As the U.S. and China prepare to sign the first phase of a trade deal, copper prices are on the rise, hitting an eight-month high at US$2.83 per pound on Tuesday.
Yet, many analysts are taking a circumspect view of the impact that a U.S.-China trade deal will have on copper.
“I think there’s certainly near-term impact, but I’m not sure it really is going to resolve core issues between the two countries,” said Pierre Vaillancourt, a senior analyst at Haywood Securities.
Still, he added, “We see positive supply and demand trends regardless of where trade is.”
It ties into a growing if cautious optimism for the copper sector after a lacklustre year in which prices fell five per cent — averaging US$2.82 per pound in the first quarter of 2019 and US$2.67 per pound in the fourth quarter.
RBC Capital Markets analysts last week predicted that M&A in the copper space could surge in 2020, especially if Chinese companies remain hungry.
Already, Jianxi Copper Corp. holds an 18 per cent stake in Canada’s First Quantum Minerals Ltd., which is looking to ramp up production from its recently constructed Cobre Panama mine; while Zijin Mining Group Co. Ltd. and Citic Metal Group Ltd. hold a combined 40 per cent of Ivanhoe Mines Ltd.
The RBC analysts also questioned whether Hudbay Minerals might be acquisitive after a U.S. judge last year overturned its approvals to build its Rosemont mine in Arizona.
The company is appealing the decision, but the process could take months or longer to resolve, Peter Kukielski, interim chief executive of Hudbay Minerals Inc., told the Financial Post.
Kukielski said the situation illustrates one reason why copper prices could rise.
“The supply side is not really that strong,” he said, adding, “It’s just getting more and more difficult to find copper let alone to mine it and bring it into production.”
He added that fears about a recession in China and the impact of trade tensions have dampened demand.
It’s just getting more and more difficult to find copper let alone to mine it and bring it into production.
Peter Kukielski, interim chief executive, Hudbay Minerals
With all the headwinds, however, there have been some notable success stories among Canadian mining companies in the copper space, including Vancouver-based Ero Copper Corp., which experienced a 99 per cent surge in its stock price during the past 12 months, to $22.05 on Tuesday.
Unlike most companies, which define a large copper deposit and then raise money to build a mine, Ero Copper bought a decades-old mine in Brazil out of bankruptcy in 2016. As a result, it started with infrastructure already in place and used cash flows from its mine to fund exploration.
“We have so much excess capacity, so every new discovery can fold into our production very quickly,” said Makko DeFilippa, vice-president of corporate development at Ero.
Justin Chan, an analyst at Numis Securities, said it proved to be an appealing strategy to investors during a time when copper prices have been middling and raising money has been difficult. It meant that Ero posed little risk of turning to a dilutive or onerous financing because it was already generating enough cash flow to fund exploration, and it had no need to build any additional infrastructure.
“There’s no dilution, full stop,” said Chan. “They (Ero) generate a lot of cash, which they are reinvesting in exploration, so there’s no need for outside capital.”
On the positive side for copper producers, Citi Research wrote last month that speculative investment, as witnessed by the copper open interest — or the amount of unsettled derivative contracts, such as copper futures — was rising at a pace not seen since the U.S. Presidential election in 2016.
Its analysts suggested more investors are long on copper, but saw little upside.
“Though we remain bullish on copper … our forecasts imply only four to five per cent upside from current levels over the next six months,” they wrote.