Report by Global Mining Research

The US-Israeli war with Iran and oil shock has resulted in some of the most volatile markets of recent times. Higher oil prices are clearly inflationary; however, the larger short-term risk for the miners is arguably the supply of liquid fuel. Slowing global growth could erode copper demand; the copper sector P/NPV10 and +1 year P/CF is trading close to previous tough levels with a spot FCF yield of 5.2% being attractive. Gold equities are still attractive with the market imputing lower spot prices today. The shares are cheap on a cash flow basis with a 6.9% spot FCF yield. Gold sector margins are still robust with better balance sheets compared to peers. Copper and gold equities have corrected, and value opportunities have emerged. Preferred coppers are Antofagasta PLC, Lundin Mining Corp and Ivanhoe Mines Ltd, whilst least preferred are First Quantum Minerals Ltd and Southern Copper Corp. Preferred golds are Barrick Gold Corp, Agnico Eagle Mines Ltd and Kinross Gold Corp.

Report by Global Mining Research

Copper prices had a strong start to the year. David Radclyffe’s review of the Q1/2024 performance versus 2024 guidance for the December year-end stocks helps put the market tightness into perspective. The key takeaway is that, as with gold companies, copper miners are banking on a strong H2/2024 to meet annual guidance figures. The risk is therefore to the downside, with once again copper producers struggling to either meet guidance or increase production appreciably. Only Hudbay Minerals, KGHM, Southern Copper, Freeport-McMoRan and First Quantum Minerals are tracking to 2024 production expectations. David’s preferred copper miners are in the small/mid-cap space on valuation grounds, including Atalaya Mining, Capstone Copper, Sandfire and Hudbay Minerals.

Report by Global Mining Research

For 2024, David Radclyffe forecasts copper to enjoy an average ROCE of 11.1%. The standout is Southern Copper Corp, helped by some very low cost and long-lived assets. Relatively new to the market Ero Copper Corp does well, while at the lower end sit Ivanhoe Mines and Sandfire Resources. When it comes to gold, the forecasted average ROCE for 2024 is at 8.3%, with Gold Fields coming out on top and Lundin Gold close behind. The copper sector as a whole continues to generate better real returns on capital than the gold sector, with gold miners continuing to suffer from shorter mine lives and a commitment to M&A to create growth.

Report by Global Mining Research

David Radclyffe reviews how mines with little access to green electricity will need to build capacity themselves or via a third party in order to meet emissions targets. Some will come under increasing scrutiny; Rio Tinto, South32, Southern Copper Corp, Freeport-McMoRan and Anglo American could all face increased capital/opex exposure. The potential capital costs associated with self-generation are massive, so investors should keep a close eye for opportunities present in the partial or full outsourcing of infrastructure.

Materials

Report by Global Mining Research

GMR provide a comprehensive review of these 3 copper producers who together make up 15% of global copper supply. GMEX is their preferred choice on valuation grounds given it trades at ~1x P/NPV (vs. 2.3x for FCX and 2x for SCCO) and 4.6x EV/EBITDA (vs. 8.4x for FCX and 9.1x for SCCO). GMEX's significantly higher dividend (6.5%) will also appeal to income-hungry investors. GMR see no reason to own SCCO (rated Sell) since it can be bought effectively much cheaper via parent GMEX. While FCX is acceptable at spot prices, it looks very expensive on LT copper US$3.25/lb.