Monsters of Rock: Copper stocks on the rise and how much is South32 willing to spend on its growth option?
Copper is the hot tip for the metal with the fortitude and necessary chops to make it through the energy transition on top, little matter what the final technology solutions to displace gas guzzling cars and fossil fuel power plants is.
It’s used in poles and wires, which will require a major expansion as electric vehicles and renewables take growing market share, not to mention those EVs contain 3-4 times as much of the red metal as an internal combustion engine car.
But there’s a problem for the copper market today.
The bare shelves at warehouses, which balanced out the weak immediate fundamentals for the commodity – in short, right now at least, more of the stuff is being mined than we actually need – are being populated.
Copper stocks on the LME are at two-year highs, having fallen to destitute levels in late 2022.
The chart just keeps spiking.
Nickel and lead charts, coming off low bases, look somewhat similar. The International Copper Study Group thinks we’ll be in a significant 467,000t surplus next year.
That could keep prices, trading around the US$8000/t mark subdued. Just last year Goldman Sachs put the incentive price on new copper mines at US$9000/t, inflation setting the bar for new mines significantly higher than previously seen. To produce all the copper we need for the energy transition this decade we’re talking records of US$13,000/t.
Current market dynamics make that a tall task, raising the risk of supply shortages and price volatility further down the line.
“Copper briefly touched an 11-month low amid signs that tighter monetary policy is weighing on demand,” ANZ’s Madeline Dunk said of the current state of affairs on Tuesday.
“Borrowing costs are soaring, with the yield on 10y bonds hitting 5%. This is raising concerns that manufacturing activity will be affected.
“Tesla dialled back growth expectations as rising interest rates hit as consumers become more cost conscious. US solar manufacturers warned of cancelled and delayed orders.
“This comes as inventories of the red metal in London Metal Exchange warehouses rose to their highest level since October 2021. A stronger USD is also creating additional headwinds for the base metal sector.”
We’ll wait to see how this shakes out, with most analysts likely to see copper prices fall beneath their forecasts for 2023, but the sector will almost certainly be one to watch as the decade unfolds.
That came despite big drops in copper, met coal and nickel production, balanced out by year on year lifts in manganese, silver, lead, alumina and aluminium.
Most importantly though, there is more certainty around the timing for the first cab off the rank at its major growth asset, the Hermosa project in Arizona.
It currently has two big components, the zinc-lead-silver Taylor deposit and the Clark battery manganese project, with copper rich Peake further away on the horizon.
South32 revealed this week it planned to release a DFS on its Taylor deposit in the December quarter, with an FID due in the March quarter next year.
S32 spent around US$71m of growth capex constructing key infrastructure and kicking off the federal permitting process.
Hermosa has been troublesome for South32 recently, its owner booking a US$1.3b impairment on the assets in its FY23 financials.
But the project remains a key growth leg for the miner, which wants to direct the bulk of its revenue into metals that will benefit from the growth of the green energy industry.
Analysts think it will cost more than the US$1.7b direct and indirect capital cost floated in a PFS in January last year.
Goldman Sachs’ Paul Young and Caleb Heiner have taken a stab, modelling Taylor’s development capex at US$2.25b. They think the February half year results release could an opportune time for the FID.
However, they say S32, which bears a neutral rating and $3.20 price target (down from $3.30), is well placed to fund Hermosa.
“We forecast net debt of ~US$650mn and <0.5x leverage at end of FY24 with S32 well positioned to fund the Hermosa project,” they said in a note.
“Although Hermosa was recently written down, we see attractive exploration upside at the Taylor deposit and the Peake prospect. Also, we don’t include the Sierra Gorda brownfields projects (4th milling line & oxide projects) in our base case, or the copper/gold/cobalt project from the Ambler Metals JV in Alaska.”
S32 was down 1.53% today as the broader materials sector rose 0.85%, powered by battery metals stocks. Lithium producer Pilbara Minerals (ASX:PLS) was up almost 6%, while Lynas Rare Earths (ASX:LYC) surged 12% as it won a variation to its operating licence that will allow it to import and process radioactive lanthanide concentrate from WA at its Malaysian processing plant until March 2 2026.
It had previously faced a ban on lanthanide concentrate imports from its Mt Weld mine to its Kuantan separation facility as of the end of 2023.
Lynas is completing works to expand its downstream separating capacity, aided with the completion of a new plant in Kalgoorlie, to 10,500tpa of NdPr, with production rates expected to lift from 300t per month in the March quarter to 750tpm in the June quarter.
“As the leading producer of rare earths outside of China, Malaysia plays an important role in the global rare earths supply chain. This decision provides a strong foundation for further development of the Malaysian rare earths industry,” Lynas CEO Amanda Lacaze said.
“Lynas deeply values our people and communities in Malaysia who recognise that Lynas Malaysia is an excellent employer and a safe and responsible community member, as demonstrated by our over 10 years of safe operation.
“Lynas thanks our people and our local communities for their ongoing support. Lynas has invested over RM3 billion in Malaysia over the past twelve years and contributed over RM4.8billion to Malaysia’s GDP. We look forward to continuing to contribute to the development of the rare earths industry in Malaysia.”