Q2/23 Review: Weak Q2 Production Sets Up Stronger H2
China real estate concerns weigh on outlook for H2 Companies focusing in B/S strength ahead of next growth projects
TD Investment Conclusion
Q2/23 generally lived up to its billing as a weak production quarter. Almost across the board, companies in our coverage list are expecting stronger production during H2/23 as a result of better grades (HBM at Constancia, FM at Sentinel), improving mill throughput (FM at Sentinel, CS at Pinto Valley), and/or the ramp-up of planned expansions (FM at Cobre Panama, CS at Mantos Blancos, CIA at Bloom Lake).
CS was on the only company to lower 2023 production guidance due to weaker production during H1/23. Unplanned downtime at Pinto Valley and a slower ramp-up at Mantos Blancos resulted in the company lowering 2023 copper production guidance to a range of 163-173kt (previously 170-190kt) at C1 cash costs of $2.75-2.85/lb (previously $2.50-$2.70/lb). FM expects 2023 copper production to be at low-end of its guidance range (770-840kt) and C1 operating costs at the upper end of the range ($1.65-$1.85/lb). We expect that production will be slightly below the low-end of the range at 760kt. LUN maintained its copper production guidance range, but due to maintenance issues at Zinkgruvan, zinc production is expected to be at the low-end of the guidance range (180-195kt) and zinc cash cost guidance was increased.
Cost inflation pressures seem to have abated with several companies noting that input commodity costs (steel, fuel, reagents, etc.) have seen some softness. However, currency movements have impacted U.S. dollar costs for ERO. Management flagged that the stronger-than-anticipated Brazilian real has been a headwind on costs, with the USD/BRL down to 4.85 versus guidance of 5.3. Management noted that close to 95% of its costs are incurred in BRL. At a minimum, we expect costs to be on the high-end of the guidance range ($1.40-$1.60/lb copper).
Within our coverage list, we see the best positive H2/23 production momentum from HBM. We expect stronger production from HBM in H2/23, with ~93kt of copper production expected, including production from the recently acquired Copper Mountain mine, which is effectively double H1/23 production. We estimate FCF of ~ $180 million in H2/23, an increase from ~$6 million in H1/23.
The uranium sector continues to be one of the better performers, with the Horizons Global Uranium Index ETF (HURA-TSX) up ~23% YTD. Uranium spot prices continue to track higher and the term uranium price is at a decade high at $56/ lb. Cameco indicated that a full-blown uranium contracting cycle is underway and given security of supply concerns and a growing nuclear fleet globally, management expects that this contracting cycle will be durable.
Top Picks remain Cameco, First Quantum, and Champion Iron Ore.