Copper Miners on Discount
Commodities Screen Value Relative to the Stock Market
From a macro view it’s clear that commodities represent value in the market, they are cheapest they have ever been relative to US equities in the last 50 years.
Commodities also provide an important hedge against inflation. During the 70s the best way for investors to protect themselves versus inflation was by owning gold (30.7% annual return) and commodities (24.1% annual return); we believe that applies to this decade as well.
Copper is the Sweet Spot
Copper is one of the most critical commodities for the future green economy; it is a key input for electric vehicles, wind, solar and infrastructure. Goldman Sachs projected green related copper demand will increase from 1Mt in 2020 to 5.4Mt in 2030. This green demand currently represents 3% of total global copper demand, by 2030 it will be be close to 16%.
Additionally, in the near term there is a very tight supply/demand dynamic for copper, with global inventories sitting at decade lows.
Base Metal Miners are Cheap vs History
Base metal miners are trading at trough valuations relative to history, the group of North American miners currently trade at 4.5x EV/EBITDA versus their historical average of 6.0x EV/EBITDA.
Screening for Value Among Copper Miners
The small and mid cap copper mining universe offers the best value in the sector, as they trade at a substantial discount to their large cap copper peers.
Sierra Metals (NYSE:SMTS, TSX:SMT) and Hudbay Minerals (TSX:HBM) are two copper miners that screen deep value relative to their small/mid cap copper peers.
Sierra Metals (NYSE:SMTS, TSX:SMT)
Relative to its small & mid cap copper producer peer group, Sierra Metals trades at a 64% discount on forward price-to-cashflow, 66% discount on forward EV/EBITDA and 63% discount on forward price-to-sales.
Sierra Metals has unique combination of superior production growth (14% compound annual growth rate over the next 5 years) and below industry average cost structure (32nd percentile on the copper industry cost curve).
Hudbay Minerals (TSX:HBM)
Relative to its small & mid cap copper producer peer group, Hudbay trades at a 48% discount on forward price-to-cashflow, 66% discount on forward EV/EBITDA and 38% discount on forward price-to-sales.
Hudbay is well-positioned on the cash cost curve relative to global copper peers and the company has a strong track record of achieving or exceeding production guidance.
