blockades of main transportation routes in November 2023, primarily due to the mine's failure to provide information on profit-sharing agreements. The strikes also affected Glencore's Antapaccay and Hudbay's Constancia.
Furthermore, Zambia's state power utility warned of cutting electricity supplies to mining companies. With over 80% of Zambia's hydropower installed capacity, the El Niño phenomenon has led to droughts in southern Africa, rendering hydropower plants inoperable and leaving the country without electricity.
Meanwhile, the Democratic Republic of Congo, which borders Zambia, usually imports electricity from Zambia. With Zambia struggling to maintain its own supply, the DRC is also facing power shortages.
Zambia and the DRC are the largest copper-producing countries in Africa, accounting for 3.5% and 11.4% of global copper mine supply, respectively. The power outage is expected to impact global production by over 150,000 tons.
These compliance issues, operational challenges, community concerns, and weather factors, among others, have compounded to repeatedly lower global copper mine supply, leading to a tight supply situation.
In the short term, another factor contributing to the copper supply shortage is the UK and US sanctions on Russian metal transactions. According to the Financial Times, starting from April 12, 2024, the UK and US announced trade restrictions on Russian commodities such as copper, aluminum, and nickel. The London Metal Exchange (LME) and the Chicago Mercantile Exchange (CME) are prohibited from using copper, aluminum, and nickel produced by Russia after April 13.
With 62.1% of LME's copper mine inventory coming from Russia, the continuous increase in LME cancellations and the decline in actual deliverable inventory since the UK and US announced restrictions have sparked market concerns about the risk of a squeeze.
Therefore, in the short term, against the backdrop of geopolitical risks, extreme weather, and frequent worker strikes in some copper mining areas, many copper mining companies have been forced to reduce or suspend production, creating the current situation of insufficient copper supply.The situation has not changed in the long term, and the supply of copper mines has not increased due to these factors. This is due to a completely different logic from short-term supply.
In the long run, from an economic perspective, the capital intensity of copper mining has become more and more prominent. In 2012, the cost of mining per ton of copper was about $10,000, and now this number is about $17,000 per ton. This is mainly due to the decline in the grade of global copper mines, which has increased the cost per ton of copper.
At the same time, as the development of new mines gradually turns to remote and underdeveloped areas, the construction cost of infrastructure such as roads is a new expenditure for mining companies.
Secondly, as shown in the figure below, copper mines are facing high resource taxes globally. For example, Chile passed the Mining Royalty Act in 2023, which allows mining companies to pay a maximum tax rate of 44.5%.
Under the conditions of high capital expenditure and high resource taxes, the mining cost of copper mining companies continues to increase, leading to companies' unwillingness to continue investing in new mines. At the same time, uncertain factors such as geopolitical risks make companies want a shorter investment payback period, which leads to a decline in the growth rate of copper capital expenditure, and the long-term supply faces a shortage.
The capital expenditure of copper mining companies usually leads the global copper production capacity by 3-4 years. We can see from the figure below that the year-on-year growth rate of global copper company capital expenditure is currently declining. Therefore, the shortage of copper supply will not change in the future, and the shortage may even worsen.
In summary, the shortage of copper is likely to continue, even if the current copper price still does not support mining companies to carry out large-scale capital expenditure. Therefore, the market's bullish sentiment on copper prices is very reasonable.
Australian copper mining stocks: Sandfire Resources (ASX: SFR)
In Australia, there were many copper mining producers before, but most of them were acquired by large companies and gradually withdrew from the market. For example, the well-known OZ Mineral was acquired by BHP, the gold and copper mining producer Newcrest Mining was acquired by Newmont, and Xanadu Mines obtained strategic investment from China's Zijin Mining.
After OZ Mineral disappeared from the ASX, investors have been looking for new alternatives. Although the reality is that no company can match OZ Mineral, compared with other companies, Sandfire Resources is the one with the largest market value and far exceeds other companies.SFR currently has a market capitalization of approximately AUD 4.35 billion, with its share price soaring by an astonishing 29% this year. SFR's revenue is 74% derived from copper, with the remainder coming from zinc (17%), as well as gold, silver, and lead. Its main mining area, MATSA, is located at the border between Spain and Portugal and was acquired by SFR in 2021 for AUD 2.6 billion. The mine currently produces about 80,000 tons of copper annually.
Another major asset, Motheo, is situated in the Republic of Botswana, Africa, and is expected to produce approximately 50,000 tons of copper annually. In addition to these, SFR owns the DeGrussa copper mine in Western Australia (which has been fully depleted) and the Black Butte copper mine in Montana, USA.
At present, neither MATSA nor Motheo has fully realized the potential of their mines. SFR anticipates that MATSA's output could further increase to 100,000 tons by FY25, while Motheo, which only achieved commercialization in July 2023, also has significant room for production growth. The company is currently increasing its investment in Motheo to expand its production potential.
This is also reflected in the financial reports, as shown in the figure below, where SFR has significantly raised its production guidance for Metheo in the second half of the year. It is expected that the resource estimate in the Motheo area will be increased with additional testing. The latest test results indicate that there are approximately 5.6 million tons of copper ore with a grade of 1.3% in the area.
In the first half of FY24, SFR's revenue was USD 400 million, with a net loss of USD 53.9 million, mainly due to the higher depreciation costs resulting from the shorter useful life of the MATSA mine. However, SFR also has several potential exploration plans near MATSA, and if there are more positive results, it could still extend the life of the mine to minimize depreciation.
The company also stated that part of the loss was due to the decline in zinc prices and copper mine sales not meeting expectations. However, with the recovery of copper prices, SFR is confident in further reducing losses.
Looking at the balance sheet, SFR's total assets amount to AUD 2.9 billion, including AUD 1.27 billion in debt, with more than AUD 500 million of the debt being interest-bearing loans. For instance, SFR has a loan of over AUD 200 million from a consortium consisting of Société Générale, Nedbank from South Africa, Natixis, and ING, providing a 7-year floating interest rate loan. The current interest rate on this loan is as high as 11.01%, which poses a certain level of repayment pressure.In general, the current high-interest environment is unfavorable for SFR to continue expanding projects. SFR's substantial borrowing activities will undoubtedly put more pressure on the balance sheet, and the company is currently in a negative cash flow state, requiring continuous financing to support project expansion.
However, the rise in copper prices is expected to accelerate the improvement of this situation, and the Motheo project's copper production increase is relatively fast, which are all positive factors.
Australian Financial Investment Research Viewpoint
Overall, in the short term, the copper market is facing the impact of geopolitical risks, extreme weather, and community issues. In the long run, high tax rates and capital expenditures hinder copper mining companies from continuing to expand production, which has become the main factor that the copper market will face a long-term shortage.
In Australia, high-quality copper mining companies have been almost completely acquired by large companies. The only remaining large copper mining company in the market is Sandfire Resources, whose mining areas are mainly located in Spain and Botswana. Among them, Botswana is the main area for copper production increase.
For SFR, both of its main copper mines are still in the expansion stage, with great potential in the future. Both copper prices and production will further support SFR's performance.
To support the smooth progress of the expansion plan, SFR has undertaken a considerable amount of debt and relatively high interest rates, which are potential risk factors.
When making any investment, please consider the applicability of the information contained in this article based on your personal investment objectives, financial situation, or personal needs, make decisions cautiously, and bear the risks yourself.
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