G&M : National Bank's opinion National Bank Financial analyst Shane Nagle thinks demand concerns and a near-term supply growth are overshadowing “compelling” valuations and “supportive” long-term fundamentals for TSX-listed copper equities.
“Copper prices are off more than 13 per cent from its peak of US$4.94 per pound on March 4th,” he said in a note released Wednesday. “Russia’s ongoing invasion of Ukraine continues to impact oil prices and supply of key reagents while China’s zero-COVID policy continues to put pressure on end-use demand as varying degrees of lockdown throughout the region continue to impact flow of workforce, raw materials and finished goods throughout the country. These broader supply chain issues will allow inflationary pressures to persist despite more aggressive monetary tightening by Governments worldwide.”
“Much of copper’s run throughout 2021 had been driven by an influx of speculative investor interest influenced by the re-opening of the global economy, accommodative Government policies/stimulus spending and ample global liquidity. Recent ‘risk-off’ sentiment has resulted in net short positions not experienced since the beginning of the COVID-19 pandemic. Add to that, copper supply disruptions year-to-date in line with expectations, and ramp-up of several key projects driving an expected market surplus in 2023/2024.”
Despite this “anticipated” volatility, Mr. Nagle remains bullish on copper, seeing “increased momentum for copper-intensive green energy initiatives and a lack of advanced-stage projects in the pipeline to meet rising long-term demand.”
He now sees equities in the sector “attractively priced” following recent struggles.
“Copper equities in our coverage are down an average of 24 per cent over the past month and while macro headlines are expected to dictate near-term performance, commodity prices continue to support favorable valuations and strong cash flow,” the analyst said. “P/NAV and EV/CF valuations are currently below historical averages and equities are pricing in US$3.08 per pound copper (based on 1.0 times NAV), one of the wider discounts to spot prices in recent years at 28 per cent.”
Mr. Nagle named three top producer picks:
* Teck Resources Ltd. (TECK.B-T) with an “outperform” rating and $65 target. The average on the Street is $60.74.
“Elevated coal prices continue to drive strong FCF margins while completion of QB2 in H2/22 will drive growth of the copper business, leading to further increases in shareholder returns,” he said. “Elevated oil prices have driven a significant inflection point in the value of Fort Hills and several advancements of non-core projects like San Nicolas, Masaba and Zafranel may lead to a number of non-core assets being monetized.”
* First Quantum Minerals Ltd. (FM-T) with an “outperform” rating and $46 target. The average is $42.99.
“Remains a ‘go-to’ copper producer given its highquality asset base, low AISC [all-in sustaining costs] and one of the most robust project pipelines (including Cobre-Panama, Enterprise, Kansanshi S3 expansion and Taca Taca),” he said. “A recent long-term fiscal agreement in Zambia and agreement in principle on royalty/tax treatment in Panama provide more confidence in near-term organic growth projections.”
* Hudbay Minerals Inc. (HBM-T) with an “outperform” rating an $11.50 target. The average is $12.78.
“2022 represents an operational inflection point with Pampacancha grades picking up in Q4/22 and New Britannia production ramping up throughout the year,” he said. “A technical report on Copper World in Q3/22 is expected to provide more clarity on the private land-only development alternative in Arizona which currently represents a free-option within the portfolio. An update in early-2023 on processing 777 tailings will also provide an opportunity to extend the operations life and reduce long-term reclamation expenditures.”