Red Metal Redux

Copper Price ($/t)

Source: Goldman Sachs

  • Anglo American has revealed that it has received an unsolicited takeover bid from BHP. The company’s share price underperformance had left it vulnerable to such a bid, but in proposing a de-merger of Anglo’s listed subsidiaries before any deal took place, BHP makes it clear what principally attracts it to the business: the South American copper assets. Adding these to BHP’s existing operations would create the world’s largest copper producer, with about 10% market share.
  • The timing looks astute. The copper price has only recently begun to break out to the upside after a couple of years of subdued trading, as commodities in general have been buoyed by improved global macro sentiment – as captured in PMI surveys, for example.
  • Yet there is much more to the copper story than cyclical sentiment swings. Supply growth has been constrained for some years. Capex has been restrained in part due to memories of the post-2010 commodity bust, but also due to the sheer challenges of getting big projects off the ground. Copper tends to be found in countries with difficult politics, local communities and workforces can be restive, and production often falls short of initial expectations. These challenges to organic growth are exactly why M&A appeals, with BHP having bought copper producer Oz Minerals last year, for example.
  • In the meantime, a new structural source of demand for copper has emerged in the form of the green economy. Copper for use in solar and wind installations, EVs and charging infrastructure grew by 39% last year to reach 9% of total copper demand. Chinese green demand jumped by two thirds, notwithstanding the broader macro stresses. Between now and 2030, it is projected that green demand will grow at a low teens annual pace, reaching 18% of total copper demand.
  • Robust demand growth potential allied to ongoing production challenges speaks to an ever-tightening market balance. As it is, the copper market has been in deficit every year since 2017 and inventories have been drawn down to very low levels by historic standards. As a consequence, as our Chart of the Month shows, Goldman Sachs project that the copper price will rise from today’s $9,650/t to $15,000/t by next year.
  • With this in mind, we have been building a position in Zijin Mining, which has assets in China but also overseas, making it the sixth largest copper producer in the world. It is also relatively unusual in that it offers production growth, targeting to boost its mined output by the mid- teens over the next two years. Its second most important asset is gold, which has also been faring well (not least due to growing interest from Chinese retail investors), and here it aims for 25% growth in mined output. The stock trades on 10x our estimate of next year’s earnings, but every 10% change in the copper price translates into a 10% further increase in earnings.
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