A Historic Copper Shortage Looks Inevitable. Play Royalties: Ecora Resources

Copper prices are on the move, up 10% since mid-February as supply disruptions are felt all the way down the supply chain.

A lack of supply is showing up in smelter margins as smelters cut prices in a battle to process scarce mined, but unrefined copper.

Smelters Competing for Scarce Copper, Driving Down Margins

Though current supply shortages are only temporary, they should be a wake up call for a copper market living on borrowed time.

copper demand is accelerating compared to the last few decades, driven by the electric vehicle and renewable energy buildout.

Copper consumption per person is expected to grow 50% in 8 years, a feat that took 20 years previously.

Copper Demand Per Person Outlook (Excluding Ai)

Electric vehicles use 2-3x more copper than a gas powered car and are forecast to grow from 18% of new car sales in 2023 to 30% by the end of the decade.

Solar and wind power generation also use significantly more copper than a typical coal or natural gas power plant. 2x-5x more.

Copper Content Per Energy Source

And now with the recent explosion in Ai adoption, a third demand driver has emerged to tighten the copper market even further.

Recent estimates put power demand from data centers at 140GW by 2028, up from 49GW today. With each GW of capacity requiring 50,000 tons of copper, the data center buildout alone will consume an incremental 4.6 million tons of copper. Potentially 18% demand growth in 5 years.

Current copper industry estimates are for at most 4 million tons of incremental global demand over the next 5 years, yet data centers could eat up that much copper alone, leaving little for the rest of the global economy.

Data Center Power Demand Outlook

The last three years of prices in the $4.00/lb range are providing false comfort to the market that supply will be able to meet surging demand.

The reality is falling mine production and only 5 million tons of new discoveries since 2015 will drive a significant copper shortage starting as early as 2025.

Supply Disruptions Pushing up Copper Prices in the Short Term

In late 2023 Goldman Sachs forecast a modest 120,000 ton deficit for copper this year.

Geopolitics and the realities of mining had other ideas however. With the shutdown of the 400,000 ton per year Cobre Panama mine and 200,000 tons of supply cuts from Anglo American, 600,000 tons- 3% of demand- has been taken out of the copper market so far this year.

Goldman nows sees a deficit of ~430,000 tons, explaining copper’s strength.

Goldman Sachs Supply Tracker Showing Big Deficit in January

These supply disruptions are temporary, but the lack of new discoveries coupled with ever increasing demand will lead to a reckoning this decade.

To visually demonstrate how bad things could get, S&P put together a forecast assuming the best supply outlook possible.

  1. Mine disruptions hit 20 year lows
  2. Recycling grows from 16% to 25% of demand

Even under this rosy scenario, copper shortages will hit 2% of demand next year, close to the worst shortages the copper market has seen in 30 years.

If mine output does not hit records and merely continues at an average pace, the copper market is on pace to hit record deficits that exceed the worst we’ve seen in recent memory by 5-10x.

Are you paying attention yet?

For traders, its worth remembering that Q1 is seasonally the strongest quarter for copper as the market digests an expected ramp in demand coming out of Chinese New Year.

So while the current price action could be choppy going into the summer, the fundamentals for the next 24 months couldn’t be any stronger.

How to Invest in Copper Shortages

We think strong outperformance will coming from owning copper companies all along the value chain, producers, explorers, developers and even physical copper.

But in today’s note we’re highlighting the opportunity from owning royalty companies. Royalty companies are a diversified way to invest in copper and carry much lower operational risk and higher yields, cash in your pocket, than owning a traditional miner.

Ecora Resources (TSX:ECOR) (LSE:ECOR) is a good example of how depressed commodity prices are driving large valuation disconnects in parts of the market.

Ecora has completely overhauled its royalty portfolio in the past five years and will have royalties on 500,000 tonnes of copper by the end of the decade, up from less than 80,000 tonnes of exposure today.

Ecora Copper Royalty Production Outlook

Copper along with exposure to cobalt, nickel and uranium are forecast to drive Ecora’s revenue from accelerating demand commodities to ~$120 million, up from only $30 million today.

Ecora Revenue Growth Outlook by Type of Commodity

The portfolio is rapidly shifting from 75% coal in 2022 to over 85% future facing commodities in 5 years, yet based on the company’s current share price, investors are unaware of the power of the transition taking place under the surface.

Ecora trades for only £0.70 pence as of March 18th, a 45% discount to the value of just the producing asset NAV.

The discount grows even larger when including the value of future growth projects. The analyst community is giving Ecora only £0.09 pence of value for 75% of the copper growth pipeline while valuing the remaining 25% at £0.62 pence.

As copper prices rise and the market increases the probability of production startup across the portfolio, we think the £0.09 pence of copper value is really worth up to £2.50.

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Ecora’s upside to consensus NAV is a significant 180%, but grows to 350% when including future copper growth at even a 50% construction probability.

Ecora Consensus NAV as of February 2024

Source: Ecora Resources, Bloomberg

And significant discounts like this aren’t uncommon across the commodity spectrum. Ecora is just one of the most glaring examples we’ve found.

Don’t Underestimate Copper Supply Troubles

We hope, after reading our all of our supply and demand work above, you appreciate the significant and growing imbalance in the copper market.

Nothing moves fast in the copper market, a typical mine takes 20 years from discovery to production, but this doesn’t mean a historic shortage is any less plausible.

Like boiling a frog, supply shortages can seem well handled for years, until they suddenly aren’t.

Slow moving fundamentals can keep prices artifically low for longer than you expect, but they also can work in reverse, keeping prices higher for longer while supply struggles to respond to demand.

Adding undervalued copper stocks to a diversified portfolio now, while the true state of copper supply and demand is obscured, will pay off big time.

Capital 10X gets down to the real money business, actionable financial insights for traders and investors. We analyze company earnings, interview management teams and help teach the fundamentals of financial analysis and options trading. Our mission is to hunt for genuine 10 baggers.

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