Investors urged to get set in copper ahead of 2025 price run

ASX copper producer stocks – what is left of them anyway now that OZ Minerals has been absorbed by BHP – could be worth watching in coming months.

The red metal has worked its way back up from $US3.60/lb to $US3.75/lb in recent weeks, which is a good effort given the global economic uncertainty and doubts about the strength of China’s rebound from the pandemic in particular.

It has been suggested previously that all of the above is of a transitory nature while the global decarbonisation push and copper’s key lead role in achieving net-zero by 2050 is not.

So there is no surprise that some big name investment banks are starting to come on board with the idea that decarbonisation will have a powerful impact on copper.

Citi’s recently released “Copper Book 2023” said the structural decarbonisation thematic could see copper at $US5.45/lb by 2025 – 45% higher than where it is now and 50% higher than when the Copper Book was penned.

It is recommending consumers and long-term investors “gradually build copper exposure over the next six months or so”.

“We see increasingly attractive risk-reward with this strategy due to our expectations of 50% upside by 2025 in our base case scenario and a near-doubling in prices ($US6.80/lb) in our bull case scenario,” Citi said.

Its bear-case scenario is 10% downside to prices.

China, the biggest copper consumer by a long shot, is the reason for some caution in near-term prices. But longer-term, Citi sees copper attracting investment inflows from all corners of the investor universe because of its strong decarbonisation-related growth.

“The scale of these potential inflows are likely to overwhelm copper’s tiny physical market,” Citi said. “Passive index funds alone could invest more than what was put into oil during its biggest inflow in history.”

UBS is another to point to copper’s bullish long-term outlook, with a warning that things could be choppy for a couple of years.

“We now forecast only a modest surplus in 2023, moving to a growing deficit from 2025. In our opinion, this increases the risk of material price upside over the next 2-3 years,’’ UBS said, adding that circa 2025 could well be copper’s “lithium moment”.

All of the above is of course why BHP paid $9.6 billion to acquire OZ. It seems that in time, it will prove to have been a bargain, and that OZ itself did not do enough to promote the decarbonisation-equals-bumper copper prices thematic enough to extract a higher bid.

The two main copper counters on the ASX now are Sandfire (SFR) and Owen Hegarty’s 29Metals (29M), and given the chorus on where copper prices area headed, it is likely money freed from OZ’s exit will make its way into the two stocks.

But is clearly not happening in a big way yet. Both stocks are trading well below share price targets set by the brokers, seemingly because the general market malaise is seen to be more important than what a 50% higher price in 2025 could mean.

Sandfire has built a copper future in Spain and Africa to take over from its mined-out DeGrussa mine in WA. Following recent first production from its African project, Macquarie put a $7.30 a share price target on the stock. It closed on Thursday at $5.81.

29Metals (29M) is in the recovery ward after massive rainfalls knocked out its Capricorn copper operation near Mt Isa in March. It is working through a restart program, and its Golden Grove zinc-/copper operation in WA keeps on giving.

Fears that it might have to raise capital to see through the Capricorn restart has driven the share price down from a 52-week high of $2.68 to 71c at Thursday’s close. That’s despite a share price target of 80c by Jefferies and a $1.10 share valuation.

Barrenjoey last week came out with a 90c price target. Noting the fears around a capital raise which it shares, the broker said “there is tangible asset value in the company that is not reflected in the share price”.

Away from the brokers, and when it comes to looking at the 29Metals’ value proposition at the current share price, the deal by special purpose vehicle Metals Acquisition Corp (MAC) to acquire Glencore’s CSA copper mine in NSW for $US1.1 billion makes for an interesting comparison.

MAC is paying five times 29Metals’ market cap of $330m for 43,000tpa of copper. 29Metals’ outlook is for 50,000tpa of copper. MAC is buying 314,000t of copper reserves. 29Metals has 540,000t.

Nimy & Cygnus:

For a while there, the market lost interest in lithium exploration results due to the freefall in prices for the battery metal.

But leveraged share price responses are back now that lithium prices have found a bottom and have started to rise in response to supply fears as the electric vehicle revolution leg of the global decarbonisation push rolls on, no less.

That was evident yesterday in the 25% price jump for Nimy (NIM) to 29.5c (it traded as high as 39.5c) in response to drilling at its Mons nickel-lithium-rare earths project to the north-west of Southern Cross in WA.

No assays just yet, but Nimy’s report of 150m-plus intersections of (potentially) lithium-bearing pegmatite certainly got the pulses racing. That the drilling was below lithium soil anomalies at the two prospects involved helped juice up the interest.

Assays results are due in about two weeks. Mons covers the lightly explored northern end of the Forrestania nickel-gold-lithium belt.

Nimy’s geological consultant said to intersect such extensive pegmatites (up to 187m from 53m) below a strong lithium soil anomaly was highly promising.

And it is. But the broader point here is that the market is well and truly switched on again to lithium exploration results. The same could be said for maiden lithium resource estimates.

That is a position Cygnus Metals (CY5) finds itself in northern Quebec where wildfires have been dominating the headlines of late.

Cygnus’ lithium prospects are in the James Bay region. The most advanced is Pontax where the market is expecting a 7-12Mt maiden resource to be announced early in the Sept quarter.

Euroz Hartleys has a 45c price target on the stock, which is trading at 22c for an market cap of $47 million.

The broker made the point in a research report that by rough rule of thumb, and remembering Pontax is still at the exploration stage, every 10Mt of spodumene could be considered to have an exploration value of $80-$120m.

It adds that every 10Mt of resource that has a clear pathway to production could be said to have $150-$300m of “speculative development value”.

Pontax is not on the development pathway just yet but as Shaw & Partners – it has a 46c price target on the stock - noted in a Cygnus note this week, the maiden resource estimate is likely to be just the beginning.

In addition to Pontax, Cygnus is about to get cracking on the Auclair prospect where a review of historical records (it has never been explored for lithium specifically) identified the presence of 67 pegmatites and the presence of the spodumene (up to 1.2% lithia).

It is on the same greenstone belt that is home to 34Mt and 55Mt deposits owned by others. Drilling is planned to start next month, all going well.

Almost as an aside, Cygnus has a rare earths “team” back in WA that has just notched up a discovery at the Bencubbin project.

Results included 19m at 1,541ppm total rare earth oxide with a high magnet metal count overlying a granite. Another one to watch at Cygnus.