Scotia Capital analyst Orest Wowkodaw sees the copper market “finely balanced as supply struggles” and believes there’s “an attractive copper equity for every investor.”
“After further downgrading both our 2023 consumption and supply expectations, we continue to forecast a copper (Cu) market largely in balance near-term with very low visible inventories, before the emergence of large structural deficits in the medium-term driven by a lack of meaningful supply growth,” he said. “Despite the obvious near-term demand risks, we believe that Cu prices near $4.00 per pound remain well-supported due to struggling supply, critically low inventories, and a large looming projected structural deficit ahead.”
In a research report released Tuesday, Mr. Wowkodaw made “material” 10-per-cent increases to his 2023 price forecasts for copper (to US$4 per pound), 62-per-cent iron ore (to US$110 per ton) and high coking coal (US$260 per ton). That led him to increase his targets for stocks in his coverage universe by a similar amount.
“All copper equities are likely to move higher if Cu prices improve,” he said. “Moreover, we believe valuation multiples could re-expand if Cu prices trade sideways given the solid margins (spot Cu of $4.00/lb vs. average AISC’s of $2.48/lb) and FCF generation of many larger producers at current prices. Moreover M&A speculation could also fuel the fire.”
Mr. Wowkodaw’s target changes include:
* Capstone Copper Corp. (
, “sector outperform”) to $9 from $7. Average: $7.05.
Analyst: “CS ranks very well in Cu growth, Cu price leverage, and valuation (P/NAV and 2024E EV/EBITDA as significant growth is expected to arrive by year-end 2023). CS also appears catalyst rich over the transition period. However, we anticipate negative FCF until 2024 due to growth spending.”
* Champion Iron Ltd. ( “sector outperform”) to $9 from $8. Average: $8.03.
Analyst: “We highlight that the three Fe producers under our coverage (CIA – Sector Outperform; LIF – Sector Perform, VALE – Sector Outperform) are currently trading at an average spot P/NAV of only 0.37 times, an average implied 62-per-cent Fe price of only $78 per ton, and have impressive average 2023E spot FCF yields of 18 per cent. We also note that CIA appears to be the cheapest producer within our large and mid-cap coverage on both spot EV/EBITDA and P/NAV metrics. However, with Chinese steel mill margins still in significant negative territory, in our view, spot Fe (and HCC) pricing risks appear to be skewed to the downside.”