Growth, deals key for Australian copper firms
Monday, 30 April 2012 | 11:00
Growth is the key to smart exposure to the Australian copper sector amid dwindling global supplies, while takeover rumbles suggest now may be the time to get a foothold in select stocks, fund managers say.
Following a healthy run-up early this year, copper prices have since faltered as Europe’s debt mess and a downgrade of annual growth forecasts by China to 7.5% triggered fears about the strength of the global economy.
Copper for three-month delivery currently trades just above $8,000 per metric ton on the London Metal Exchange, with spot prices at $3.63 a pound on Comex Metal Exchange.
Deutsche Bank strategists forecast copper spot prices to hold at $3.90 a pound through 2012, and average $3.77 a pound in 2013.
Used extensively in wiring, construction and electronics, copper’s outlook is tightly bound to economic activity in developing markets.
China is the world’s biggest consumer of the industrial metal and disappointing first-quarter gross domestic product figures released this month cast more doubt on future demand.
Yet signs pointing to rebound in growth are beginning to emerge. A rise in new loans, steel production and domestic new orders suggest momentum is picking up in China.
AMP Capital senior investment strategist and portfolio manager Nader Naeimi said a handful of recent indicators point to China’s economy bottoming before the end of the second quarter.
“There’s good correlation between Chinese monetary measures and industrialization. China has an underlying consumption uptrend,” Naiemi said.
This week UBS, JP Morgan and Merrill Lynch all upgraded their view on the resources sector on improved confidence in the Chinese economy.
The world’s fastest-growing economy is also central to boutique resources fund manager Limestreet Capital’s bullish stance on copper.
Limestreet research analyst Andrew McLeod — whose fund invests in miners outside BHP Billiton Ltd. and Rio Tinto Ltd. — says supply pressures and deteriorating grades are the biggest challenges facing the copper market.
“Mine supply is more of a concern than demand. The bigger copper miners are struggling to increase their capacity and grades are falling,” McLeod said.
Grades tend to deteriorate as mines age, and declining grades – or the amount of copper existing in the mined metal – drives up costs for copper producers. As the easier and higher grade deposits are mined out, operators have to move more dirt, and invest more capital to keep production steady.
“People have to run very hard just to stand still in the copper space,” said Prasad Patkar, portfolio manager at Platypus Asset Management in Sydney.
On this basis fund managers’ recommend investing in producers with a solid growth pipeline.
Platypus manages around 1 billion Australian dollars ($1.03 billion) in funds and names PanAust Ltd. as its top copper pick.
Patkar says Oz Minerals Ltd. has solid future growth prospects in its South Australian Carrapateena project, “but there’s a bit of a hole in the growth profile in the medium-term.”
Limestreet holds three smaller copper plays with increasing production profiles — African-based Tiger Resources Ltd. and Discovery Metals Ltd. as well as Hillgrove Resources Ltd., a junior producer with operations in South Australia.
Tiger Resources’ copper project in the Democratic Republic of the Congo went into production last year. Discovery Metals Botswana-based mine is due to move into production later this year. The project boasts high copper grades at around 1.5% — above decreasing global averages of about 1%.
“Investors should keep all these little companies on their radar. It’s not that hard for these companies to double production, but for BHP Billiton to, it’s near-impossible. The leverage is enormous for these guys,” Playtpus Asset Management’s Patkar said.
Consolidation in the copper sector is also on the industry’s radar.
AMP Capital’s Naeimi — who helps manage A$123 billion in multi-asset investments — says junior copper producers are appealing takeover targets.
“In this environment, valuations are very attractive and once you start seeing a rebound in China, you will start seeing corporate activity. Some of the smaller [resources] firms will be targeted — when you see green shoots and good valuations, you’re going to see corporate action and acquisitions,” said Naeimi.
Last on the shelf in the resource-rich Congo, Limestreet’s Mcleod identifies Tiger Resources as the number one takeover target in the copper space.
“All of the surrounding mines in their region have all corporate activity over the last twelve months. A likely candidate is major shareholder Trafigura — I’m sure they’ll be involved in some capacity with any corporate action,” Limestreet’s McLeod said.
Source: Market Watch
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