Scotia Capital After “another weak quarter,” Scotia Capital analyst Orest Wowkodaw sees near-term uncertainty lingering in the copper market.
“The Q3/23 reporting season was largely overshadowed by several material corporate updates from our largest miners, including TECK’s disappointing late stage QB2 capex increase but new all cash plan to fully divest its HCC business, FM’s heightened Cobre Panama operating and fiscal uncertainty, and the closing of CCO’s WEC acquisition after more than a year of regulatory scrutiny,” he said. “With these major events and Q3 results behind us, we revisit the Cu equities in the context of current spot prices under several key relative metrics: (1) value, (2) growth, (3) leverage, and (4) capital return potential. Given the challenge in building new large-scale Cu capacity, we anticipate a heightened M&A environment, supporting elevated multiples.”
In a research report released Monday, Mr. Wowkodaw emphasizing three key takeaways from the quarter, pointing to “(1) The current operating environment remains challenging (FM, NEXA, and TECK cut 2023 production guidance); (2) Cost pressures are not materially easing as expected (ERO, FCX, and FM increased 2023 cost guidance); moreover, we believe consensus cost expectations for 2024 are likely to move higher; (3) Growth execution appears challenged, with most miners (excluding IVN) experiencing schedule and/or cost pressures (notably CS, ERO, NEXA, and TECK). Since our Q3 preview note, our 2023-2025 EBITDA estimates for the mid-and large cap miners decreased by an average of 0 per cent, 2 per cent, and 4 per cent, while our 8-per-cent NAVPS’s decreased by 4 per cent. ... We forecast elevated average 2023 all-in sustaining costs of $2.46 per pound copper for our coverage, up 6 per cent from $2.33 per pound in 2022 and up 31 per cent from $1.88 per pound in 2021. However, cash margins remain positive for most miners given a $3.70 per pound spot price.”
Mr. Wowkodaw also said he expects the copper market to be “essentially in balance” through 2025 “before the emergence of large structural deficits.”
“We note that despite demand weakness, total global visible Cu inventories remain at a critically low approximately 4 days, in our view, largely due to ongoing supply side underperformance,” he said. “While demand uncertainty in both China and ex-China markets continues to overhang the near-term outlook for copper, a potential end (and possible future reversal) to the current global (ex-China) interest rate hiking cycle could positively impact sentiment for growth and by extension, most commodity prices.”
Revisiting his valuations for copper equities, he made these target price adjustments:
- Altius Minerals Corp. ( “sector perform”) to $20 from $21. The average is $23.88.
- Champion Iron Ltd. ( “sector outperform”) to $7 from $6.50. Average: $7.46.
- Ero Copper Corp. ( “sector perform”) to $22 from $24. Average: $24.82.
- Ivanhoe Electric Inc. ( “sector outperform”) to US$16 from US$18. Average: US$17.50.
“All copper equities are likely to move higher if Cu prices improve, or lower if Cu prices weaken,” he said. “While more modest than last quarter, valuation multiples remain somewhat elevated in the context of current spot prices; however, this is likely supported by the very constructive medium to long term fundamental picture, the energy transition thematic, and by ongoing M&A speculation. We note that margins for most producers remain solid (spot Cu of $3.70 per pound vs. average AISC of $2.46 per pound) although FCF generation appears muted.”
“Overall, TECK and CCO remain our top picks, while CS and FCX are our other preferred picks for Cu exposure; we also recommend CIA, HBM, and IVN. Among the developers (within our coverage), we recommend IE. Among the royalties, we prefer ECOR. Our Sector Outperform-rated equities currently have an attractive 12-month average implied return of 44 per cent.”