Excellent Copper writings keep popping up. I will soon be...

Excellent Copper writings keep popping up. I will soon be accused of bias confirmation if this goes on.

Recommend you read the whole thing: https://www.wilsonsadvisory.com.au/news/dr-coppers-healthy-prognosis

Dr Copper’s Healthy Prognosis - Copper Deficits Now Likely in 2024

Rob Crookston - Wilsons Advisory. 27 March 2024

Amidst a challenging year to date for the resources sector as a whole, copper has been one of the standout commodities of 2024 with spot prices approaching 12-month highs. The recent rally in the copper price has been driven by the pull forward of expectations of market deficits into 2024 following significant supply cuts in recent months.

Leaving aside copper’s strong long-term demand outlook, from a cyclical perspective the global macro environment is also supportive of copper demand over the next 12 months. With interest rate cuts from the Fed expected this year and a ‘soft landing’ scenario likely for the global economy, demand for copper should be well-supported given its range of industrial uses (i.e. construction, consumer goods, machinery, etc.). The copper price is also poised to benefit from a weaker US dollar (our base case) following Fed rate cuts.

Supply cuts from some of the world’s largest copper producers has been the central driver of the dramatic shift in copper’s near-term supply/demand dynamic, with a meaningful deficit now expected this year, which contrasts to previous expectations of a surplus in 2024. Several large projects have faced political, social, and operational disruptions, removing significant supply from the market, including:

First Quantum – was forced to shut down all operations at its Cobre mine, which produces ~400kt p.a., after the Panamanian Supreme Court invalidated the law that underpinned its mining licence.

Anglo American – cut its 2024 copper production guidance by ~200kt due to geotechnical problems and challenging ore.

Vale – the operating licence for its Sossego copper mine, which produces ~70kt p.a., has been suspended by the state of Pará.

Codelco – the world’s largest copper producer has seen its output drop to 25-year lows, and all four of its megaprojects have been delayed by years while facing billions in cost overruns.

In total, an estimated >750kt of expected 2024 copper supply, or ~3% of global supply, has been removed from the market since late 2023 due to production downgrades and mine closures, which has driven a rapid swing in expectations from a healthy surplus to significant deficit in the copper market in 2024. Ultimately, recent challenges on the supply front highlight the difficulties in building reliable, large-scale copper supply. This is supportive of our positive structural view of copper, which is poised to experience growing deficits long-term as supply fails to keep pace with strongly rising demand.

ON SFR:

Sandfire Resources (SFR) was added to the Focus Portfolio in November 2023 and remains a 2% position, and our preferred (pureplay) copper exposure.

Strong production growth – SFR’s copper equivalent production is expected to increase from ~130kt in FY23a to >150kt in FY25e, driven by the ramp-up of Motheo. Recent updates have reaffirmed the delivery of Motheo continues to be first-class, with the project delivered on-time and on-budget thus far.

Motheo’s ramp up underpins consensus EBITDA growth of 33% p.a. to FY26e, with risks skewed to the upside given our positive copper price outlook.

(N)otwithstanding its rally since late 2023, SFR continues to trade on an attractive FY25e free cash flow (FCF) yield of ~11%, which is nearly double the global peer group at ~6%. As Motheo ramps up to its ultimate output in FY25e, and the investment thesis is ‘de-risked’, SFR’s valuation should re-rate further.

MATSA optionality offers additional valuation upside – there is scope for SFR to extend MATSA’s reserve life (~6-7 years currently) to ~30 years (Wilsons Advisory Research base case) given the geological potential (and hence exploration potential) within the Iberian Pyrite Belt and MASTA’s strong track record of resource additions and resource-to-reserve conversion. Mine life extensions provide significant valuation upside potential for the stock.

Ash