Copper has earned the nickname “Dr. Copper” because the red metal acts as a kind of very knowledgeable economist, predicting global economic performance by its price trajectory. The copper price is a proxy for global economic health and activity because it is the third-most-used metal in the world behind iron ore and aluminium, and is used in electrical wiring, plumbing, construction, producing industrial machinery, vehicles and cooking equipment.
But these uses are not the only reasons why copper has more than doubled from its pessimistic depths of US$2.08 a pound (US$4,626.50 a tonne) in March 2020, to ten-year highs of around US$4.34 a pound (US$9,519 a tonne), and a new record of US$4.88 a pound in May. Longer-term, investor sentiment for copper is highly bullish, driven by demand from the clean technology and green energy sectors.
According to the McKinsey Global Institute, copper consumption will surge by 43%, by 2035, on the back of electric vehicles (EVs).
Morgan Stanley expects electric cars – and the charging infrastructure to support them – to need 1.1 million tonnes of copper by 2025, a six-fold surge in demand from 2017. That’s expected to grow to 1.7 million tonnes by 2027, according to the International Copper Association (ICA).
The proposed drive to net-zero emissions, “decarbonisation” and “electrification” will need colossal quantities of copper, which is critical for solar panels, wind turbines, electric vehicles and battery storage.
Toronto-based research firm Capitalight Research says demand for copper “from renewable power projects, energy storage and electric vehicles could double by 2025, to 8.5 million tonnes.” Capitalight Research also says that “unlike recent years, prices will be driven less by short-term macro-economic developments in China, and more by rising demand linked to global decarbonization.” EVs can use up to three-and-a-half times as much copper as a standard internal combustion engine passenger car, according to resources industry research firm Wood Mackenzie.
This is not to say that China has been sidelined as a demand driver: Beijing’s Made in China 2025 and China Standards 2035 initiatives include spending US$1.4 trillion ($1.87 trillion) on copper-heavy infrastructure programs, including 5G networks, industrial internet, inter-city transportation and rail systems, ultra-high-voltage power transmission and EV charging stations.
So – the world is going to need a lot more copper. But supply has been relatively static for a while, and there is actually a looming copper shortage. There has not been a major copper mine brought on-stream for about a decade: Capitalight Research says the copper price needs to remain above long-term “incentive levels” – which it puts at around US$3.50 a pound – to justify new mine development. Copper has only been above that level since December – miners need to see sustained high prices before they commit.
Australia is a major copper producer, the world’s fifth-largest, producing 884,900 tonnes a year, and it holds a significant chunk of the world’s undeveloped copper reserves. But the paradox is that representation on the stock exchange is scarce.
BHP churns out 1.7 million tonnes of copper a year from its operations in Chile and Olympic Dam in South Australia, but at 19% of underlying earnings, copper’s contribution to the company is dwarfed by iron ore, at 64% of earnings. Rio Tinto produces 528,000 tonnes of copper, but again, at 9.2% of operating earnings, it is small bikkies compared to the 78.7% of earnings that iron ore brings in. IGO mines copper at Nova in Western Australia, but it is a virtual sideline compared to nickel, gold, and now lithium.
However, the ASX does have a handful of copper plays, ranging from producers to explorers.
Here are 3 of the best-positioned, with two of them fully franked dividend payers.
1. OZ Minerals (OZL, $22.12)
Market capitalisation: $7.2 billion
Three-year total return: 35.6% a year
Estimated FY22 dividend yield: 1.2%, fully franked
Analysts’ consensus valuation: $25.00 (Thomson Reuters), $23.59 (FN Arena)
OZ Minerals mines copper and gold at its Prominent Hill and Carrapateena operations in South Australia, and is developing the Carajas East province in Brazil. In 2020 OZ produced 97,620 tonnes of copper and 257,987 ounces of gold.
For FY21, OZL has guidance of 120,000 to 145,000 tonnes of copper and 190,000 to 215,000 ounces of gold, at an all-in sustaining cost (AISC) – which incorporates not only the “cash cost” of production, but all the costs that allow production to be sustained – expressed in copper terms, at US$1.30 to US$1.45 a pound, although cash costs are running at US 70–80 cents a pound – pretty good, considering the current spot price for copper is US$4.34 a pound. Because of the gold credits, Prominent Hill is one of the world’s lowest-cost copper mines.
OZL has become a globally significant copper-gold producer, and the future looks promising for the company as it ramps-up its expansion plans, including the already-approved block cave expansion at Carrapateena, the expansion study at Prominent Hill, the development of the Carajas East operation in Brazil into a hub for ore from other nearby deposits, and the West Musgrave copper-nickel project in central Western Australia, where OZL envisages a potential 26-year mine life (it is Australia’s largest undeveloped copper-nickel project.) West Musgrave is unlikely to start producing until around mid-2025 should a positive investment decision follow the upcoming feasibility study – the final investment decision (FID) is expected in early 2022.
