Article about copper bodes well for Capstone
10 October 2007
Global
Equity Research
Diversified Metals & Mining (Metals & Mining) / OVERWEIGHT
Metals & Mining
SECTOR REVIEW
Looks set for a major rally
Event: The miners are poised for a major rally, in our view. The catalyst is likely to be a breakout in copper that has so far failed to breach the magical $4.00 per pound that was reached in April 2006. Copper is likely to be the big call for Q4 because it is the bell weather for the industry and represents
30-50% of earnings for our diversified miners. Iron ore is likely to fade in importance given negotiations are unlikely to be completed until Q1 of '08 and has less impact on overall earnings. This is why metal exposed stocks are likely to outperform the bulks.
View: We think it is a mistake to assume copper prices will eventually
recline back to the highest marginal cost of producer of $1.50 per pound.
Our Brave New World III analysis suggests supply will grow by 3.6% per
annum at best over the next 8 years. This estimate could prove too high given the problems many of our DR Congo producers are encountering and the ongoing labour and grade issues in Chile.
Catalyst : Our marketing in South Africa, Europe and North American in the last 3 weeks has encountered a general scepticism amongst investors that the miners can continue to rally, given their strong performance since mid August. We think the move is just the beginning of strong fourth quarter rally as investors still do not appear positioned for such a move. Mining rally set to continue and copper is likely to lead the charge.
Valuation : A breakout in copper above $4.00 per pound should send a
clear message that the equity markets are significantly undervaluing our copper producers which seem to be implying a long term copper price of only $1.50-$1.60 per pound. This compares with today's price of $3.65 per pound and the five year price of $2.50 per pound. The market continues to accord peak of cycle earnings for our sector. The diversified miners are trading between 11-13X forward earnings and 8X for the copper names.