Is this copper run overcooked?

Commbank mining analyst Vivek Dhar says base metal prices could have overdone themselves as copper and its cousins rise against traditional indicators
MineLife’s Gavin Wendt says investor sentiment has been behind copper’s rise in 2024, but he still sees shortages and higher prices long term
Falling attractiveness of investing in Chile and Peru – the world’s two largest copper producing countries – heaps pressure on energy transition

Base metals have surged in recent days and enthusiasm in the investment community is rising.

Case in point — ANZ says US$12,000/t is now the incentive price needed to stimulate new copper production. Historic highs sit at US$10,700/t in May 2021.

Goldman Sachs has tipped that level to come by the end of 2024 in a bullish update released by its global commodities team earlier this month.

But those runs for metals critical to the energy transition like heavily pumped copper, surprise packets aluminium and zinc and maligned nickel have seen some dissenting voices urge caution.

“Copper mine supply growth has particularly slowed with the closure of First Quantum’s Cobre Panama mine at the end of last year (~1.4% of copper supply), alongside slower than expected production growth from expansions and new copper projects,” Commbank’s mining doyen Vivek Dhar said in a note yesterday.

“However, we think it would still be a stretch to conclude that supply‑side disruptions alone explain the synchronised increase in base metal prices.

“A preference for base metals has clearly emerged as inflation has proven more resilient, but at odds with how base metals has typically tracked against the US dollar and Chinese demand. Our concern is that base metals have got ahead of themselves.”

Dhar says that risk will intensify if the US dollar strengthens.

Supply risks power higher prices

Despite a stagnant but high US rates environment which has underpinned a strong US dollar and seems less likely to turn dovish by the day, copper, zinc, aluminium and even nickel have all surged higher since the start of April thanks to supply concerns and speculation.

Nickel was up 2.2% Wednesday to US$19,489/t after independence protests in French territory and major nickel supplier New Caledonia turned ugly, leaving three dead.

“Eramet SA has halted its nickel operations there, while operations at the vast majority of mines have been suspended,” ANZ’s Catherine Birch, Brian Martin and Daniel Hynes said in a note.

Copper rose 1% to US$10,219/t as net longs hit their strong position since 2021. It’s up 15% since the start of April.

Three-month LME Zinc prices have risen 22% in the same period, with aluminium 11% better off.

“While copper has grabbed the headlines with prices surging above $US10,000/t, a number of industrial metals have rallied strongly since the end of March,” Dhar said.

“The synchronised upswing across a number of industrial metals typically suggest a common factor is at play.”

“The US dollar typically holds a negative relationship with industrial metal prices. The logic follows that a stronger US dollar makes US‑dollar denominated metals more expensive for non‑US consumers.

“Since the rally in industrial metals from the end of March, the US dollar has strengthened overall, despite the fall in the US dollar this month … a rise in both industrial metals and the US dollar is unusual.”

While Chinese metal demand is typically a major factor in price growth, Commbank expects commodity demand in the Middle Kingdom to track sideways amid persistently a weak property sector and slowing fixed asset investment growth.

Speculator’s dream a producer’s nightmare?

Mining expert Gavin Wendt, the founder of Sydney research firm MineLife, believes there are fundamental drivers pushing copper higher.

But he said much of the recent price run was down to the re-emergence of speculative investors who had abandoned the copper market last year.

“We have heard all about the positive demand for copper, the fundamentals and the fact that supply is challenged – Will we be able to keep up with demand?” Wendt told Stockhead.

“And I think people started to doubt that (last year) because the price weakened off, but I think you have to bear in mind that apart from traditional end user demand for copper … also there’s a big speculative element so a lot of funds take positions in the copper market.

“I think that’s been the biggest driver and it’s transcended some of those factors that would normally weaken the copper price like the US dollar.”

There have been supply challenges putting pressure on copper prices in the short term.

The biggest hit to copper supply this year has been the early closure due to community opposition of First Quantum’s Cobre Panama mine — at 350,000tpa around 4% of global primary metal supply.

In the world’s top producing jurisdiction, Chile, production was down 0.7% YoY in March to 433,300t.

Other physical market factors have played a role, like overcapacity among Chinese smelters pushing treatment and refining charges negative.

But the market is also fairly balanced … for now.

