Robust copper prices the 'new normal', say analysts
The copper mining industry is operating under “a high degree of stress”, with forecast demand for the metal over the medium term much higher than projected capacity, according to Canaccord analysts. The outlook suggests robust copper prices going forward.
The projected tight supply-demand environment “should underpin investor confidence that copper prices of US$6,600 and above are now simply normal”, they say.
Their long-run price forecast is based on an analysis of 16 copper projects announced and under study by large mining companies.
But as well as tight supply, rising costs will also demand higher prices. Canaccord points out that capital costs in the copper industry have risen “dramatically” since the 1990s, with higher tax takes and operating costs.
The analysts say: “In our view, this means copper company managements need to be confident in life of mine prices averaging at least US$6,600/tonne, if not higher.
“We do not believe that copper equities are pricing in such a reality, even for those with mines already in production.”
They reckon that in such an environment, companies with relatively low-cost, producing assets, such as Chile-focused Antofagasta (LON:ANTO) and, assuming it can delivery with key projects, Central Asia Metals (LON:CAML), look highly attractive.
The current credit market concerns over sovereign debt markets means Canaccord analysts also prefer companies with lower-cost production and cash balances.
They are confident that both their preferred copper picks, Antofagasta and Central Asia Metals, offer this combination.
Antofagasta management has an “enviable problem”, say the analysts, “with many projects in its portfolio and plentiful cash being generated to spend on them”.
Canaccord rates Antofagasta shares a ‘buy’ with a price target of 1610 pence. The stock is its favourite among the large cap producers.
Kazakhstan and Mongolia focused Central Asia Metals, meanwhile, boasts the potential to be a successful low-cost copper producer.
Canaccord says the combination of imminent start-up of production and what looks to be very low-cost production, makes Central Asia Metals its top pick within its copper universe.
Central Asia’s first leach plant is under construction in Kazakhstan, with first commercial production scheduled for late 2011.
The analysts add: “Given an all-in cash cost of approximately 71 cents/lb for copper produced over the plant life, we anticipate very strong cash generation from the asset.
“We expect Central Asia Metals management to pay a dividend in 2012, as well as commit to developing a second leach plant to accelerate production.
The resulting cash stream could in part be used to progress the Alag Bayan copper prospect that the company owns in Mongolia.
Canaccord is initiating coverage of Central Asia Metals with a ‘buy’ recommendation and a price target of 220p. The stock is the broker’s top pick within its copper universe.
The analysts say their generally positive stance on the copper market - assuming that the world does not plunge back into a substantial global recession – means they believe both Antofagasta and Central Asia Metals offer good risk/reward profiles.
The projected tight supply-demand environment “should underpin investor confidence that copper prices of US$6,600 and above are now simply normal”, they say.
Their long-run price forecast is based on an analysis of 16 copper projects announced and under study by large mining companies.
But as well as tight supply, rising costs will also demand higher prices. Canaccord points out that capital costs in the copper industry have risen “dramatically” since the 1990s, with higher tax takes and operating costs.
The analysts say: “In our view, this means copper company managements need to be confident in life of mine prices averaging at least US$6,600/tonne, if not higher.
“We do not believe that copper equities are pricing in such a reality, even for those with mines already in production.”
They reckon that in such an environment, companies with relatively low-cost, producing assets, such as Chile-focused Antofagasta (LON:ANTO) and, assuming it can delivery with key projects, Central Asia Metals (LON:CAML), look highly attractive.
The current credit market concerns over sovereign debt markets means Canaccord analysts also prefer companies with lower-cost production and cash balances.
They are confident that both their preferred copper picks, Antofagasta and Central Asia Metals, offer this combination.
Antofagasta management has an “enviable problem”, say the analysts, “with many projects in its portfolio and plentiful cash being generated to spend on them”.
Canaccord rates Antofagasta shares a ‘buy’ with a price target of 1610 pence. The stock is its favourite among the large cap producers.
Kazakhstan and Mongolia focused Central Asia Metals, meanwhile, boasts the potential to be a successful low-cost copper producer.
Canaccord says the combination of imminent start-up of production and what looks to be very low-cost production, makes Central Asia Metals its top pick within its copper universe.
Central Asia’s first leach plant is under construction in Kazakhstan, with first commercial production scheduled for late 2011.
The analysts add: “Given an all-in cash cost of approximately 71 cents/lb for copper produced over the plant life, we anticipate very strong cash generation from the asset.
“We expect Central Asia Metals management to pay a dividend in 2012, as well as commit to developing a second leach plant to accelerate production.
The resulting cash stream could in part be used to progress the Alag Bayan copper prospect that the company owns in Mongolia.
Canaccord is initiating coverage of Central Asia Metals with a ‘buy’ recommendation and a price target of 220p. The stock is the broker’s top pick within its copper universe.
The analysts say their generally positive stance on the copper market - assuming that the world does not plunge back into a substantial global recession – means they believe both Antofagasta and Central Asia Metals offer good risk/reward profiles.
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