Today’s market wobbles fail to dent widely-held bullish outlook for copper
Analysts tip Sandfire to be a big winner, especially if BHP takes over OZ, leaving Sandfire as the biggest ASX copper producer. Plus, there’s leverage galore in $22m Labyrinth with maiden JORC Resource imminent at its Canadian gold project.
Here is a reminder of what BHP said about the outlook for copper two weeks after it lobbed its $8.3 billion indicative takeover bid for OZ Minerals in August.
“A ‘take–off’ of demand from copper–intensive easier–to–abate sectors (renewable power generation, the electrification of light duty transport, and the infrastructure that supports them both) is expected to be a key feature of industry dynamics from the second half of the 2020s forward: if not earlier,” BHP said.
“Grade decline, resource depletion, water constraints, the increased depth and complexity of known development options and a scarcity of high–quality future development opportunities are likely to result in the higher prices needed to attract sufficient investment to balance the market.
“Our view is that the price-setting marginal tonne a decade hence will come from either a lower grade brownfield expansion in a lower-risk jurisdiction, or a higher grade greenfield in a higher risk jurisdiction. Neither source of metal is likely to come cheaply.”
The commentary was penned by BHP’s VP of market analysis and economics Huw Mckay. It is something he does with the release of BHP’s financial results and to BHP’s credit, it is unbiased stuff.
What other company would talk up the outlook for copper when it has an $8.3 billion bid out there which the target company has rejected as being opportunistic because the copper price has been under short-term pressure?
Little wonder then that the market supports OZ’s view that the $25 a share bid doesn’t cut it by holding OZ at prices of more than $26 a share. So it is clear BHP will have to increase the offer or walk away.
If it walks, an already thinner BHP – a result of its exit from coal and petroleum - will have less copper under its belt when that 2025 “take-off’’ in demand hits. BHP doesn’t talk about its price expectations.
But others do, including Goldman Sachs, which is on board with the BHP view that a supply shock is on the way, arguing that prices above $US5.90/lb compared with the current $US3.50/lb will be needed to “incentivise” the 8 million tonnes of additional annual production needed by 2030.
From all that, it can be said that while the copper price has been under the pump of late, its longer term outlook has never been better thanks to the biggest thematic of our times – decarbonisation through electrification.
That’s not to say that copper is about to shake-off recession fears from the global attack on inflation anytime soon. But there is the hope that stimulus in China, the world’s biggest consumer of all metals – could turns things around in the back end of the year.
Rio Tinto – which has a $US3.3 billion bid on the table for the minorities in the Canadian-listed vehicle for its Oyu Tolgoi copper mine in Mongolia – reckons that could be the case. Its boss Jakob Stausholm told Bloomberg in recent days that China does not have an inflation problem, making it easier to stimulate the economy.
“We remain convinced that the Chinese have the means and desire to stimulate the economy,” Stausholm said.
So while Chinese demand was not strong in the first of 2022, “more growth will come in the second half’.’ That would be good for copper, and the whole suite of metal commodities.
Should OZ eventually fall to BHP – it would take a bid around the $30 a share mark – the title of Australia’s biggest copper producer outside of the majors on the ASX would pass to Sandfire (SFR).
Absent a takeover bid like the one for OZ, Sandfire’s market value has been under the pump because of the 20% fall in the copper price from the June-half average.
It last traded at $3.93 for a market cap of $1.61 billion, which is less than it paid to acquire the MATSA copper-zinc mining complex in southern Spain, with the transaction completed in February.
MATSA, and the Motheo project in Botswana and the eventual development of Black Butte in the US, is now Sandfire’s future as its DeGrussa mine in Western Australia is about to give up its last high-grade copper/gold ore.
MATSA and Motheo together are good for more than 132,000t of annual copper equivalent production come 2024 – a year chosen here because it is the year before BHP’s take-off year in copper demand.
The short-term focus of the market on the inflation and possible recession impact on copper prices means that Sandfire’s current market value does not reflect its newly established, and bigger, production base in a commodity heading for take-off.
That came through in five analysts’ reports issued after a recent tour of MATSA. Price targets on the stock ranged from a low of $5.25 a share (Jeffries) up to $6 a share (Citi). The implied upside on the current share price then was 33% to 52% (and it’s not a lithium stock).
It is also worth noting that the share price targets were not based on any heroic price assumptions. Far from it, and certainly not reflecting the 2025 take-off scenario.
Gold’s retreat to two-year lows means that positive newsflow is vital if gold stocks want to swim against the tide.
And because the producers/developers are directly linked to the gold price and sentiment around the yellow metal, it is the exploration juniors with positive newsflow that will outperform.
A diary note suggests that is about to happen for Labyrinth (LRL) which was mentioned here in March when it was a 3.8c stock. It is now back at 2.5c for a market cap of less than $22 million. So if anything, it is more leveraged to some positive news than it was.
The company has said previously that it expected to come back to the market in September with a release on its maiden ASX/JORC-compliant resource estimate for its gold project of the same name in Quebec on the prolific Abitibi gold belt.
Labyrinth picked up the historic high-grade project last year and has been drilling away to convert the foreign resource estimate it came with of 479,000oz at a handy 7.1g/t to an ASX-JORC compliant estimate.
Here we are near the end of September so the new compliant resource estimate can’t be far off. Assuming something around 500,000oz is the outcome, Labyrinth with its tiny market cap will be off to a flying start with the acquisition.
That’s because a recently completed drilling program extended mineralisation down dip by up to 390m to 690m along about 900m of the known 1.6km strike length. Results included assays of up to 44g/t.
The results from the program will be included in a later resource update, so the resource growth story has well and truly begun for the company, one populated by a bunch of former mine and geology managers from Northern Star (NST).
Something bigger at Labyrinth will be in keeping with its Abitibi address on the border of Quebec and Ontario. The belt is home to the 47m ounce Kirkland Lake gold camp and the 19m ounce Val D’or gold camp, among others.
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One of Australia’s leading business journalists, Barry FitzGerald, highlights the issues, opportunities and challenges for small and mid-cap resources stocks, and most recently penned his column for The Australian newspaper.