Underlying sentiment in the resources sector comes down to industrial metals such as copper, says resources expert Gavin Wendt.

What stocks have recently caught your eye?

Junior explorer AusQuest (ASX:AQD) is run by an ex-Rio Tinto team and have entered into a joint venture with South32 (ASX:S32). They have proven to be quite nimble in their approach and have already identified a number of high quality opportunities.

Together the pair are pursuing seven projects, mostly in Peru but also a Zinc mine out of WA. They are interesting because they have a small company attitude and are very technical driven.

Often its hard to get the small company nous in a large operation but Rio have joined with Azure minerals (ASX:AZS) to try and find the next generation of deposits in Mexico as well as with Antipa Minerals (ASX:AZY) to find gold in WA.

The partnerships are reflective of how the big companies are attempting to think further outside of the square to find the next round of discoveries. Juniors are known as exploration junkies so it’s a matter of waiting to see what they can do.

Copper prices recently hit three-year highs and nickel is at a two-year peak. What are your thoughts on these and other industrial metals?

Copper is the most traded metal and is the one to watch because the price directly reflects the underlying sentiment in the resource sector and the health of the economy.

Major mines are currently operating at peak capacity so more mines will need to come on stream.

The problem is that new mines need to dig deeper and the cost of development is high but the grades tend to be lower. Given the cost of exploration, in order for new deposits to be developed you need the price incentive from the market to give them a push.

There is no doubt that the current price is running strong, but the underlying fundamentals are robust and that is what is driving them. I think they will stick around this mark for while.

Can smaller copper explorers and producers compete with the big guys like Rio Tinto?

There is always room for new players but the key is where you sit on the cost curve.

Marginal producers might be big but they are more heavily influenced by changes in the market both positive and negative. When you look at those that are smaller in size, they can be hugely profitable as they might be degrees smaller but can find grades that are higher.

The issue with the copper industry is that the low hanging fruit has already been found.

That which is most profitable has already been mined and explorers have to dig significantly deeper and mine a lot more dirt in the first place.

Off the back of the commodities slump, the big miners have sat back and not spent on pre-production works but we are starting to see them come back and start on pre-production projects.

Are industrial metals overly reliant on the strength of the Chinese market?

In the resources space we are seeing strong performance from industrial metals used in manufacturing. While demand from China tends to wax and wane, overall it has driven strong growth in the industry and while we might not be seeing the breakneck speed we were used to in the last decade, it will be maintained at a more modest level.

Key base metals have always had a level of underlying demand in China, and a lot of people were sceptical as to whether it would continue to have the same hold given the levelling off of residential development but now we are seeing a greater shift towards domestic consumption as the middle class grows.

Where to next for industrial metals?

There was always a view that the initial spike in commodities was driven by Chinese construction – which is true but now there is a drive for more middle-class consumption.

China is powering ahead and has shone a spotlight on the performance of these industrial metals which have been underperformers in the last couple of years. In 2017 there has been strong Chinese demand and the market has had to deal more with supply side factors unique to each particular metal.

Copper in particular has had to deal with issues of industrial disputes due to the location of the mines in such areas as Mexico and Chile. We’re seeing supply side factors impact production and so the price has risen in recent months as the argy bargy continues between unions and the companies.

 

Gavin Wendt has been involved in the Australian share market for the past 20 years as a resource analyst. He specialises in researching and evaluating mining and energy companies.

After many years as a broking resources analyst with Intersuisse, Gavin helped establish the Fat Prophets Mining Report in 2005, writing and producing the report until he established MineLife in 2010. MineLife’s core reader group comprises sophisticated investors, finance industry professionals, resource industry executives, retail investors and self-funded retirees.

 

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

Featured Companies

You might be interested in