Barry FitzGerald: A couple of beaten-down copper stocks with three reasons to re-rate

Garimpeiro reckons there is an opportunity in the copper stocks now that the red metal is picking up after sinking to six-month lows.

Copper’s price fall from more than $US4/lb to a May 24 low of $US3.50/lb hit the share prices of the ASX producers hard.

Now that copper has worked its way aback up to around $US3.70/lb, with investment banks like Morgan Stanley saying the “upside price risk could be growing,’’ some catch-up by the copper stocks should be expected.

But Garimpeiro is looking for a triple-banger effect. It is where a copper stock has been hit by the now passing weakness in the copper price, where it has been hit by issues of a passing nature, and where it has clear growth in the pipeline.

The idea is that they could be in line for a re-rating, with copper’s rebound the initial trigger.

He has found two – AIC Mines and 29Metals. Both have operations in the copper rich Mt Isa-Cloncurry region of north-west Queensland.

AIC Mines (ASX:A1M)

This one has a good following thanks to its go-go MD Aaron Colleran who was previously in charge of business development and investor relations at Evolution during its establishment and strong growth phase.

AIC was trading at 67c a year ago but is now back at 39c for a market cap of $180 million. It has $37m in cash after completing a $30m equity raising at 45c.

Colleran got AIC on the radar as a copper stock to watch back in November 2021 with its acquisition of the Eloise copper/gold mine, 50kms southeast of Cloncurry.

And then he grew the story by acquiring the nearby and undeveloped Jericho deposit by acquiring the ASX-listed Demetallica, with the deal completed in January this year.

Issues at Eloise that AIC has been working through means that its FY2023 production target of 12,500t of copper and 6,000oz of gold will be missed, and costs have been higher than expected.

But the bigger picture with this one is the eventual move up to an annual production rate of 20,000tpa of copper and 10,000t of gold, all at a lower cost, from the development of Jericho and an expansion of the Eloise treatment plant.

Nobody expects Colleran will be wanting to stop there. Mine and regional exploration success, along with more acquisition activity, are expected.

Broker Ord Minnett this week increased its price target on the stock from 65c to 70c after a return visit to Eloise a year apart, noting it had “seen material improvements.’’

“Despite this improvement, the stock has retraced about 31% over the past year (the stock was trading at 40c at the time of report).’’

“This is partly driven by a deterioration in the commodity price, some operational hiccups (e.g. equipment availability, seismicity) and equity dilution. However, in our view, the stock price does not reflect the vastly improved outlook and we see the operation delivering about 12,000tpa of copper over the next 18 months.’’

After that, the broker sees production increasing to more than 20,000tpa by FY2027 with the staged expansion of the mill and the development of Jericho.

29Metals (ASX:29M)

Queensland and Western Australia copper/zinc producer 29Metals was the biggest mining IPO on the ASX in 2021.

The $2 shares in the IPO valued the company at $960 million and for a brief time at least, the stock traded as high as $3.15 a share for a market cap of $1.5 billion.

But it has been downhill since, with mid-week trade in the stock at 70c giving it a market cap of just $336m.

The retreat in the copper price has not helped. But the big issue for the company was the suspension of operations in March at its 20,000tpa Capricorn copper operation near Mt Isa due to a record-breaking five days of rain.

The main underground mine at the operation was flooded and the equivalent of 600 Olympic swimming pools of water submerged key plant and equipment on the surface. The company has another operation in WA, the Golden Grove copper-zinc operation.

But the loss of production from Capricorn, and the cost of re-establishing the operation, has panicked the market into thinking the company will have to raise a chunk of capital in a dilutive equity raising at some point.

The downside from all that is already reflected in the company’s beaten up share price. And it could be argued the sell-off in the stock has been overdone.

A production profile that builds to around 80,000t of copper equivalent from both Capricorn and Golden Grove in the next two years or so will be hard to ignore in a rising copper market.

It is meaningful copper production in ASX terms and could well see the company re-rated to a level that better reflects its status as the second biggest copper-focussed producer on the ASX after the Africa-Spain copper producer Sandfire (ASX:SFR).

It’s why Macquarie and Morgan Stanley have price targets on the stock of $1 and $1.15 respectively despite the long road ahead in bringing Capricorn back up to speed.

While both price targets – issued after the release of the company’s Capricorn recovery plan – are well short of the $2 a share in the IPO of the company by Owen Hegarty’s private equity group EMR Capital, they are substantially higher than the current market price.

So potentially at least, good news for new investors in the stock at these levels while the original subscribers at $2 a share are left to curse the weather gods.

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