Price premiums in copper M&A show how remaining stocks are under-valued

Last week it was mentioned here that savvy investors were buying the copper dip in anticipation of a price surge and more M & A action.

They are doing all right too as the copper price has rebounded towards record levels of more than $5/lb and things on the corporate front have begun to stir again.

Last week copper was $US4.85/lb. It’s now knocking on the door of $US5/lb ($US4.96/lb) which means the price year to date is up some 20% on last (calendar) year’s average.

While the chatter around the reasons why the red metal is on the march again usually gets linked to the daily politics of the US, there is something much more fundamental driving the metal - a supply deficit.

As noted last week, BHP estimates copper demand could grow by 1Mtpa each and every year to 2035 in response to demand being powered up by global electrification.

Meeting that demand is a seemingly impossible task unless copper prices fly up in a major way.

Anticipating all that, industry players – and a good dash of private equity – have been increasing their copper exposures, be it at the production or advanced project level, through M & A action and/or by forming strategic alliances.

That the industry and other corporates have front-run the equities market on the copper squeeze is reflected in the big premiums they have paid in recent times to take over ASX names like OZ Minerals, Rex Minerals, New World Resources, MAC and Xanadu.

They have all popped off at fancy premiums to their pre-bid market values, confirming that while investors are now catching up with the copper thematic, the remaining copper stocks on the ASX have continued to be undervalued.

Sandfire/Havilah:

All that was reflected in Thursday’s market when South Australian copper stock Havilah (ASX:HAV) climbed 48% to 40c for a market cap of $140 million after agreeing to sell Sandfire (ASX:SFR) up to 80% of its 2Mt Kalkaroo copper project for $210m.

The earn-in is in two stages comprising $105m upfront (70% scrip and 20% cash) and a further $105m on completion of a new feasibility study into Kalkaroo’s development. Sandfire will also spend $30m on regional exploration under a strategic exploration alliance.

Clearly then Havilah has been under-valued by the market something chronic. That is despite it having once had a strategic alliance with OZ Minerals that recognised Kalkaroo as a leading development candidate.

But BHP walked away from that arrangement when it acquired OZ on the basis that it had enough SA copper with its Olympic Dam, Prominent Hill and Carrapateena mines, and the Oak Dam discovery.

Kalkaroo is also not BHP scale. But it is to Sandfire with its $7.5 billion market cap. It marks Sandfire’s return to operating in Australia after it pushed into copper in Spain and Africa ahead of its DeGrussa mine in WA coming to an end.

Kalkaroo is a potential 20 year-plus project likely capable of producing 45,000tpa of copper and 100,000 oz of gold annually, with cobalt credits and lots of exploration upside.

Caravel:

One of the clear signals that copper supplies are already under pressure has been the collapse in the treatment and refining charges for the processing of copper concentrates by custom smelters.

The charges have fallen to less than zero in some cases and are the lowest in living memory as the smelters compete for concentrate flows.

That has just played out on the ASX with Indian conglomerate Adani striking a strategic alliance with Caravel (ASX:CVV) over its 3Mt namesake copper project in Western Australia’s central wheatbelt.

Adani needs long-term concentrate supplies to feed its newly built 500,000tpa Kutch smelter in the western state of Gujarat. It also has plans to expand the smelter to 1Mtpa, such is the demand for domestic supplies of copper.

Caravel in the meantime is well advanced on a definitive feasibility study into the development of its project, a low-grade but bulk tonnage opportunity where economies of scale can deliver margins that triumph over the low-grade (0.24%).

An updated preliminary feasibility study in 2023 arrived at a $1.67 billion development producing 65,000tpa of copper along with molybdenum, gold and silver. Using a $US4/lb copper price assumption and a US72c exchange rate, the pre-tax net present value (7%) was put at $2 billion.

Plug in $US5/lb copper and the NPV would be more like $3.8bn. There will be changes in the DFS, but the point is made about the project’s value creation potential.

Caravel was a 24c stock for a market cap of $140m on Thursday. Clearly the market continues to hold back on the stock because of the capex bill, and the low grade, even if it is not so low-grade in a $$US5/lb-plus copper market.

Adani, which is obviously now deeply enmeshed in the copper market, obviously thinks differently, hence the non-binding strategic alliance.

The alliance envisages collaboration between the companies on funding to advance Caravel towards a final investment decision in 2026 and the negotiation of a potential life of-mine offtake agreement covering 100% of Caravel’s production for processing at the Kutch smelter.

At the same time, Caravel is working with leading banks to structure a financing package, including what could be available from export credit agencies, alongside traditional debt and equity. Financing is now all that much easier with Adani’s presence.

Alma/Canterbury:

Another low-grade but big copper project on the other side of the country to Caravel is also coming into its own thanks to the heightened interest in potential large scale and long life copper projects.

It is the 2Mt and growing Briggs copper project in central Queensland, a joint venture between Alma Metals (ASX:ALM) and Canterbury Resources (ASX:CBY) under which Alma is earning a 70% interest by spending a further $7m before June 2031.

The pair have tiny market caps – Alma $15m (0.7c share ) and Canterbury $6.5m (2.4c). Importantly they have just committed to a pre-feasibility study into the project which is wonderfully located 60km from Gladstone.

The commitment follows the completion of a scoping study, the key findings of which can’t be reported because the proportion of the indicated resources was not high enough. But the partners did point to an “aspirational”’’ mining rate of 30Mtpa.

There it is again - a low-grade but bulk tonnage opportunity where economies of scale could deliver margins that triumph over low-grade, with multi-decade production potential.

It is the very stuff that attracted Adani to Caravel. By the by, Caravel shares office space in Perth with Alma and Alasdair Cooke is on the board of both.

Trek:

Investors in junior explorers are happy to see a solid share price gain whatever the underlying reason.

And so it was on Thursday for Trek Metals (ASX:TMK) which gained 1.6c or 38% to 5.8c, taking its market cap to $35 million.

Investors in the stock are there for the Christmas Creek project in WA’s Kimberley region. It’s a former Newmont project with big-time gold potential in the rocks beneath extensive soil cover.

Trek has been working away at teasing out that potential both with high-tech wizardry and good old-fashioned reconnaissance work like walking the ground, pick in hand.

On one of the pick-in-hand excursions, outcrops of manganese were encountered and are now interpreted to be part of a large hydrothermal system, with rock chip assays returning super high grades of up to 58% manganese.

Given the grades and the 750m strike of the cluster of outcrops before they dive under cover, and because the style of mineralisation is thought to be similar to the world-scale Woodie Woodie deposits in the Pilbara – Trek is now preparing a drill program at the virgin prospect.