FIRST QUANTUM, XSTRATA RECOMMENDED Citigroup upgrades copper...

FIRST QUANTUM, XSTRATA RECOMMENDED
Citigroup upgrades copper price forecasts
With strong commodity prices and limited avenues for capital investment, Citicorp has forecast a significant cash build-up for copper miners.

Author: Dorothy Kosich
Posted: Monday , 06 Aug 2007

RENO, NV -

The combination of strong global demand and a struggling supply, Citigroup envisions a structural change in copper markets, which convinced London-based analysts to upgrade 2008-2010 copper price forecasts to US$3-3.50/lb.

In their recent report, "Metals and Mining Strategy Copper Look at These Prices," analysts Craig Sainsbury, Heath R. Jansen and Liam Fitzpatrick increased their local-term copper price forecasts from $1.10/lb to $1.45/lb. The 32% increase is driven by the combination of structural costs increases for existing producers, combined with increasing capital and operating cost hurdles.

The analysts also predicted that UK-based copper miners will deliver 1.4mt of new copper production, representing 25% of additional global supply. "Therefore copper bulls, the better leverage will be in growth stocks such as First Quantum, Antofagasta, Vendanta and Xstrata," they asserted.

Meanwhile, Citigroup recommended First Quantum Minerals (FQM) as its preferred pure play copper exposure, "given the longer-term strategic upside (exploration/development potential in Africa) as well as our belief that FQM is a prime potential takeover target."

The analysts asserted that further upside value in equities would need to be driven by exploration success; further copper price upside; cost reduction; improved profile; and M&A activity. Based on these drivers, Sainsbury, Jansen and Fitzpatrick highlighted "Xstrata and First Quantum as the two most likely companies to deliver."

Citing FQM's early-mover advantage in the Zambian/Congolese copper belt, and projects such as Kashimie, the expansion of Guelb Meghrein and Frontier, the analysts noted "there is a potential for FQM to be a 600ktpa-plus producer by 2010.

Meanwhile, the analysts declared that "Xstrata has one of the best stables of copper projects among its global peers. Projects such as the debottlenecking of Collahuasi, Las Bambas, Tampakan and El Pachon have the potential to add 500kt of new production for XTA by 2012/"

Citigroup noted that "cash generation remains a strong theme for all the miners. Between now and 2010, we see the copper-exposed equities generating 70% of their current market value in surplus." The analysts explained that "with the strong commodity prices and limited avenues for capital investment, we see significant build up of cash on the balance sheet