Here's the complete article from The Eureka Report dated 18th...

Here's the complete article from The Eureka Report dated 18th July 2007. Cheers John

Cooking with copper for fun and profits
By Tim Treadgold

PORTFOLIO POINT: There is a smorgasbord of copper stock choices close to home or overseas.



Aluminium is driving interest in Rio Tinto and BHP Billiton, but for most investors that’s a bit of a yawn. More fun, and profits, can be found in a metal that has a much deeper market – copper.

Unlike aluminium, and its precursors in bauxite and alumina, copper is not (not yet, anyway) in the hands of a few major miners. For Australian investors that means a smorgasbord of copper stock choices, sticking either with the locals mining close to home, or looking to the growing number of Australian copper miners building operations overseas.

Africa, in particular, is re-awakening as a world-class supplier of copper. Political risk remains high, but the risk is regional and generally a lot less than 10 years ago. The trade-off is that the potential financial reward from taking a fresh look at a region once known as “the copper belt” can be enormous – even if the price of the metal is at a peak.
Equinox Minerals is an example of African copper power. For much of its life, the Perth-based company limped along with a dream of developing the Lumwana project in Zambia. The low copper price, uncertainty about Zambia, and a lack of Australian financial support saw Equinox attract its greatest following in Canada and Europe.

Talk about a missed opportunity!

Overlooking Equinox has been a mistake to rival the way Australians refused to believe that Aquarius Platinum could play a key role in restructuring the South African platinum industry – missing a stock that has run from $5 two years ago to $41 today, a rise of 720%.

Equinox, on a percentage basis, has been even better than Aquarius. Over the last two years, as the copper price has risen and Africa calmed, Equinox shares have soared from 34c to $4.80, a 1300% gain to rival that of Australia’s iron ore star, Fortescue Metals Group. (Equinox recently popped up as a key stock for fund manager David Bryant as reported on July 12 by Adele Ferguson.

Comparing the rise of Equinox with the rise of giant iron ore developer Fortescue Metals (FMG) is not as silly as it sounds. One might be in copper, and the other in iron ore, but they’re both in the ‘trifecta’ of winners nominated by Rio Tinto boss Tom Albanese as the metals with most to gain from the industrialisation of China and India.

According to Albanese, there will be “three big metals in the China story: steel, copper and aluminium. He said that when justifying his $44 billion bet on Alcan – which is really nothing more than a bet on the future price of energy because Alcan is ‘water-powered’ through its access to cheap hydro-electricity in Quebec (aluminium is sometimes called “congealed electricity” because of the process and power required to make it).

Whatever the rationale behind buying Alcan, the underlying message is that the brains in Rio Tinto see three big metal winners (along with the twin fuels of coal and uranium).

Of course, Albanese did not mention that for Australian investors the aluminium game is tiny – the only exposure is available through Alumina Ltd. On the other hand, the stock opportunities from Albanese’s other two ‘China runners’ – copper and steel, (via iron ore or some of its speciality additives such as nickel and manganese) are endless.

Copper stocks worth a closer look include Equinox (EQN), Zambezi (ZRL), Marengo (MGO) and Tamaya (TMR), which all have their best assets overseas. CopperCo (CUO), Aditya Birla (ABY), Hillgrove (HGO) and Copper Strike (CSE), which are working in Australia.

The world uses about 12-times more copper than it does nickel – 18 million tonnes a year of copper v 1.4 million tonnes of nickel. Better still, copper consumption, according to the Lisbon-based International Copper Study Group is rising strongly. Last year, copper usage totalled 16.66 million tonnes. Next year, it is forecast to reach 18.43 million tonnes, an increase of 1.77 million tonnes or 10.6% in two years.

To put that equation another way, the world must increase copper production by about 880,000 tonnes a year to meet the ‘growth’ in annual demand – thanks largely to China. Given that BHP Billiton is planning to expand its already giant Olympic Dam copper/uranium mine to an annual output of 600,000 tonnes of copper, one could say that the world needs at least 1.4 additional Olympic Dams a year.

It’s the growth in demand which earns copper a place on Rio Tinto’s top three metals, even if the price should retreat from its current near-record high of $US3.50/lb.

Forecasts of a copper-price correction are near universal with the only argument being by how much, and when. A survey of 28 analysts by Reuters on 11 July forecast an average copper price next year of $US2.76/lb, and a further fall in 2009.

