Looking at the basics of price forecasting, it means working out how much will be coming out of the ground in five or 10 years and how much China will be buying. According to Macquarie Bank analysts, who put on a briefing for (virtual) LME Week, China now consumes around 60 per cent of all metals, so is by far the most important market when looking ahead.
There is a convincing case from copper bulls around its continued necessity as part of the global electrification push, greater general industrial demand, and a drop in global copper reserves. Many of the most important copper deposits were discovered more than 100 years ago.
So that is one basic part of the equation – higher demand alongside lower supply. But beyond the usual risk of strikes at mines, operational struggles and, of course, Covid-19 outbreaks, there is the short-term sugar rush of higher prices, as we’re seeing now, turning into additional (potentially excess) supply.
Macquarie base metals analyst Vivienne Lloyd said the sweet spot for market balance was around $6,000 (£4,615) a tonne, compared with the current price of over $6,700 a tonne.
The ‘balance’ price level would keep most mines generating cash while deterring capital allocations for more difficult new operations that need a higher price to justify investment. “Now that we have prices back up around $6,700 a tonne, I've had to put a lot of [the higher-cost mines] back into the model, assuming quite a lot of these things will be operational, at least in the next decade,” Ms Lloyd said.
This is factoring in mining’s continual push to maintain or increase production levels. Mr Glasenberg picked this as a major weakness for the industry, speaking at a Financial Times event last week. “If you take five or six of the last major projects... mines which were meant to cost $2bn cost $10bn,” he said, also flagging delays as common. “ You’ve killed the returns of your company,” he said.
Current major copper projects include Anglo American’s (AAL) Quellaveco mine in Peru and Rio Tinto’s (RIO) Oyu Tolgoi underground project. The former has so far kept to schedule as much as possible in a country heavily impacted by Covid-19, while the latter is much more of a cautionary tale, with massive cost overruns and a redesign now taking place after safety concerns were raised about the initial design.
For investors in copper companies this presents an interesting dilemma – could investing because of high copper prices only see you enter at the peak, given a strong price will see the company’s returns fall in the coming years? In the short term there is an obvious answer: enjoy the higher cash flow that comes from companies like Antofagasta (ANTO), Kaz Minerals (KAZ) and Central Asia Metals (CAML). Further out, equities have other drivers than the spot price.
“Because of the amount of supply that we think is coming and because of how the major multinationals are very interested in copper as a future metal, we actually think the equities will outperform the price in the next few years,” Ms Lloyd said. “There will be quite a lot of competition amongst the majors, Chinese companies and the mid-tiers for decent copper assets.”
What qualifies as decent varies on your risk tolerance, but pre-production London options include SolGold (SOLG), which also has major gold reserves at the Cascabel project, and further down the development path Castillo Copper (CCZ) and Phoenix Copper (PXC), although the usual caveats apply when investing in pre-revenue juniors. SolGold offers the best takeover hope, however, with the latter two companies either too early or too small to interest the majors. Taseko Mines (TKO) is a fairly new arrival already in production with growth prospects, although London is a low-volume secondary listing for the Canadian company.
