Why copper looms as the biggest potential winner post COVID-19

Copper miners and explorers could end 2020 as big winners, with analysts predicting a recovery in the price of the red metal as massive government stimulus spending drives demand and interruptions at major mines in Latin America limit supply and see stockpiles reduce.

No one is forecasting an increase in copper demand while COVID-19 is having its way with the global economy, but once the threat passes and the stimulus dollars start flowing through to infrastructure projects, particularly in countries such as China, there is an expectation it will surge.

At the end of March, New York-based UBS executive director Andreas Bokkenheuser recommended investors buy several “Americas” copper producers including Freeport and Southern Copper, stating a belief that one quarter of price weakness would be followed by “six quarters of price strength”.

He forecast copper prices correcting to $US1.60 ($2.52) a pound from $US2.26 a pound spot as “COVID-19 weighs on global copper demand … however, assuming the world ex China follows China’s current industrial recovery in H2, we estimate copper prices will rebound” to $US2.35 a pound in H2 2020 and $US3 a pound in 2021.

The UBS view on copper is not dissimilar to that of analysts from ratings and research firm Fitch, who revised their 2020 price forecast at the start of March from $US5,700 a tonne to $US5,900 a tonne on the back of expectations that China would implement aggressive stimulus measures to achieve its GDP targets in the wake of the COVID-19 crisis.

The Fitch analysts expected the majority of shuttered manufacturing hubs and supply chains in China would be freed of restrictions by April, which is essentially what has played out, and that, along with the fast-tracking of infrastructure projects, would pave the way for higher copper prices in the second half of the year.

An emerging factor adding weight to the idea of a second-half price rebound is the interruption to production and expansion at several large copper mines in Latin America.

Mines being shuttered

Just in the past week, London-listed miner Antofagasta announced it would stop work on the $US1.3bn expansion of its Los Pelambres operation in Chile for four months as the coronavirus pandemic had made it impossible to continue.

And First Quantum Minerals was forced to close its Cobre Panama mine in Panama after one worker died from complications caused by the coronavirus and several others tested positive.

Wood Mackenzie research director Nick Pickens said in late March initial mine shutdowns in Peru and Chile could remove about 1.5 per cent from global annual supply.

“At this stage, we are not assuming mine supply from these countries will stop in its entirety,” he said.

“However, we believe there is a significant risk that disruptions will escalate, and breach 5 per cent this year.

“If the need for containment leads to wholesale lockdown of mine sites, and this Latin America disruption is replicated in Africa, North America and Australia, this would have catastrophic consequences for global copper mine supply.”

At the same time, there is hardly an extensive queue of new copper discoveries waiting to be developed and those that are in the pipeline aren’t necessarily moving into production rapidly.

A long path to production

“If you think about a typical copper deposit going from discovery to production, it’s well over 10 years, and quite capital intensive,” Andrew Stewart, CEO of copper explorer Xanadu Mines (ASX:XAM), told Stockhead.

“It becomes a little bit different to a gold discovery, or any other type of commodity, it’s something that does have a long lead time for new discoveries to come into production.”

When you think about this in the context of the International Copper Association Australia’s forecast that global copper consumption per year will double from current levels by 2040 (~3.5 per cent long-term compound annual growth rate), it’s not hard to be bullish about the long-term price outlook.

Stewart thinks Japan, in particular, is showing signs of concern about future copper supply, with the recent deal his company signed with state-backed major Japan Oil, Gas and Metals National Corporation (JOGMEC) just one piece of evidence.

JOGMEC agreed to sole fund up to $US7.2m of exploration to earn a 51 per cent interest in Xanadu’s Red Mountain porphyry copper-gold project in Mongolia.

“The Japanese have been quiet in the base metals space for several years now,” Stewart said. “They have always had a steady supply of copper concentrate, but I suspect they’re looking at a dwindling supply and what’s coming online in the next two to three years, and they’re really looking to act now to protect that supply.”

The Aussie contenders

Sweden-focused explorer Alicanto Minerals (ASX:AQI) is hunting high-grade and bulk-tonnage copper-gold deposits in the historic mining district of Bergslagen in Sweden.

CEO Peter George told Stockhead previously that low copper prices for much of the last decade meant there had been very little investment in new projects.

“The fundamentals for copper have not really changed,” he said.

“We are rapidly approaching a supply and demand divergence, where the amount of copper being produced is going to be far outstripped by demand.”

Hot Chili (ASX:HCH) is a copper-gold porphyry play based in Chile. In late 2019, the explorer unveiled one of the best global drill results of the year from its tier 1 Cortadera project— 972m grading 0.5 per cent copper and 0.2g/t gold from surface.

Meanwhile, prior to the COVID-19 outbreak, Gold Mountain (ASX:GMN) had been busy drilling at its flagship Wabag project in the under-explored northern part of the New Guinea Mobile Belt.

The project covers 2,500sqkm and was formerly held under application by BHP.

The first two holes at its Monoyal prospect both intersected wide zones of copper and molybdenum mineralisation.

Then there’s Sunstone Metals (ASX:STM), which is hunting for a big porphyry deposit in Ecuador. The company has an 87.5 per cent stake in the Bramaderos gold-copper project.

CEO and managing director Malcolm Norris agrees the long-term fundamentals for copper remain strong.

“If you step out of the COVID-19 issue and you look at supply/demand, you look at electrification of the world, you look at countries that want to grow — they’ve been staying static for too long and they want to grow, you combine all those things and copper has a major role to play in all of that,” he explained.

“Once the demand side of the equation ticks over post-COVID that’s when I think we will see a very rapid increase in the price of copper.”

Aussie copper stocks still look attractive

One upside for domestic copper producers right now is they have a weaker Australian dollar working in their favour.

The US dollar copper price is off 11.67 per cent for the past 12 months, while the Australian dollar copper price is only down 6.24 per cent over the same period.

Many of these producers are also receiving by-product credits for gold in Australian dollar terms. The Australian dollar gold price is historically strong at around $2700 an ounce.