Copper Rallies on China Reopening: The Miners to Have on Your Radar

It’s been an incredible start to 2023 for copper, the red metal has risen to a 6-month high on the back of China easing its stifling COVID restrictions.

In early December China announced sweeping changes to its national response to COVID, as the central government was forced to move away from its strict zero-COVID approach that prompted protests across the country.

On January 8th China reopened its borders to tourists after three years of COVID-19 closure. Incoming travelers will no longer need to quarantine; 400,000 people are expected to travel into mainland China from Hong Kong in the coming weeks with long queues for flights into cities including Beijing and Xiamen.

Additionally, nearly all major Chinese cities are reporting a recovery in subway use, a sign that COVID infections may have peaked in some urban areas.

A China Reopened is Bullish for Copper

The reopening is viewed as bullish for commodity demand and prices. BlackRock believes China’s reopening will spur domestic spending and drive global growth, offsetting the negative impacts of a potential developed market recession. They estimate that economic growth in China will be 6% in 2023, cushioning the global slowdown in major developed market economies.

Goldman Sachs highlights that capital expenditure across mining companies in 2022 was nearly 50% below peak spend in 2010’s while disruptions on the copper mine supply side are set to hit 1.6Mt this year, a record level. Operators have cited that cuts to maintenance capex as the key factor that has left mines with greater susceptibility to disruption and underperformance.

Given the significant disruptions on the copper mine supply side, the copper market is set to remain in deficit for 2023 – and Goldman does not anticipate any surplus over the near term horizon (2023-2025).

Global inventories for major base metals are sitting at record low levels. Ole Hansen, Head of Commodity Strategy at Saxo Bak, believes the low levels of industrial metals held at exchange monitored warehouses (LME & SHFE) will force buyers to look elsewhere should China trigger a sustained pickup in demand.

The Energy Transition will be Copper Intensive

On a longer term perspective, a 2022 S&P Global study found that significant copper shortfalls will begin in 2025 – as result of increased demand from energy transition and limited new copper supply. Their rocky road scenario assumes current mine supply and recycling trends continue, resulting in a 10 million metric ton shortfall by 2035. Even in the high ambition scenario, assuming significant enhancement in extraction and recycling rates the shortfall persists till 2035.

For the automotive industry, net-zero ambitions will require the transition from internal combustion engines to battery-powered electric vehicles. Many auto manufacturers are aiming to completely revamp their fleets to EVs and hybrid vehicles. The copper intensity in EV will significantly increase moving forward. For an internal combustion vehicle of any size there is approximately 24KG of copper, in a light duty EV its 60KG, medium duty EV has 139 KG and a heavy-duty EV has 425 KG.

Best Value Among Copper Miners

This is clearly a very constructive near-term and long-term backdrop for copper miners. We highlight two of the best value plays among small cap and large cap miners – Amerigo Resources and Lundin Mining.

Amerigo Resources (TSE:ARG) – Dividend Income with Leverage to Copper Prices

Amerigo (TSE:ARG) is one of the most attractive names in the copper mining sector, a company with strong leverage to copper prices and highest dividend yield in the sector at 8%.

Amerigo produces copper without a copper mine, they recover copper from tailing waste streams at Chile’s largest copper mines. They process the waste to recover the copper along with molybdenum – the concentrate product they produce is the same concentrate produced by traditional mines.

Amerigo isn’t a mining company, their core business proposition is a better analogy with a wastewater treatment company. The real differentiator is that a wastewater plant gets a flat fee, while Amerigo gets full leverage to the copper price.

Amerigo has minimal sustaining capex requirements and therefore can focus on return of capital to shareholders. The company has three tools they utilize for their capital return policy: quarterly dividends, performance dividends and share buybacks.

Amerigo Resources’ unique value comes from its peer leading dividend yield. Amerigo’s current 8% yield puts it ahead of all but 1 of the highest yielding companies in the S&P 500 and well above the 1.5% yield of the Russell 2000. Amerigo even yields more than the average high yield bond at 7.7%, even though the company is in a net cash position, putting its credit quality far above high yield.

Amerigo’s 8% dividend yield is also higher than the TSX Dividend Aristocrats Index and the TSX Composite Index.

Amerigo’s base dividend is well supported. In 2022, management guided that at a $4/lb copper price, Amerigo should generate free cash flow to equity of $18 million, 1.2x coverage of the current dividend run rate of $14.8 million. Higher copper prices in 2023 over 2022’s $4/lb price are the catalyst to look for in this company.

Lundin Mining (TSE:LUN) – Geographically Diversified & Copper Focused

Lundin Mining is the large cap copper miner that screens best to us. Lundin trades at a ~10% discount to its C$10.71/sh NAV and has a 5%+ dividend yield on top. Lundin trades at a big discount to larger peers like Freeport and First Quantum and a 10% discount to the copper universe as a whole. Lundin mining offers investors a significant geographic diversification in stable jurisdictions coupled with strong copper metal production.

Management thinks they can cut production costs in 2023 and the market is currently expecting costs to decline 12% in 2023, which could support a further raising of the dividend.

Given Lundin’s low production costs, rising revenue and conservative debt profile, we like the mix of yield, discounted valuation, upside to higher copper prices and a low risk balance sheet.

0 0 votes
Article Rating

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.

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.
Subscribe
Notify of
guest

0 Comments
Inline Feedbacks
View all comments