Bargains emerging in sold-off copper and lithium sectors

Mining equities have been beaten up recently in line with the wall of worry that’s been dragging down the broader market.

As always, there will come a time when the collective thought will be that the sell-off has been overdone and that investment opportunities at the lower levels will be there for the taking.

The Middle East, oil prices, inflation, interest rates and the US midterm elections have created the wall of worry.

There’s no quick fix, or certainty in the case of midterms, to suggest that the wall of worry is about to tumble and clear the way for equity markets to regain their composure.

A bell never rings to signal the bottom. But if there is to be one, it is closer than it was a week or a month ago.

In the meantime, there is a special case for certain mining equities – the copper and lithium producers - to be the first to benefit in a meaningful way because the global electrification thematic is a long-lasting structural event.

It too has its challenges created by the current wall of worry. But it is a long-term shift that will be playing out for decades to come.

So while the copper and lithium stocks have been savaged recently as if they were running furniture stores, a disconnect with the long-run impact of electrification and their long-run value story has opened up.

Some investors will act on the opportunities now presenting while others will wait for the wall of worry to fade. One set of investors will be paying more than the other.

The suggestion that “bargains” are emerging in the copper and lithium space is backed by a single figure in BHP’s September production report during the week and an anecdote from PLS on lithium demand.

COPPER:

BHP, the world’s biggest copper producer, reported in its quarterly report that its average realised price for the red metal in the period was US$7.01/lb.

It is unprecedented stuff which includes the benefits of premiums producers are able to secure in a balanced but in increasingly tight market on the supply side.

The price BHP averaged was a staggering 53% increase on the previous corresponding period.

Yes, the rise in copper prices into record territory is due in part to hoarding in the US ahead of a seemingly unlikely imposition of a copper tariff, and the acid shortage due to the Middle East conflict.

But that is wall of worry stuff. In its quarterly, BHP preferred to explain copper’s run through a structural, long-term lens.

“Unprecedented investment in data centres and enabling infrastructure globally is reinforcing the long-term outlook for copper,” it said.

And should the AI/data centre investment boom falter, BHP remains committed to the view that demand is expected to exceed committed supply in coming years, requiring new supply to come to the market.

With its production forecast at 3.8 billion pounds (mid-point for FY2027), it’s no wonder that BHP’s copper unit has left its iron division in the shade. BHP’s share price is nevertheless down 12.5% since September 1 because of the wall or worry.

LITHIUM:

While the copper stocks have been beaten up despite record copper prices and an intact supply/demand thematic off the back of electrification, lithium stocks have been absolutely thrashed.

Sector leader PLS is down 47% since September 1.

It could be said that’s fair enough given lithium prices have about halved since reaching US$3,000/t in May for all sorts of reasons, some factual and a lot fictional about the supply/demand situation.

Forgetting that current prices for WA spodumene concentrates continue to deliver fat margins for the producers, it can be suggested that there is a disconnect between lithium equity values and what the long-term demand picture looks like in the lasting thematic of global electrification.

It was a point made in a simple way by PLS boss Dale Henderson at the company’s recent announcement of a $1.9 billion expansion to double production at its Pilgangoora operation in the Pilbara, itself a demonstration of the company’s conviction in the scale of demand growth ahead for the battery material.

“PLS continues to receive inbound (supply) requests, and there are three major Asian conglomerates seeking enormous volumes,” Henderson said.

“And we take this as the strongest marker of the trajectory of the industry.”

Enormous? Enough said.

DEVELOPERS:

It is not just the copper and lithium producers that have been beaten up in response to the market’s wall of worry, even if there is good reason to believe the electrification thematic remains intact and will be long after the worry wall comes down.

In the copper space, FireFly Metals (ASX:FFM) has taken a 27% price hit since September even though the current copper price points to an NPV for its Green Bay project in Newfoundland being a multiple of that outlined in its preliminary economic assessment.

The Steve Parsons-led company is also set to deliver strong newsflow in coming months.

A definitive feasibility study is slated for the first quarter of next year and will be followed by debt/offtake agreements and a final investment decision later in the year for first copper production in 2029.

At the smaller end of the copper market, Orion Minerals (ASX:ORN) is now on a pathway to first production from its Prieska project in South Africa’s Northern Cape province in late 2027 after Glencore came to the party with US$40 million in project funding.

As for the advanced lithium developers with world-scale projects like PMET (ASX:PMT) and Wildcat (WC8), there might well have been a sense of their projects being crowded out by PLS’ doubling of Pilgangoora production.

But the reality is that Henderson’s off-script anecdote of ‘enormous’ demand from three Asian conglomerates was just what they needed to hear as they advance their projects to the starting line.

Having said that, PMET’s share price is down by 37% since September 1 and Wildcat is off by 46%.