copper shines amid gloom

http://www.brw.com.au/p/sections/investment/copper_shines_amid_gloom_l9mJDMo2eFXwelDLeBqCXL

COPPER SHINES AMID GLOOM
PUBLISHED: 03 Oct 2012 05:33:43 | Tony Featherstone

The outlook for base metals is bleak but copper looks like an exception to the general gloom and there are opportunities to take advantage of a price rebound. Photo: Reuters
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Declining iron ore and coal prices have overshadowed an emerging recovery in base metals. Despite recent price gains, aluminium, nickel, zinc, copper and lead are still down on peak prices a year ago.

It seems too soon to punt on a sustained commodity price recovery, with one exception: copper, which has held up better than other base metals after a sharp rally in September.

A third round of quantitative easing in the United States boosted sentiment towards commodities last month and sparked a rally in base metal prices from low levels. More important in the medium term are signs that China is achieving a so-called soft landing.

One of the market’s best commodity forecasters, Macquarie Research, says stronger global economic growth and improved business confidence will support commodity prices in 2013, especially in metals, where supply is constrained. “Copper remains our favoured base metals exposure due to the demand benefit from China’s infrastructure push and the ongoing lack of supply growth,” Macquarie said.

Copper demand is highly leveraged to Chinese spending on infrastructure and there has been less new supply of copper from China itself than other base metals.

As Beijing boosts infrastructure spending, it is possible that copper will lead other base metals higher in 2013.

Investors seeking pure exposure to copper can use an exchange-traded commodity (ETC), such as ETF Securities’ new ETFS Copper. It tracks the Dow Jones-UBS Copper Subindex, is based on the movement of future contracts and suits experienced investors. ETFS Copper is listed on the Australian Securities Exchange and can be bought and sold like a share.

Like all ETCs, this one eliminates company risk from investing in copper shares. I favour ETCs, especially for precious metals such as gold, but in the case of copper, investors are better off buying ASX-listed copper shares, given recent share price weakness.

There are not many significant ASX-listed copper producers and explorers to choose from. The best-known are Oz Minerals, PanAust, Discovery Metals, Blackthorn Resources and Sandfire Resources. Macquarie has an “outperform” recommendation on the first four and a “neutral” rating on Sandfire because of valuation reasons.

My favoured copper stocks are PanAust, Discovery Metals and Tiger Resources.

This column has covered Discovery and Tiger before: shares in both companies soared in the past three years but are down in the past year.

Discovery’s flagship asset is its fully owned Boseto project in Botswana. The project, officially opened in early September, is designed to produce 36,000 tonnes of copper and 1.1 million ounces of silver a year. It is making good progress and was developed on-budget.

Discovery slumped from a 52-week high of $1.88 in April to as low as 88¢ in early September. Like other small miners, Discovery was belted during the sell-off in resources.

Macquarie, a substantial shareholder in Discovery, has a $1.60 price target. Its shares are now trading at about $1.19. Discovery has fallen too far, given its operational gains and the “de-risking” of its plant.

Shares in Tiger Resources, another Africa-focused miner, have fallen by 20 per cent in the past 12 months. It has a 60 per cent interest in the Kipoi project in the Democratic Republic of the Congo. The first stage of Kipoi, designed to produce 35,000 tonnes of copper a year, is performing better than expected. The second stage is due in the fourth quarter of 2012.

At least half a dozen brokers have “buy” recommendations on Tiger, with price targets ranging from 50¢ to 85¢, according to a Tiger presentation. The current share price is 34¢.

Capitalised at $1.8 billion, PanAust is much larger than Discovery and Tiger. Its key producing assets are the Phu Kham copper-gold operation and Ban Houayxai gold-silver deposit in Laos. It has a majority stake in a copper-gold exploration project in Chile.

Rising production at its Lao projects should help fund a strong pipeline of exploration opportunities and potential medium-term production in South America.

PanAust shares have rallied from $2.19 in July to $3.10, in part on firmer copper and gold prices and bullish earnings guidance. PanAust has timed its run well: a rise in production should coincide with a stronger recovery in the copper price in 2013 and still-high gold prices. Macquarie’s price target for PanAust is $3.60. Two of four brokers that follow PanAust rate it a “strong buy” and two have it as a “hold”, according to consensus analyst forecasts.