Capstone Copper Corp T.CS

New TP Increase from STIFEL from $3 to $4.20

[Evrytingisawsum]

Renewed optimism driving the base metals sector higher

 

Summary

We are increasing our base metal price outlook and updating our financial models for the base metal companies under coverage. Historically we had looked at the copper price from an incentivised cost perspective. We evaluated a series of development stage project and solved for a copper price required ot deliver an 15% after tax return for those projects. That led us to the view that the copper price needed to move to the $3.10-3.20/lb range to incentivise investment in this industry to deliver increased supply. With the current positive view to increasing electrification of global transportation networks, continued build out of renewable energy sources and the expansion of these demand drivers in the near term copper has moved well beyond the incentive price. Our revised deck essentially reflects the midpoint of the incentive price and the current copper price curve.

Key Points

Renewed optimism in the base metals. An increasing global policy focus on sustainable energy generation, transmission, and consumption is driving incremental demand for copper. Of all the metals used in the generation, transmission, storage, and consumption, copper remains the common denominator. Electricity generation, transmission infrastructure, energy storage, and consumption all require copper. The long term demand for the red metal is backstopped by this demand in green energy, as it is significantly more copper intensive than traditional, fossil fuel based infrastructure.

Physical inventories, TC/RCs at multi year lows. Physical inventories for copper and smelter TC/RCs are at multi year lows, illustrating short term price support for copper in our view.

Incentivised cost of replacement. Due to the cyclicality of the copper market, we have looked across the sector at mega projects currently board greenlighted to get a sense of downside price protection for the red metal. By putting ourselves in 'management's shoes' we have attempted to understand the incentivised cost of production for new projects, ie the minimum required commodity price to generate an acceptable return on investment. With a copper market in excess of 22MMt Cu annually, only major projects (we define as those greater than 200ktpa Cu produced) have the ability to materially swing the needle on the supply/demand balance. Based in part on capital costs, operating costs, and a minimum acceptable return on investment, we estimate that current major projects require a minimum price in excess of $3.20/lb Cu, globally. Our analysis is backstopped in part by two main factors impeding metal supply:

1. Deposits are lower grade & deeper. Due to the exhaustible nature of the business, we feel this represents the low watermark for long term copper prices. Globally declining copper reserve grades, and increasing capital intensity for projects as deposits get deeper/ harder to exploit represent significant downside protection to the price of the red metal as projects become more costly, in our view.
2. Market appetite & availability of projects. Like grade, declining capital markets interest/ availability to fund these projects following the last build cycle has resulted in a weak pipeline of new greenfield projects, further exacerbating the inelasticity of market supply. As new projects decline in grade, the required size of a project to generate a minimum return is generally larger, increasing the difficulty in project funding, permitting, logistics, timeframe, and potential cost overruns.

Forward price curve indicates long term price support and demand for copper. Analysis of current copper forward curve pricing showcases a tight spread. Forward copper contracts currently average ~$3.60/lb Cu through 2022, and only dip 10c to $3.50/lb over the long term to 2025, indicating tight market support for current pricing levels in the red metal.

For these reasons, we are updating our LT Cu price to $3.40/lb. We believe a combination of short and long term market support in pricing (physical inventories & TC/RCs at multi year lows, LT forward curve pricing within 4% of spot), and a lack of available projects that generate acceptable returns at recent metal prices provide downside protection to our long term estimate.