Copper Miners in Focus: Hunting for Value

The Bullish Macro Backdrop for Copper

Copper is one of the best performing metals in 2021 having risen 16% year to date, second only to tin.

We believe we’re at the early stages of a commodity bull market and copper will be front and center, there’s significant upside ahead.

Source: Bloomberg

Record Central Bank Money Printing = Inflation

To combat the 2020 pandemic induced recession central banks have printed a record setting amount of money. The amount of cash in the economy (M1 Money Supply) is up an astounding 355% from the previous year.

This historic level of money printing is feeding into inflation expectations, the market believes inflation will be 2.6% over the next 5 years – the highest level in over a decade.

Commodities are Well Positioned

Commodities have historically provided investors a safe haven to protect against inflation. Investors are in an advantageous position as commodities are the cheapest they have been in the last 50 years relative to US equities.

Commodities relative to US Equities

Source: FT, Longview Economics

During this half century commodity bear market there was very little price incentive for new capital spending. US private investment in mining exploration has fallen from $500 billion at the previous peak of the commodity boom (1980) to $50 billion today.

US Private Investments in Mining Exploration (USD Billions)

Source: Crescat Capital LLC, Bureau of Economic Analysis

Given this low level of investment, the copper market is setting up to be in a large deficit position relative to supply post 2025. Current global mine production and projects in development simply can’t keep up with the strong demand.

Source: Wood Mackensie

Additionally, in the near term there is a very tight supply/demand dynamic for copper, with global inventories sitting at decade lows.

Global Copper Weekly Inventories

Source: Bloomberg

Hunting for Value

Small & Mid Caps Primed for M&A

This is a very attractive structural macro environment to invest in copper miners, we screened the producer universe for value.

Small & mid cap copper producers are trading at steep discounts relative to large cap producers on every valuation metric. Small & mid trade at a 45% discount on forward price-to-cashflow, 59% discount on forward EV/EBITDA and 61% discount on forward price-to-sales.

Source: Bloomberg Consensus Estimates

Given that large cap valuations are nearly double that of small/mid producers, M&A is one of the most tangible ways for large caps to grow production and enhance shareholder value.

We believe we are on the verge of entering a prolific M&A boom in the sector and investors will be positioned for the most upside by owning small & mid cap producers.

Small & Mid Cap Copper Value: Sierra Metals & Hudbay Minerals

Sierra Metals (NYSE:SMTS, TSX:SMT) and Hudbay Minerals (TSX:HBM) trade at a deep valuation discount to their small & mid cap copper peers (which are already very cheap vs. large caps).

Source: Bloomberg Consensus Analyst Estimates

Sierra Metals (NYSE:SMTS, TSX:SMT)

Relative to its small & mid cap copper producer peer group, Sierra Metals trades at a 65% discount on forward price-to-cashflow, 58% discount on forward EV/EBITDA and 35% discount on forward price-to-sales.

Sierra Metals has unique combination of superior production growth (14% compound annual growth rate over the next 5 years) and below industry average cost structure (32nd percentile on the copper industry cost curve).

Source: Sierra Metals

Hudbay Minerals (TSX:HBM)

Relative to its small & mid cap copper producer peer group, Hudbay trades at a 49% discount on forward price-to-cashflow, 41% discount on forward EV/EBITDA and 39% discount on forward price-to-sales.

Hudbay is well-positioned on the cash cost curve relative to global copper peers and the company has a strong track record of achieving or exceeding production guidance.

Source: Hudbay Minerals

Large Cap Copper Value: First Quantum & Lundin Mining

Given the steep discount of small & mid cap copper miners, we believe exposure to large cap copper miners should be muted relative to small & mid cap.

Source: Bloomberg consensus

First Quantum (TSX:FM)

The company trades at valuation multiples inline with small & mid caps and ~50% discount to its large cap peers.

However one of the challenges for the company is growth, First Quantum is guiding for production growth of 4% from 2021 to 2023.

Source: First Quantum

Lundin Mining (TSX:LUN)

Lundin also trades at a ~50% valuation discount to its large cap peers, it has also been a laggard in terms of price performance over the last year vs its large cap peers.

The company is set to grow copper production by 30% in 2021, however production remains flat out to 2023.

Source: Lundin Mining

 

Sierra Metals is a market awareness client of Capital 10X.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

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