Long-term supply concerns fuel copper and nickel

Australian mining companies have weathered the COVID-19 storm relatively well thanks in no small part to the strength of the gold and iron ore sectors.

Tellingly, while the ASX200 is down 13 per cent for the year-to-date, the ASX300 Metals and Mining Index is down just 2 per cent over the same period.

Prices for both gold and iron ore have been upgraded throughout the first half of 2020, with the former benefiting from its status as a safe haven in uncertain times.

Iron ore has meanwhile risen on robust Chinese steel production and supply disruptions in Brazil.

However, RBC Capital Markets believes the outlook for commodities could change due to a number of key near-term catalysts.

While gold is likely to retain its safe haven status, the bank notes that the consensus view for iron ore is for an emerging market surplus in the second half of 2020.

On the copper front, RBC said the market was starting to exhibit fundamental tightening with prices rising from lows of $US2.12 per pound in mid-March to $US2.70 per pound.

Like iron ore, China appears to be driving demand for copper with key manufacturing indicators like auto sales, grid investment and property completions improving.

RBC says a key drive of copper prices in the near term will be the evolution of the COVID-19 pandemic throughout South America and its impact on key copper operations in Chile and Peru.

There is also news of tensions between mining corporations and labour unions in Chile.

“We believe the market is pricing in some supply risk from the region, and this could provide additional upside in the near term,” RBC noted.

“The other factor that may play out over the near term is the current reduction in maintenance activities, which could impact future production levels.”

The bank said copper companies appeared to be largely shrugging off near-term earnings downgrades as investors took a longer-term investment view in commodities that faced supply shortages in time.

Nickel is also trading below its long-term estimates due to increasing demand and declining supply, RBC said.

ASX copper, nickel explorers on the march

Shares in copper explorer Redstone Resources (ASX:RDS) are making their way back up, rising from 0.4c in late March to the current price of 0.8c.

A recent drill program at its West Musgrave project in Western Australia returned high-grade copper hits.

Significant intercepts from drilling at the Tollu copper vein include 13m at 3.04 per cent copper from 56m that includes an 8m interval at 4.4 per cent copper, 26m at 1.03 per cent copper from 277m and 11m at 1.4 per cent copper from just 4m.

Meanwhile, Alicanto Minerals (ASX:AQI) has also seen its shares double from a low of 3c in late March to the current price of 6c.

It recently applied for an additional 158sqkm of prospective tenure after uncovering a number of new, completely undrilled copper-gold targets near the flagship Wolf Mountain prospect.

Last year, initial work by Alicanto uncovered a previously unrecognised, 14km long large-scale hydrothermal system at Wolf Mountain, prospective for high-grade and bulk-tonnage copper-gold deposits.

On the nickel front, shares in Mincor Resources (ASX:MCR) have been on the uptick since mid-March, rising almost 90 per cent to the current price of 76.5c.

The company recently raised $50m through a fully underwritten placement of shares priced at 72c each and is raising a further $10m through a share purchase plan.

Proceeds will be used to progress a final investment decision for its Kambalda nickel operations; undertake resource extension and exploration programs; and negotiate debt funding for project development.

Mincor has also increased resources at the Cassini nickel sulphide deposit by 16 per cent to 58,700 tonnes of contained nickel.

The long-term view of both copper and nickel could also be behind $3.5bn miner Oz Minerals’ (ASX:OZL) move to acquire explorer Cassini Resources (ASX:CZI) to secure the remaining 30 per cent interest in the advanced West Musgrave nickel-copper project in WA.