red metal payday for copper heads

Red metal payday for copper-heads

Stephen Bell
Tuesday, 1 August 2006


IT IS certainly a nice time to be mining copper. Just a few years ago, owning a copper mine in Australia was the first step on the road to penury. Now, with the red metal in the fierce grip of Chinese demand, it is more of a licence to print money.


Copper was the stand-out metal on the LME last week, with its price rising 9% on the ongoing labour tensions at BHP Billiton's giant Escondida mine in Chile. The metal was up a further 3% Monday on fears of a strike at Escondida.

According to Macquarie Bank, the metal was also buoyed by news that Codelco's Chuquicamata mine, had suffered a broken conveyor after a rockslide.

These ructions in South America are good news for several Australian companies, including Peter Buck's Breakaway Resources, which recently bought LionOre Mining's Australian exploration assets.

The ground includes some ripe nickel targets but the Eloise copper mine near Mt Isa in Queensland has proved to be the juicier part of the deal so far.

Alongside a 100%-owned base metals exploration project, Breakaway retains a 30% royalty stream from the producing Eloise mine, operated by contracting group Barminco.

Breakaway said yesterday that the royalty payable for the June quarter is expected to be $6.07 million, bringing total payments for the 2005-06 financial year to around $14.15 million.

There are only two years of life left at Eloise. But with Barminco putting in a new $9 million ventilation shaft, MD would not be surprised to see mining go on well beyond that date.

Another interesting Queensland play is CopperCo, where Keith Liddell's Mineral Securities yesterday agreed to up its stake in the explorer to 18.2%.

Under the $17.6 million share swap deal, Robert de Crespigny's Scarborough Minerals will quit its CopperCo stake and take up an 18.3% stake in MinSec.

CopperCo, run by former Straits Resources chief Brian Rear, has the Lady Annie project, north of Mt Isa, which is due to start production in the second quarter of next year.

There are, of course, numerous other small copper hopefuls out there. The most famous is CuDeco (formerly Australian Mining Investments), which is still bullish about its Rocklands project, despite its embarrassing revelation last month that the resources were less than half the origin estimate.

But moving beyond the explorers into the mid-cap space, there is much less on offer for punters.

Australia has lacked a "pure" heavyweight copper stock since Xstrata took out MIM Holdings several years ago at a price that now looks like the steal of the century.

That situation changed, however, in May with the $300 million initial public offering of Aditya Birla Minerals – the spin-off from India's Hindalco metals group that plans to produce more than 100,000 tonnes per year of copper from its Nifty mine in Western Australia and Mt Gordon in Queensland.

Nifty, in particular, is a key focus for investors as the underground sulphide project ramps up production.

However, it has not been a particularly impressive start to public life for Birla. Last week, the company cut its annual production targets by 15% after its June quarter was hit by heavy rains and lower grades at Mt Gordon, labour shortages and technical problems at the Nifty oxide circuit.

From a high of $3.19 in May, the shares have slipped back to recent levels of around $2.44 each, suggesting that the stock is not one for the faint-hearted.

"The risks are high, but so is the leverage to copper prices," says CSFB, which has a Buy on Birla.

Analysts estimate that a 10% movement in copper prices pushes up Birla's fiscal 2007 earnings by around 20%.

So the direction of copper prices will likely influence Birla's share price even more than progress on commissioning Nifty's sulphide project.

UBS would agree with that assessment. Despite the production downgrade, the broker last week upped its share price target from $3.20 to $3.30 because of higher copper price forecasts from its analysts.

"While the reduction in production guidance is disappointing, we see no technical reason why Nifty Sulphide should not reach full capacity," UBS said.

Aside from production risks, the other issue that may worry investors is whether Birla remains a pure copper play.

Birla has a stated objective to grow by acquisition.

The company has recently been named by the Nigerian Government as one of 16 companies short-listed to bid for 10 state-owned coal fields in the African country.

Will the offshore expansion strategy of 51% shareholder Hindalco sit well with Birla's new Australian shareholders?

It would seem to be a genuine concern. Not many punters buying into Birla on the back of copper's soaring fortunes would be expecting a diversification into Nigerian coal.

In MD's book, Birla is yet to justify those broker Buy recommendations. He will be watching closely to see if the company can put some operational runs on the board, rather than just being a punt on copper prices going up.