Analysts are becoming more optimistic on OZL, with the most recent broking firm to upgrade its research, Macquarie, posting a price target of $31.00 on the stock.
2. Sandfire Resources (SFR, $6.75)
Market capitalisation: $1.2 billion
Three-year total return: –6.3% a year
Estimated FY22 dividend yield: 5%, fully franked (grossed-up, 7.1%)
Analysts’ consensus valuation: $7.70 (Thomson Reuters), $7.60 (FN Arena)
Sandfire has underperformed in recent years – certainly in comparison to OZ Minerals – mainly because the market is concerned at looming depletion at its flagship DeGrussa/Monty copper-gold operation in Western Australia. At the moment, Sandfire plans to continue high-grade, low-cost copper production at full pace through to the September Quarter of 2022, and the company hopes to keep going right up until it starts producing from the two development projects that Sandfire has put in place to take over from DeGrussa/Monty – the Motheo copper project in Botswana and the Black Butte copper mine in Montana, USA. Motheo Project in Botswana. That’s expected to happen in early 2023.
The definitive feasibility study (DFS) for Motheo outlined an initial 12.5-year operation, producing on average about 30,000 tonnes of contained copper and 1.2 million ounces of contained silver a year over the first ten years of operations, with relatively low capital intensity and a robust operating margin. Mining is planned to commence in early 2022. with commissioning and ramp-up scheduled for early 2023. If all goes to plan, Motheo will come onstream as one of very few new copper mines commencing production around the world. With all-in sustaining costs forecast at US$1.76 a pound for the first ten years of operation, payback is expected to take just 3.8 years from the beginning of production.
Sandfire envisages Motheo forming the centre of a new, long-life copper production hub in the central portion of the world-class Kalahari Copper Belt, where it holds a large ground holding spanning Botswana and Namibia. The company says the Kalahari Copper Belt represents one of the last under-explored large-scale copper provinces anywhere in the world.
Black Butte is further out, with enhanced feasibility study currently underway, and a new exploration program completed, with assay results pending.
Even further out, Sandfire looks like it has a world-class volcanic massive sulphide (VMS) copper and gold exploration project at Doolgunna in Western Australia. In the company’s 7,189 square-kilometre footprint across the Bryah Basin it has discovered three centres of sulphide mineralisation so far – DeGrussa, Monty, and the Morck Well deposit – and successfully mined two of them.
In FY20, Sandfire produced 72,238 tonnes of copper and 42,263 ounces of gold, at a cash cost of 72 US cents a pound, making a net profit of $74.1 million, or earnings per share (EPS) of 42.9 cents a share, and paying a 19-cent dividend, fully franked. For FY21, Sandfire’s guidance is for 67,000 to 70,000 tonnes of copper and 36,000 to 40,000 ounces, at a cash cost of 90–95 US cents a pound. Analysts expect EPS of 108.9 cents, followed by 107 cents a share in FY22.
Again, the most recent updates to price targets are bullish: Macquarie and Morgan Stanley have released updated research on SFR this month, with price targets of $10.00 and $8.25 respectively.
3. Aeris Resources (AIS, 19 cents)
Market capitalisation: $345 million
Three-year total return: 19.6% a year
Estimated FY22 dividend yield: no dividend expected
Analysts’ consensus valuation: 23.5 cents (Thomson Reuters)
Junior miner Aeris Resources is mining the Tritton and Murrawombie underground mines at its Tritton project near Cobar in western New South Wales. The Tritton mine has been producing copper since 2005: during this time, it has produced more than 320,000 tonnes of contained metal. In FY20, Tritton produced 25,041 tonnes of copper: in FY21, Aeris expects Tritton to throw off 22,500–23,500 tonnes of copper, at an AISC of $3.60–$3.75 a pound.
Aeris has three deposits nearby ready for development – Budgerygar, Avoca Tank and the Murrawombie open-pit and its three most recent discoveries (Avoca Tank, Kurrajong and Constellation) in the Tritton area all show good copper and gold grades. There are six other main exploration targets – and Aeris has shown itself to know what it’s doing when it comes to exploration.
In July 2020, Aeris bought the high-grade, low-cost Cracow gold mine in Queensland from Evolution Mining. In FY21, forecast production at Cracow is 70–75,000 ounces of gold at an AISC of $1,525–$1,575 an ounce.
There isn’t the dividend cushion that there is with OZL or SFR, but there’s good potential for AIS to re-rate even higher than its current analysts’ price targets, as it lifts its copper production profile, helped by the gold contribution, and brings-in further good exploration news.
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