Finding value in junior miners
The large cap copper miners are expensive, trading as much as 3.4x NPV10 on David Radclyffe’s base case assumptions and as much as 2.3x on spot copper prices. Better value can be found in the smaller to mid-cap miners, which often offer attractive growth paths and M&A upside. Risks are sometimes higher in the smaller copper companies. with share liquidity another trade off. Of the five stocks covered in David’s latest report, the best financial leverage to higher copper prices are Taseko Mines Ltd and Atalaya Mining Copper SA, while the lowest leverage is with Sandfire Resources Ltd having strong margins. However, Capstone Copper Corp has the best four-year growth outlook assuming Santo Domingo delivery. The implied copper price (10% nominal discount rate) shows most stocks are near the spot price levels. Out of the group, David prefers Taseko Mines Ltd which offers value, FCF yield, leverage and growth, with Atalaya Mining Copper SA herein upgraded to BUY.
US copper continues to atrophy
Political and legal challenges continue with few domestic US copper projects advancing (and some then failing), while existing production continues to mature (see chart). Ultimately, stagnation of US domestic production strengthens the upside case for the copper price. The US has the resource inventory to be self-sufficient, yet it is hard to see any of the key larger projects progressing in the mid-term. By the end of this decade, Global Mining Research sees incremental projects lifting volumes to ~1.3Mt/yr from current production at ~1.1Mt/yr. Preferred US-exposed copper plays are Freeport (upside from leach and Bagdad 2X), Taseko (Florence ISL expected to commence in 2025) and Hudbay (significant resource optionality).
Copper vs Gold
Gold miners have traditionally been considered premium rated miners, yet copper stocks covered by GMR have moved to a premium compared to gold and other base metal and bulk miners. Gold stocks are out of favour with valuations underperforming the gold metal price during 2023; the high beta of gold stocks presents an opportunity when the gold price gains traction. Preferred equities include Lundin Gold and Northern Star. Copper stocks remain attractive as supply weakness and low inventories are offset by macro concerns. Preferred stocks are Atalaya Mining and Taseko Mines as junior miners, and Sandfire amongst the mid-larger names.
