National BankThough he sees the fundamentals in the copper market “strong” to start 2022, National Bank Financial analyst Shane Nagle warns headwinds could be poised to build. “Copper prices remained well-supported throughout 2021 and fundamentals are strong to start 2022 as refined inventories are low, demand remains strong and speculative investment is near its lowest level since the onset of the pandemic,” he said in a research note released Wednesday. “Ongoing inflationary pressures, tightening monetary policies worldwide and forecasted supply growth into 2023 may create more volatility than experienced throughout 2021. Long-term fundamentals for copper remain attractive given the lack of advanced-stage projects in the pipeline to meet rising long-term demand.”
Though inflation did not “materially” impact to 2021, Mr. Nagle expects “elevated” operating and capital budgets to be announced in the coming weeks, pointing to ongoing supply chain issues, high consumable prices and increased labour contracts.
“Throughout previous cycles, inflation was most prevalent in large-scale Greenfield development projects, as a result, we highlight a breakdown of upcoming capital budgets for our coverage universe with CMMC, CS, LUN and TKO having the highest proportion of Greenfield capital spending in the coming years,” he said.
Despite this cautious view, Mr. Nagle sees equity valuations remaining “compelling.”
“NBF Base Metal coverage is currently implying a copper price of US$3.39 per pound or 77 per cent of spot for producers and US$2.68 per pound or 61 per cent of spot for developers — these levels have been largely unchanged throughout the latter half of 2021 as equities remain discounted relative to underlying copper prices,” he said. “Combining our valuation/sensitivity analysis alongside key themes and deliverable catalysts for the upcoming year, TECK/B, HBM and CMMC screen favourably as our top picks.”
Among his top picks, Mr. Nagle raised his target for Teck Resources Ltd. (TECK-B-T) to $55 from $48.50 with an “outperform” rating. The average on the Street is $43.71.
“Despite some logistical challenges in Q4/21 (persisting into 2022) stemming from heavy rainfall in BC, Teck’s coal business is set for a significant improvement throughout H1/22 at a time when seaborne coking coal prices are well supported above US$375 per ton as a result of tight supply,” he said. “The completion of QB2 in 2022 will also drive near-term copper/FCF growth leading to increased shareholder returns.”
He cut his Copper Mountain Mining Corp. (CMMC-T) target to $4.75, below the $5 average, from $5.25 with an “outperform” rating.
“Despite embarking on a large capital spend at Eva, Copper Mountain has several additional catalysts as the Copper Mountain mill expansion to 45,000 tpd was completed in H2/21 and ongoing exploration efforts at both Eva and New Ingerbelle are expected to showcase longer-term optionality of the portfolio,” said Mr. Nagle.