Tight supply fuels copper’s strong finish to ’23 and points to more gains ahead

Looking back on the year about to pass, it can be said that the performance of copper was somewhat heroic.

Despite punitive interest rates and economic concerns in China, the biggest consumer of the red metal, the copper price held up remarkably well.

The current price of $US3.90/lb is just shy of the June half average of $US3.95/lb and the average for (calendar) 2022 of $3.99/lb.

Sure, it seems that $US4/lb-plus copper prices like that achieved in the opening months of the year are needed before investor interest in the ASX copper space fires up. And copper is not back about $US4/lb just yet.

But it is coming, with an eventual challenge to the all-time high of $US5.02/lb in the works thanks to copper’s key role in the global push for decarbonisation through electrification.

BHP for one is red hot on copper’s outlook, with its confidence in the outlook for the metal on show with its $9.6 billion acquisition of OZ Minerals during the year at a time when the copper price was struggling.

Part of the reason for copper struggling at the time was the need for the global copper industry to digest new production coming from mines in Latin America and Africa. Combined with the glum economics forecasts of the day, the new production would cause a supply surplus.

That was the theory anyway. That copper supply has managed to remain tight is why 2023 is coming to an end with the price knocking on the door of $US4/lb copper.

BHP obviously looked behind the temporary funk in the market with its OZ acquisition. And it was quite open about the reasons why it did so.

Talking about the new supply coming on, BHP said in August that once the phase of growth in supply was transitioned, a “durable pricing regime is expected to emerge in the final third of the 2020s”.

“Holistically speaking, a decent build-up of inventories is this decade’s middle third (‘23-‘27) would provide a healthy buffer in advance of the pronounced deficits we envisage in the copper industry’s medium-term future,” it said.

In short, BHP reckons the world is going to need more than double the copper over the next 30 years compared to the last 30 years. It means a lot more mines are going to be needed if there is any chance of the supply challenge being met.

But where are they going to come from? A look across the ASX copper space shows a distinct shortage of copper explorers/developers/producers ready for the supply challenge.

BHP’s OZ takeover and its copper expansion plans elsewhere demonstrated how it is positioning itself to take advantage of the higher copper prices that will flow from the coming “pronounced deficits” in supply.

Others are also positioning themselves.

This year has seen Metals Acquisition Corp of the US stump up $1.73 billion to buy the ageing CSA copper mine in NSW from Glencore and more recently, Evolution stumped up $720 million (including a contingent payment on copper prices taking off) for 80% of the Northparkes copper/gold mine, also in NSW, from China’s CMOC.

The big dollar acquisitions were for surprisingly small copper production – 40,000tpa at the CSA operation and 25,000t of copper and 38,000oz of gold for Evolution from its 80% share of FY2024 production from Northparkes.

The fancy valuation metrics implied in those deals has yet to work its way down in to the ASX copper explorers for good reason. They don’t have a project yet. But it is also missing in the developers. A push through $4/lb copper will change that in a hurry.

FireFly Metals (FFM):

The broad copper thematic, and the NSW examples of what is being paid for copper production in the here and now, is working nicely for FireFly Metals (FFM, formerly AuTeco).

As mentioned here on November 17, FireFly recently acquired the high-grade Green Bay copper-gold project on the Baie Verte peninsula in Newfoundland, Canada, for a knockdown price of $65 million in staged payments.

The knockdown price reflected past difficulties under the previous under-capitalised owner which spent some $250m getting the project into production.

FireFly is in no rush to get the flagship Ming mine (635,000t of copper equivalent at 2.1%) back into production, preferring to first grow the resource and then right-size the treatment capacity.

A bunch of analysts have had a look at the story and have named FireFly as one to watch in 2024 as the company under the leadership of can-do Steve Parsons of Bellevue Gold (BGL) fame gets to work on the eventual return of a bigger and better Ming.

Canaccord is the latest to take a shine to FireFly, saying in a December 20 note that it represented a cheap entry price for considerable copper exposure.

“In our view, Ming’s existing resource has inherent capacity to support a 30,000-60,000tpa copper operation with a gold credit of 18,000-36,000/ozs (depending on the ultimate size of the processing facility), independent of further resource growth,” Canaccord said.

It has a $1.35 price target on the stock, which is more than double the 60c market price this week for a market cap of $220m, which is interesting when compared with the NSW copper acquisitions mentioned above.

Shaw & Partners rated FireFly as one of its Top 10 small cap ideas for 2024 with a price target of $1.20. It also nominated Queensland copper producer AIC Mines (A1M) in its Top 10, with a price target of 80c, also more than double its market price of 33.5c.

Rex Minerals (RXM):

Part of copper’s supply challenge is that it takes years from a discovery hole through to first production.

Rex Minerals (RXM) and its Hillside copper/gold project across the waters of St Vincent Gulf from Adelaide on South Australia’s Yorke peninsula is a prime example.

The discovery hole was drilled in 2009 and work since has confirmed it as one of Australia’s biggest underdeveloped projects (1.9Mt of copper and 1.5Moz of gold). Goldman Sachs ranks it as one of the Top 50 copper projects globally.

Stage 1 is good for 11 years and envisages annual production of 42,000t of copper and 30,000ozs of gold at an all-in sustaining cost of $US1.79/lb after gold credits. Post-tax NPV at $US3.92/lb copper has been estimated at $847m. Plug in $US5.90/lb copper (a Goldman Sachs suggestion on the incentive pricing that is needed for the industry) and out pops a $2.17 billion NPV.

So it is just the type of project that needs to be developed if there is any chance of avoiding BHP’s “pronounced deficits” in copper supplies come the back end of the 2020s.

Being housed inside a junior – Rex last traded at 19.5c for an undiluted market cap of $120m – Hillside with an initial development cost of $A854m was always going to be a big ask in a sub-$US4/lb copper market.

But as suggested above, the copper market in coming years is going to look very different, and positioning to the upside is underway.

All that came through in Thursday’s announcement from Rex that it had signed a (non-binding) letter of intent with Japan’s $850m Nittetsu Mining, a copper producer in Chile and operator of Japan’s biggest limestone mine.

Under the LOI, Nittetsu can initially acquire a 15% interest in Hillside, with an option to increase to 45%, and offtake rights to a share of copper-gold concentrates.

The plan is for the new partners to identify additional joint venture partners to secure a 50:50 debt:equity financing package for the project. It is presumed Nittetsu will use its good graces to call on Japan Inc to come to the party.

Remembering that the giant North West Shelf gas project was developed in the late 1970s on the basis of no more than handshakes on supporting offtake agreements with the Japanese gas buyers, there is no better backing a resources project can have than that which comes from Nippon.