But, previous forecasts of a major copper-price correction have been wrong, as have forecasts of a dramatic expansion in copper production. New mines that would normally be coming on-stream at this stage of a price-cycle are not being developed, and the supply-side of the copper equation is being squeezed by strikes and plant closures, especially in South America.

The importance of supply can be clearly seen when tracking the price of copper on the London Metal Exchange. Five years ago, stockpiles held by the exchange started to fall. The effect on price was immediate – as stockpiles went down the price went up. The same reaction can be seen in a more recent event. Last August, the stockpile started to rise, and the copper price fell, sliding from $US3.60/lb to $US2.45/lb – and then back up to where it is today (as the stockpile fell again, thanks to supply disruptions).

This supply/demand see-saw confirms that copper is a critical and fundamental part of the global economy, and it reacts rapidly to changes in market conditions. However, what is equally clear is that the copper price is highly unlikely to retreat to its pre-boom level of US50c/lb, and any company able to produce copper for $US1/lb, or less, will be handsomely profitable.

That explains why Rio Tinto and BHP Billiton see copper as a key part of their global growth strategy, and why even the smallest investor will do well by including a well-run copper stock in their portfolio, such as:

Equinox: This is a terrific little company on the way to stardom, and eventual full-foreign ownership. The starter project is Lumwana, producing a forecast 122,000 tonnes of copper a year for a minimum of 37 years, with the future bonus of a potential uranium operation on the side. Goldman Sachs JBWere and Credit Suisse recently toured the plant and both returned with refreshed ‘buy’ recommendations on the stock. Though an ASX listing, the Equinox development is based in Zambia. The Zambian zone of the larger African ‘copper belt’ is returning to its glory days of 50 years ago when it was one of the world’s most important sources of copper.

Zambezi: A third Aussie-in-Africa for risk-takers, with the added excitement of being in the exploration phase. Originally listed in London, Zambezi got an ASX listing earlier this month with its 45c shares opening on July 5 at 52.5c and climbing to around 55c now. Interest in the stock will grow as a five-rig drilling program bites into a series of targets in northern Zambia.

CopperCo: After three decades of being an also-ran, CopperCo’s Lady Annie mine near Mt Isa in Queensland has finally made its debut. Relatively small to start with at 19,000 tonnes of copper a year, Lady Annie will grow quickly to 25,000 tonnes, and beyond as exploration continues – along with revised interest in the company which has seen its share price rise from 65c a month ago to 91.5c, all on the strength of making the transition from explorer to producer.

Hillgrove: Has returned to one of the homes of Australian copper, Kanmantoo, in South Australia. First production is expected in early 2009 at a rate of 19,000 tonnes a year, plus 6000 ounces of gold. The stock has risen from 20c in March to recent trades around 52c.

Others to watch include: Tamaya (active in Chile), Marengo (in PNG), Aditya Birla (Indian, but producing copper in Australia), and Copper Strike (promising Queensland discoveries) are worthy of forming part of a copper-bottomed share portfolio.
Why has copper become critical?

Twenty-three years ago, when he was a share-market raider hunting BHP, the late Robert Holmes a Court, saw Escondida as one of the hidden gems inside the mining leader then known as The Big Australian. Holmes a Court’s interest in copper even saw him form a close relationship with the once-great American copper miner, Amax.
But, it was the value he saw in the Escondida discovery of the mid-1980s, coupled with an interest in copper (and the Jabiru oil discovery in the Timor Sea) that encouraged Holmes a Court to persist with his raid on BHP despite furious opposition from the Melbourne establishment led by John Elliott.
What Holmes a Court could see in the 1980s was the role copper played in virtually every facet of human endeavour. The computer on which you’re reading this story is packed with copper to carry electronic signals. The electricity to drive it probably came down a copper power cable. The plumbing in your bathroom is most probably copper. Air conditioners, washing machines, cars and planes all rely on copper – and the best pots and pans in your kitchen are copper-bottomed.
The demand for copper flows from two of its qualities: One, copper is an exceptionally multifaceted metal, good in conducting electricity and long-lasting. Two, it is relatively abundant in the earth’s crust.
This final point might make some investors wary. Abundance can mean over-supply – as happens routinely with another boom-time favourite, nickel, currently suffering a sharp price decline.