Kristie Batten: What the experts say on how to make your copper pick a winner

Copper is sitting at a five month high
How do analysts pick the copper miners they think will outperform?
New copper producer Hillgrove ready to deliver plan at Kanmantoo

The copper price hit a five-month high this week, shining a light on the best way to get exposure to red metal equities.

Copper is once again closing in on US$5 per pound after major Chilean producer Codelco warned of weaker production and China announced stimulus plans.

MST Access analyst Chris Drew said copper was one of the firm’s preferred commodity exposures.

“We see a number of themes playing out to support this,” he told the NWR Communications/MST Access Copper Conference this week.

“Firstly, we’ve got the megatrends of decarbonisation and electrification.”

While some countries, including the US, are rolling back initiatives to combat climate change, Drew said even non-renewable energy sources, including gas and coal, required a lot of copper.

“We’ve got seven billion or so people out there who are all ultimately seeking better access to energy and electricity,” he said.

“Those demographic drivers are going to continue to underpin strong demand for copper in the medium and longer term.”

Under the International Energy Agency’s stated policies scenario, copper demand from clean energy would rise from 24% currently to 34% in 2030.

If the announced pledges scenario materialises, copper demand from clean energy would rise to 39% by 2030.

“We’re clearly going to see a step up in demand for copper from these trends even under the more conservative scenarios that are out there,” Drew said.

AI wildcard

Another theme driving copper is the emergence of artificial intelligence and the data centres required to power it.

While it accounts for below 1% of copper consumption today, AI is expected to rise to 2.5-3% by next decade, while BHP believes it could account for 9% by 2050.

“Remember, that’s just the copper in the data centres – it’s not the copper that’s going to be needed for the associated power supply or infrastructure,” Drew said.

“This is an incremental source of new demand that further adds to the medium-term pressure we see coming in copper markets.”

On the supply side, not as much copper is being discovered and it’s harder to bring mines into production.

“From a supply perspective, the pressure remains firmly on for copper,” Drew said.

“An ideal scenario for commodity prices is supply side constraints running into strengthening demand and that is largely the set-up we see for copper.”

How to pick a winner

The ASX only has a handful of large-cap copper plays, including Sandfire Resources, MAC Copper and Capstone Copper, and a bunch of smaller producers including Hillgrove Resources, Aurelia Metals and AIC Mines.

There’s a small group of developers but most of the copper names on the ASX are explorers.

MST Emerging analyst Matt Frydman said he and his colleagues looked at a lot of companies between them.

“So the question is, how do we as analysts, or more importantly, how do all of us as investors … find the companies that are interesting and pick the bottom-up winners?” Frydman asked.

“And I think for us as a team, there’s three things that we can kind of boil it down to, at least as the first ports of call in terms of answering that question.”

Management key

Frydman said the top criteria when looking at any mining stock was the management.

“Why is the management team number one? Why isn’t it the deposit? After all, you can’t change the rocks in the ground, but as an investor, the reality is, you’re not giving your money to the rocks in the ground. You’re giving it to the board and the management team,” he said.

The conference heard from Hillgrove Resources (ASX:HGO) managing director Bob Fulker, who has been in the top job since mid-2024, around the same time the company achieved commercial production at its Kanmantoo copper mine in the Adelaide Hills.

Fulker has a strong operational track record, having previously been chief operating officer of ASX 200 producers Evolution Mining and OZ Minerals.

Hillgrove’s Kanmantoo delivered a record 1105t of copper metal production in February and is on track to produce 12,000-14,000t in 2025 at costs of US$3.40-3.90/lb. The recent price run will help HGO generate improving cash flows.

“We’re a good example of a pure Australian copper play,” he told virtual attendees. “We do expect strong free cashflow generation this year.”

As Hillgrove delivers into its plan, Fulker believes a rerate will be due for the emerging producer.

Also presenting was Cyprium Metals (ASX:CYM) executive chairman Matt Fifield, who is also managing director of private equity firm Pacific Road Capital.

Fifield told the conference the development of the Nifty copper mine in Western Australia would be his ninth mine restart.

Frydman urged investors to learn how management teams were invested in companies and how they would be rewarded if successful.

Shortly after his appointment last year, Fulker acquired 700,000 Hillgrove shares on-market.

Meanwhile, Mark Stowell, chairman of presenting company Southern Hemisphere Mining (ASX:SUH), holds 9.7% of the explorer and has made two on-market purchases in the past three months.

The rocks

Second on MST’s list is the geology of a project.

Frydman said it wasn’t necessarily about finding the “best” deposits.

“Anyone can tell you that 2% copper is higher than 1% copper – that doesn’t take a genius, but it’s really about looking for those deposits which have the combination of factors that mean that ultimately they’re more likely to make money for investors,” he said.

“It’s not just the metal in the ground, but also the project’s financial metrics. What valuation is it trading at versus what could it achieve over time? What are the technical risks and some of those non-geological potential advantages, like, is there existing installed infrastructure?”

Cyprium is working on a $30 million restart of Nifty, using existing infrastructure, with the pre-feasibility study returning a pre-tax net present value of $86 million and internal rate of return of 110%, using a copper price of US$4.25/lb and exchange rate of US71c.

The project will fund a larger open pit and concentrator restart project.

On the other end of the spectrum, Xanadu Mines is pursuing the large Kharmagtai greenfields copper project in Mongolia.

The long-life project has a post-tax NPV of US$930 million and IRR of 21%.

While capital costs are US$850-900 million, Xanadu has the backing of major shareholder and 50% project partner, Chinese major Zijin Mining.

Access to capital

Funding can be the biggest challenge for mining companies.

“You’ve got to do drilling and then studies, and then more drilling, and then more studies, and then permitting, and then you’ve got to actually build the thing,” Frydman said.

“And then you probably want to drill it again. Then you’re ramping it up, so you’ve probably drilled the thing four or five times before there’s even any risk of shareholders getting some kind of a dividend out of it.”

The five conference presenters discussed a range of different funding options.

Hillgrove successfully tapped the equity market last month, raising $13 million to accelerate the development of the Nugent orebody at Kanmantoo.

The company is seeking a further $3 million via a share purchase plan, which is due to close at the end of the month.

Xanadu will hold a shareholder meeting next month to weigh up funding options for the Kharmagtai BFS and development.

Options include a partial project selldown to Chinese mining giant Zijin, funding its share via debt, equity or a royalty/streaming deal, or a company or asset-level transaction involving another corporate.

Southern Hemisphere also indicated it was open to an equity investment, but not a project joint venture.

“We have people in the data room as we speak,” Stowell said.

Cyprium has the backing of Glencore as a financier and offtake partner and is also open to a partial selldown of the Nifty project.

Orion Minerals’ (ASX:ORN) Errol Smart, whose company owns the Prieska and Okiep projects in South Africa, said debt and equity was no longer the main game for developers.

“As you can imagine, traders are really banging down our door with production due within 12 months,” he said.

“Offtake-related financing is really the go.

“The majors all want copper so you can imagine some of the conversations we’re having.”

At Stockhead, we tell it like it is. While Hillgrove Resources is a Stockhead advertiser, it did not sponsor this article.