The copper space is getting hotter as the majors step up their hunt for options to supplement rapidly declining inventories to help meet soaring demand driven by the global decarbonisation and electrification effort and top consumer China relaxing its COVID-19 restrictions. 

The red metal is making headlines as the price makes advances and heads for its best month since April 2021. After taking a bit of a breather, the LME copper price has rebounded 5.6% to $US8,342 a tonne in the past couple of weeks.

The copper market’s available inventory is normally marked in months or weeks, however, current levels are at record lows and according to Trafigura are expected to fall to less than 3 days’ supply by the end of the year.

This comes as investors start speculating that China might move away from its COVID-zero policy and announce new significant infrastructure and stimulus packages which would both be very bullish for sentiment and increase demand for copper.

At the same time, consolidation in the sector is rife as the impact of years of underinvestment in new copper projects starts to be felt by many.

BHP (ASX:BHP) is extremely confident in the trajectory for copper demand, predicting it could double over the next 30 years compared with the last 30.

This prompted the heavyweight to take another tilt at OZ Minerals (ASX:OZL), with a sweetened $28.50 per share offer, valuing OZ at $9.6 billion. BHP has also just secured a strategic interest in Canadian porphyry explorer Brixton Metals.

 Veteran industry watcher Barry Fitzgerald says BHP’s re-engagement with OZ Minerals says a lot about where the mining giant thinks the copper and nickel markets are headed, specifically that “BHP’s intent on increasing its exposure to the two future-facing metals is deeper than many observers suspect”.

Industry legend Robert Friedland goes further stating that humanity has mined about 700 million tonnes of copper to date. He estimates the need to mine that same amount in the next 22 years to keep up with the deepening green energy transition.

Rio Tinto (ASX:RIO) is also working on expanding its copper portfolio, with a $US3.3 billion offer it is trying to get over the line for the remaining 49% stake in Turquoise Hill Resources – its partner in the massive Oyu Tolgoi copper mine in Mongolia.

In the last month, Glencore sweetened the deal with Metals Acquisition for a $1.1 billion cash disposal of its CSA copper mine in NSW.

M&A is also occurring at the more junior end of the market as illustrated by Zijin Mining’s proposed strategic investment in Xanadu Mines (ASX:XAM) and its flagship Kharmagtai project in Mongolia.

BloombergNEF (BNEF) said in late August copper miners were looking to bolster their assets as they recognised the energy transition would drive up demand for the red metal.

But while copper demand is set to grow by 53% to 39 million tonnes by 2040, according to BNEF, supply is only projected to rise by 16% to 25 million tonnes in a base-case scenario, reflecting declining ore grades and difficulty developing greenfield mines.

“BNEF expects more consolidation in the near term to boost supply and lower costs,” the research house said.

“Copper miners have the cash to fund mergers and acquisitions, with BNEF analysis indicating the top 11 miners are sitting on $53 billion of cash and cash equivalents — the highest level in a decade.”

Despite this cash position, few are investing significantly in new development projects – a scenario driven by the significant cost inflation taking place in the industry, the lack of advanced copper projects currently in the project development pipeline and an estimated incentive price at a substantial premium to current levels being needed to encourage significant capital investment.

With more consolidation on the cards, it will become harder for investors to gain exposure to quality ASX-listed copper stocks, and investors are starting to take notice. It is expected that good new discoveries will be well rewarded, and be the focus of strategy investors and M&A.

“Often when you see the Tech sector broadly sold off as it has recently, and now coupled with corrections in crypto (a new sector), there is a rotation into hard assets and the resource sector,” Sam Spring, a forming mining analyst and current CEO of porphyry hunter Kincora Copper (ASX:KCC), told Stockhead.

“With high inflation, many have been waiting for that rotation to finally occur and maybe the first signs of this are starting to come to fruition, with gold outperforming on a relatively basis and both copper and nickel prices starting to get a bid.

“Reported copper inventory levels, significant short financial derivative bets and the potential of material, positive government policy in China provides a potentially very dynamic scenario, and noting the first calendar quarter is generally a seasonally strong period for the copper price.”

Leveraged to exploration success

In the last month Ecuadorian porphyry developer and explorer SolGold has attracted Jiangxi, the largest copper producer in China, as a third strategic investor on its register in addition to BHP and Newcrest, prompting speculation of a potential bidding war.

SolGold is a case study for the value created from the discovery of a gold-rich copper porphyry, which re-rated 20x between holes 13 and 67 at the Cascabel project, despite an unfavourable copper price and general resource markets at that time.

With permits, land access agreements and improving ground conditions following recent flooding in the district, Kincora is preparing to kick off the next phase of drilling at its flagship Trundle project in Australia’s foremost porphyry region, the Macquarie Arc in the Lachlan Fold Belt (LFB) of New South Wales.

The LFB is well-known as the home to major mines including Newcrest Mining’s (ASX:NCM) Cadia-Ridgeway operation and CMOC’s Northparkes mine.

Cadia is one of the largest and lowest cost mines globally with an endowment of 50Moz of gold and 9.5Mt of copper, while Northparkes is Australia’s second-largest porphyry mine hosting 5.5Moz gold and 4.5Mt copper.

Previous exploration at Trundle by Kincora has shown evidence of potential ore-grade porphyry vein mineralisation at the Trundle Park prospect.

In August, Kincora re-assayed an intercept from the fourth hole (TRDD032) at the emerging Southern Extension Discovery Zone, which delivered the highest primary grade hit yet at Trundle of 2m at 19.9 grams per tonne (g/t) and 2.43% copper.

In the next round of drilling, the company will test five separate but adjacent zones within an existing 3.2km mineralised corridor at its Trundle project.

To put the scale of this 3.2km mineralised system and target zone into perspective, it is the same size as Alkane Resources’ (ASX:ALK) Boda project, which hosts over 10 million oz gold equivalent, and compares favourably to the 4.5km strike at Northparkes.

The potential for Kincora to make a significant porphyry discovery has not gone unnoticed, with Bridge Street Capital analyst Dr Chris Baker noting in a research report that the Trundle tenement featured an estimated quarter of the Northparkes Igneous Complex, host to the Tier 1 porphyry copper deposits at Northparkes.

Dr Baker said Kincora was strongly leveraged to exploration success, with the market paying under $5m for the company’s LFB effort, which “looks quite inexpensive”.

 

 

 

This article was developed in collaboration with Kincora Copper, a Stockhead advertiser at the time of publishing.

 

This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.

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