Pic: Suppled/Stockhead
Mining
Welcome to Ten Bagger, where Lowell Resources Fund chief investment officer John Forwood gives us his take on a sector of the ASX resources market full of value.
This month, John tells us why market watchers thinks the copper price will rise after recently breaking the shackles of 12 months of indifference from traders.
Copper, and not lithium, could be the metal that defines, controls and benefits most from the energy transition.
S&P Global thinks that between 2020 and 2050 the drive to Net Zero will double copper demand to 50Mtpa.
Some of that will be filled by recycling, but it won’t come close to closing the gap.
It’s a situation that has analysts at places like Goldman Sachs and Shaw and Partners projecting prices lifting from ~US$9000/t today to US$10,000/t and US$11,000/t — the latter an all time high — by 2025.
It comes after a host of supply cuts from miners like First Quantum — forced by the Panamanian Government to (perhaps permanently) shut its flagship Cobre Panama mine — Vale and Anglo American. These surprises smashed expectations of a large copper surplus in 2024. A substantial deficit is now expected.
On top of that China’s decision to invest in a massive expansion of copper smelting capacity in response to increased demand from renewables and the energy transition has backfired.
The radical lift in competition for tightening copper supplies has forced Chinese refiners to dramatically discount treatment charges, to the extent the industry agreed to voluntarily cut production this year.
That will see lower refined copper output than expected, prompting a 3.1% single session lift to an 11 month high of US$8927/t on the LME on Wednesday.
“Refining charges are have been said to be as low as three US cents a pound, which is just insane, and treatment charges are also at rock bottom”,” Lowell Resources Fund chief investment officer John Forwood said.
“They’re just not making any money for providing this service unless they’re swiping some of the by-product credits, which sometimes in contracts they don’t have to pay for.
“The Chinese smelting groups are getting together to try and work out what to do about it because they must be losing money.”
Forwood said refining charges were typically closer to 70c a pound, outlining just how tight upstream supplies are.
Copper is already one of the top focuses of M&A globally, with some of the biggest deals of the past three years centred on the commodity.
Among the major transactions are BHP’s (ASX:BHP) $9.6 billion deal to acquire OZ Minerals and Rio Tinto’s (ASX:RIO) own multi-billion buyout of minorities in the Oyu Tolgoi mine, along with major acquisitions in Spain and Chile from Sandfire Resources (ASX:SFR) and South32 (ASX:S32).
That’s not to mention consolidation further down the spectrum and the $325 million IPO of Metals Acquisition Corp (ASX:MAC), which followed on from its more than US$1b deal to pick up Glencore’s CSA mine in Cobar.
If anything, competition is about to get hotter, Forwood thinks.
“I think one of the things that’s going to flow from this — and I’m already seeing it — is Chinese companies, mining companies in particular, are going to be going out and trying to put their foot on more copper,” he said.
“They’ll go upstream and make sure they can supply their smelters with copper, and certainly I was just in South America looking at a copper project and a lot of the interest in big porphyry copper projects in places like Colombia, Peru and Ecuador is expected to come from the Chinese.”
One outcome of recent inflationary pressure and the increased depth and complexity of mining operations is that the incentive price to bring a new copper mine online is increasing.
Goldman Sachs thinks incentive prices of US$3.60/lb would be required just to get BHP and Rio Tinto to sanction an expansion of Escondida, the world’s biggest single copper mine.
To justify new developments, GS thinks long run prices need to be at least US$4.30/lb — around US$9400/t.
Current prices are in the order of US$4.05/lb.
“It’s interesting, two of the bigger new developments that have just come online are in South America — Quellaveco and Quebrada Blanca II (QB2),” Forwood said.
“One of them needs a copper price of US$4.75/lb to wash its face on project economics and one of them needs a copper price of six bucks to wash its face on project economics.
“QB2 is estimated to need six bucks a pound copper for a 15% project IRR and Quellaveco looks like it needs US$4.75 a pound for a 15% project IRR.
“So on that basis, you would say that US$4.75/lb is probably a minimum of where the copper price needs to be to incentivise new production … and to bring on even more you’re talking about more like six bucks a pound.
“It’s well north of where we are at the moment.”
He noted the market did often find a way of filling what seem like insurmountable gaps, noting the speed with which nickel prices have been reigned in by rapidly rising Indonesian battery grade nickel production — all supported by processing advancements out of China.
Forwood’s hedging his bets on calling copper prices higher, but says there’s a strong case for adding copper exposure to Lowell’s fund.
“Some of the smartest people in the room got it wrong on nickel. Could that be the same with copper?” he mused.
“Well sure. 10 years ago everyone was forecasting that within two or three years we’d have a massive deficit of copper.
“Groups like WoodMackenzie etc. And here we are 10 years later and the price hasn’t moved much but the forecast looks very similar.
“The gap got filled by not so much big new projects, and there have been a few, but it’s been smaller projects of ~100,000tpa or less that have come online and expansions of existing projects.
“Can that happen again? Absolutely. Can it happen to keep the price down where it is? You wouldn’t want to bet on it.
“So what we’re doing at Lowell is making sure that we do have good exposure to the copper market in the event the price does take off.”
As we’ve seen in previous Ten Bagger columns, Lowell has been staunch on its enthusiasm for copper explorers in recent times.
Among their copper picks, Forwood and Lowell have been following Mogotes Metals, an unlisted company based in Melbourne which is hunting for copper immediately south of C$3 billion capped Lundin Group explorer Filo Corp and its Filo Del Sol discovery in Argentina’s Andes mountain range.
There are a couple of longer established Australian players Forwood also likes the look of when it comes to finding value.
“One of our biggest holdings is Caravel Minerals (ASX:CVV) with the Caravel copper project in WA,” Forwood said.
“That’s a massive but very low grade copper project, but it does have some real positives in terms of infrastructure, low strip ratio and decent metallurgy.
“So we like that one as an option on the copper price.”
Anax Metals (ASX:ANX), which owns 80% of the Whim Creek copper and zinc project in WA’s Pilbara is another development stage story Forwood likes, as well as Arizona-focused New World Resources (ASX:NWC), which owns the historic and high grade Antler project in the US.
“New World has got a high grade copper-zinc project, which is in pre-feasibility study at the moment and moving through permitting, which will take at least 18 months,” Forwood said.
“But their NPV on that project from the scoping studies I think is ~$600 million with a capital cost of ~$200 million.
“New World has got a market cap of ~$80 million.
“The exciting thing is that they’ve got a plethora of look-a-like targets to drill. Some are immediately adjacent to the known resource, and some are within trucking distance.
“One area called Javelin, which is just south of the famous Baghdad copper mine in Arizona, has a screaming copper soil anomaly and a screaming IP target as well. And drilling of the Discus prospect has just started”
Moving to Canada and Forwood likes the look of T2 Metals Corp (TSX-V:TWO), a C$7.5 million capped explorer looking for polymetallic volcanogenic massive sulphides at the Sherridon deposit in Manitoba.
“They just drilled a gold rich zone there — 23.5m at 6.8g/t gold plus base metal credits,” Forwood noted.
“It’s got a $9 million (AUD) market cap. If that were listed on the ASX it’d probably have an AUD$30 million market cap just to pick a number.”
At Stockhead, we tell it like it is. While New World Resources was a Stockhead advertiser at the time of writing, it did not sponsor this article.
Mining
Mining
Mining
Get the latest Stockhead news delivered free to your inbox.
