Current Market Swings Fail To Shake Widespread Bullish Outlook For Copper – Barry FitzGerald
Analysts believe Sandfire is a big winner, especially if BHP takes control of OZ, leaving Sandfire as the largest ASX copper producer. Additionally, there is leverage galore in the $22 million maze with the looming first JORC resource on its Canadian gold project.
Here’s a refresher on what BHP said about copper’s outlook two weeks after it launched its $8.3 billion indicative tender offer for OZ Minerals in August.
“A ‘take-off’ in demand from copper-intensive sectors that are easier to reduce (renewable energy generation, electrification of light transport and the infrastructure that supports both) should be a key feature of industry momentum from the second half of the coming 2020s: if not sooner,” BHP said.
“The declining grade, resource depletion, water constraints, increased depth and complexity of known development options, and scarcity of high-quality future development opportunities are likely to drive the higher prices needed to attract enough investment to balance the market.
“Our view is that the marginal ton of price-fixing in a decade will either come from an extension of lower quality brownfields in a low-risk jurisdiction, or from a higher-quality brownfield in a risky jurisdiction. higher. Neither source of metal is likely to be cheap.”
The commentary was written by BHP’s vice president of market analysis and economics, Huw Mckay. It’s something he does with the release of BHP’s financial results and to BHP’s credit, it’s an unbiased thing.
What other company would talk about the outlook for copper when it has an $8.3 billion offer that the target company has dismissed as opportunistic because the price of copper has been under pressure in the short term?
It’s no wonder, then, that the market supports OZ’s view that the $25 per share offer doesn’t cut it by keeping OZ at prices above $26 per share. It is therefore clear that BHP will have to increase supply or walk away.
If it works, an already finer BHP – due to its exit from coal and oil – will have less copper under its belt when the 2025 demand “take-off” occurs. BHP does not talk about its price expectations.
But others are doing it, including Goldman Sachs, which agrees with BHP’s view that a supply shock is underway, arguing that prices above US$5.90/lb versus at the current US$3.50/lb will be needed to ‘incentivize’ the additional 8 million tonnes of annual production needed by 2030.
From all of this, it can be said that while the price of copper has been under the pump lately, its longer-term prospects have never been better thanks to the biggest theme of our time – decarbonization through electrification.
That’s not to say copper is about to shake off recession fears from the global attack on inflation anytime soon. But there is hope that the revival in China, the world’s largest consumer of all metals, could turn things around by the end of the year.
Rio Tinto – which has a $3.3 billion bid on the table for minorities in the Canadian-listed vehicle for its Oyu Tolgoi copper mine in Mongolia – believes that could be the case. Its boss Jakob Stausholm told Bloomberg in recent days that China does not have an inflation problem, which makes it easier to stimulate the economy.
“We remain convinced that the Chinese have the means and the will to stimulate the economy,” Stausholm said.
So, while Chinese demand was not strong in the first half of 2022, “more growth will come in the second half”. It would be good for copper and the whole range of metal products.
If OZ ultimately fell to BHP – it would take a bid around $30 per share – the stock of Australia’s largest copper producer outside the ASX majors would jump to Sandfire (SFR).
Absent a takeover bid like OZ’s, Sandfire’s market value has come under pressure due to the 20% decline in the price of copper from the June half-year average.
It last traded at $3.93 for a market capitalization of $1.61 billion, which is less than what it paid to acquire the MATSA copper-zinc mining complex in the south of Spain, the transaction having been finalized in February.
MATSA, and the Motheo project in Botswana and the eventual development of Black Butte in the United States, are now Sandfire’s future as its DeGrussa mine in Western Australia is set to abandon its last copper/gold ore to high content.
MATSA and Motheo together represent over 132,000 t of copper equivalent annual production by 2024 – a year chosen here as it is the year before BHP’s take-off year in copper demand.
The near-term market focus on inflation and the possible impact of the recession on copper prices means Sandfire’s current market value does not reflect its newly established and larger production base in an emerging commodity. take off.
This emerged from five analyst reports released after a recent visit by MATSA. Stock price targets ranged from a low of $5.25 per share (Jeffries) to $6 per share (Citi). The implied upside of the current stock price then was 33% to 52% (and that’s not a lithium stock).
It should also be noted that the stock price targets were not based on heroic price assumptions. Far from it, and certainly not reflecting the take-off scenario of 2025.
Gold’s pullback to two-year lows means positive news flow is vital if gold stocks are to swim against the tide.
And because producers/developers are directly tied to the gold price and sentiment around the yellow metal, it is exploration juniors with positive newsflow that will outperform.
A journal note suggests this 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 below $22m. So if anything, he’s more swayed by positive news than he was.
The company previously said it expects to return to the market in September with a release of its first ASX/JORC-compliant resource estimate for its namesake gold project in Quebec on the prolific Abitibi gold belt. .
Labyrinth took over the historic high-grade project last year and drilled to convert the accompanying foreign resource estimate of 479,000 oz at a practical rate of 7.1 g/t to an estimate consistent with the ASX-JORC.
We are close to the end of September so the new conforming resource estimate should not be far away. Assuming something around 500,000 ounces is the outcome, Labyrinth with its small market capitalization will kick off with the acquisition.
Indeed, a recently completed drill program has extended mineralization down dip to 390m to 690m along approximately 900m of the known 1.6km strike length. Results included assays up to 44g/t.
The results of the program will be included in a later resource update, so the story of resource growth has well and truly begun for the company, populated by a group of former mining and geology managers. from Northern Star (NST).
Something bigger at the Labyrinth will live up to its address in Abitibi on the border of Quebec and Ontario. The belt hosts the 47 million ounce Kirkland Lake Gold Camp and the 19 million ounce Val D’or Gold Camp, among others.
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