“Has copper already outrun those demand-supply factors? Sure, the big picture is still there. But investors are not necessarily interested in that right now,” Wendt noted.

“End users should be and they’re concerned, but right now investors are concerned with the here and now and if they see that the market might be looking overpriced there’s certainly potential for money to come out of the sector.”

Long term deficit

But Wendt still subscribes to the idea copper will see growing supply shortages from the energy transition, which will require an extraordinary lift in copper demand for poles and wire, EVs and renewable generation.

Discoveries of global scale are virtually non-existent and those reasonably sized mid-tier deposits — many of which are deep and low in grade — will need higher prices to encourage mining companies to invest and banks to provide finance.

The challenges facing the delivery of new projects was summed up in BHP (ASX:BHP) and its $64.5bn bid for Anglo American, which would make the world’s biggest miner also the world’s largest copper producer.

It shows those with the means to develop new sources of the metal would rather pay for existing tonnes than bring new ones to market.

“If they want exposure to copper now I think there’s that feeling, if we want to bump up our proportion of earnings that come from copper we better go out and start buying some of these assets. Because of the timeframe to commission new mines, we can’t just rely on our organic growth profile or our exploration team,” Wendt said.

“Probably over the years mining companies have cut back on exploration because it’s a risky business … and also they know that there’s going to be hot competition for assets because they’re thinking ‘well, all of our peers are thinking the same thing’.

“So not only will we secure that asset or those assets for ourselves, but it means our competitors won’t be able to get their hands on them.”

While a mine acquired in a deal with a known position in the global cost curve will contribute to profits straight away, a new discovery could take years to be commissioned.

That’s before the riskiest phase — ramp up — which often lasts longer and costs far more than feasibility studies envisage.

Snakes and ladders

BHP’s bid for Anglo ironically comes as the two jurisdictions in which it has copper assets — Chile and Peru — slide precipitously down the ranks of the world’s most attractive mining investment destinations.

The 2023 Fraser Institute Annual Survey of Mining Companies, released on Tuesday, shows Peru’s ranking has slipped from 24th in 2019 to 59th in 2023 in the overall investment attractiveness table.

Chile has fallen from 17th to 38th over the same period, though as a caveat the Fraser Institute survey tends to be hampered with sample size problems – many jurisdictions featured field less than 9 responses.

Still, Wendt says operating in Chile and Peru has become tougher in recent years.

“The fact that the risk situation in those countries is assessed to be higher than previously, yes it is a concern. It should be a concern for investors,” Wendt said.

“Because that would indicate that there is the potential for supply out of those countries to be negatively impacted and it could also potentially impact the amount of investment dollars going into new operations.

“Companies that are looking around the world in terms of where they invest their money in exploration and potentially generating new discoveries may well look at other geographic locations (which are less prospective).

“In my view it should add to the concern about this whole renewable energy transition.

“South America has been referred to as the Saudi Arabia of copper.

“Growing risk issues can be interpreted as a threat to future supply and on that basis there is a very real potential for impact on the overall energy transition because it just won’t happen if we can’t get our hands on copper in the sorts of volumes that we need to.”

In terms of ASX stocks, Wendt said MineLife had recently initiated coverage on Revolver Resources (ASX:RRR), which is aiming to get the small scale Dianne mine in Queensland up and running by the end of 2025.

Revolver boasts a modest resource of 18,000t of copper metal at a grade of 1.1% at the mine, once one of Australia’s highest grade copper mines when it was last in operation from 1979-1983.

Having banked a $1.3m grant from the Queensland Government for feasibility and pre-development work earlier this year, the minnow is aiming to produce copper cathode onsite via a heap leach and electrowinning plant, with a one-year timeline from FID to first metal and four-year mine life.

Small-scale operations like these have struggled in recent times — Austral Resources (ASX:AR1) is a case in point, though a decision by mining giant and offtaker Glencore to buy its debt should aid a planned recap.

But copper prices are starting to put more shine on these kinds of developments, Wendt said.

“The marginal producers don’t see a lot of love. They fall very, very quickly as the commodity price is declining. But equally when it picks up those marginal producers offer a lot of leverage,” he said.

“I’m not saying that SX-EW is marginal, but certainly I think (those companies) become more attractive as the copper price increases.”

Revolver is down 19% YTD, but up 62% in the past month.