Copper cathode producer Austral Resources could be a standout bargain as copper demand rises with the energy transition
Link copied to
Few metals have the long term momentum of copper, one of the key commodities essential to the transition to clean, green transport and renewable energy.
The role copper will play in the energy transition is multi-faceted. Each electric vehicle contains up to around 83kg of copper, around four times as much as an internal combustion engine car.
On top of that copper is a major component of renewable energy systems like solar and wind turbines, which adds up to a looming rush in green demand for copper.
Mining giant Teck estimates demand for copper for EV charging will rise by more than 1000% by 2030, from 2020 levels.
The connection of renewables to the electricity grid will also require cabling that points to a massive lift in copper demand as well.
“While supply should be enough in 2023-24, we could see deficits starting in 2025,” Fastmarkets head of metals research and strategy Boris Mikanikreza recently told Stockhead.
He says “green demand” will take time, but it’s already growing rapidly, at 24% in 2023 against just 1.8% in traditional “brown demand”, and will account for 11% of total demand by 2030.
“We expect to see large deficits over the next 10 years because there is not enough supply (and even less given the current copper price) to meet demand which should lead to a higher equilibrium copper price to rebalance the market,” Mikanikreza said.
S&P last year estimated copper demand would nearly double to 50Mt by 2035. Current production is only around 28Mt, with major producing mines in South America declining in output and grade.
Investment banks and price forecasters predict we will see a lift in prices to incentivise new sources of supply, with Goldman Sachs last year saying prices of US$13,000/t would be needed to ensure demand is catered for by 2030.
Fitch sees long term copper prices hitting US$11,500/t, which is huge, as copper has historically never traded above US$10,700/t.
But with long build times and high capital costs for new mines planned or under construction, it is existing miners who benefit the most if copper lifts from current levels.
In that context Austral Resources looms as a standout copper bargain.
Listed in 2021, Austral (ASX:AR1) has a market cap of just $108.1 million according to Commsec.
BHP and Rio Tinto (ASX:RIO) are two of the world’s largest copper miners, producing in excess of 1Mt and 500,000tpa respectively. But they are valued for their iron ore divisions.
Heading down the list ASX investors only have the options of Sandfire Resources (ASX:SFR), 29Metals (ASX:29M), Aeris Resources (ASX:AIS), AIC Mines (ASX:A1M) and Austral when it comes to standalone ASX-listed copper producers.
Austral is the cheapest of the lot. Yet, it is the most advanced down the copper market value chain.
Other producers deliver a concentrate which is then sold on to smelters. Austral goes a step further, selling a 99.9% pure copper cathode that gives it far higher payabilities and exposure to changes in the price of copper metal.
Morningstar has an undervalued rating on AR1, currently trading at 21c, putting a fair value on its shares of 46c.
It’s not the only company that rates AR1 highly amid what is a bullish copper outlook – Peloton Capital resource analyst Ian Spence has placed a 50c price target on the stock, 2 ½ times its current going rate.
Its Mt Kelly Heap Leach plant near Mt Isa is the only one operated by an ASX company using the solvent extraction electrowinning production method, producing 130,000t of LME A-grade copper cathode since 2007.
At rates of 1000t per month – Austral hit 33.5t per day within operating cost budget throughout February despite heavy rainfall in north Queensland – the company is using just a third of Mt Kelly’s capacity, providing ample room for growth.
“AR1 is a rare, substantially de-risked opportunity to invest in an established domestic copper producer with realistic strong aspirations of attaining substantial share price growth through increased revenue from planned scheduled increased production as well as leverage upside from a planned fully funded aggressive exploration and resource development drive,” Spence said in his February 28 note.
“Whilst there are plenty of junior copper companies currently listed on the ASX, only a tiny few are currently able to take advantage and leverage off current and forecasted high copper prices by producing physical metal.”
Ore is currently coming from the Anthill open cut mine, which contains a reserve of 5.06Mt at 0.94% Cu for 47,500t of contained copper metal.
This high grade oxide material is the tip of the iceberg, with Austral boasting a broader resource base of 60Mt at 0.7% copper, an inventory of predominantly sulphide material that amounts to a total resource of 432,000t of contained copper.
By way of comparison, $200m capped AIC Mines, owner of the Eloise and Jericho mines in Queensland, has a resource base of ~295,000t of copper with gold credits.
Austral has started a pre-feasibility study on its nearby Lady Colleen deposit, which on early scoping study numbers could increase its operating life by five years from 2024-25.
“Even less of these producing companies have a similar substantial large tenement holding, located in a world class copper district,” Spence said.
“[They] hold not only a significant global resource base to build on, but have strong potential for delineating and discovering substantial additional oxide and copper resources such as Lady Colleen and Lady Annie, capable of being rapidly converted to mining reserves for near term production from already granted mining leases.
“AR1 has that rare mix of revenue through recently increased copper cathode production, comfortably fully funding a large aggressive exploration campaign with 2023 drilling testing several targets underway.
“This combination of revenue and anticipated success from fully funded exploration, we believe, has the potential to see the Company’s current low capitalisation significantly re-rated in the near term.”
AR1’s potential has been identified by major names such as Thiess, the world’s biggest mining contractor which is a large shareholder and is operating the mine, and Glencore, AR1’s offtake partner which provided US$15 million in the form of a pre-payment to help Austral establish the Anthill operation.
The operation provides important domestic feed to Glencore’s Townsville refinery.
Spence says Austral is likely to extend Anthill beyond its remaining three year mine life.
But Austral has an enormous 2147km2 package including both near mine and regional exploration targets, providing a platform for growth.
Over 22,000m of drilling is planned this year across a catalogue of oxide and sulphide targets.
Lady Colleen is the most advanced prospect outside the Anthill mine, with an independent scoping study by CSA Global confirming its robust economics last month.
According to the study, the deposit would produce 44,000t of copper from a mineral resource of 2.8Mt at 1.9% Cu, with 91% of its resource in the measured and indicated category.
The rest will be upgraded to indicated, with further drilling, with the project possessing a pre-tax IRR of 38% over five years and pre-tax NPV of $60m.
At C1 operating costs of US$2.78/lb and a conservative copper price of AUD$12,000/t used in the Scoping Study, the mine is expected to pay back its capital in just 2.6 years through a mix of heap leach and flotation processing. Today copper sits at around AUD$13,400/t, worth an additional $61.6m in revenue to the Lady Colleen project.
This article was developed in collaboration with Austral Resources (ASX:AR1), 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.