Equity Strategy
27 March 2024
Dr Copper’s Healthy Prognosis
Copper Deficits Now Likely in 2024

Amidst a challenging year to date for the resources sector as a whole, copper has been one of the standout commodities of 2024 with spot prices approaching 12-month highs. 

The recent rally in the copper price has been driven by the pull forward of expectations of market deficits into 2024 following significant supply cuts in recent months.

Figure 1: The copper price has rallied to near 12-month highs

A soft landing is supportive of copper demand 

Leaving aside copper’s strong long-term demand outlook, from a cyclical perspective the global macro environment is also supportive of copper demand over the next 12 months. 

With interest rate cuts from the Fed expected this year and a ‘soft landing’ scenario likely for the global economy, demand for copper should be well-supported given its range of industrial uses (i.e. construction, consumer goods, machinery, etc.). 

The copper price is also poised to benefit from a weaker US dollar (our base case) following Fed rate cuts. 

Production cuts have driven a sharp reduction in near-term supply

Supply cuts from some of the world’s largest copper producers has been the central driver of the dramatic shift in copper’s near-term supply/demand dynamic, with a meaningful deficit now expected this year, which contrasts to previous expectations of a surplus in 2024. Several large projects have faced political, social, and operational disruptions, removing significant supply from the market, including:

  • First Quantum – was forced to shut down all operations at its Cobre mine, which produces ~400kt p.a., after the Panamanian Supreme Court invalidated the law that underpinned its mining licence. 
  • Anglo American – cut its 2024 copper production guidance by ~200kt due to geotechnical problems and challenging ore. 
  • Vale – the operating licence for its Sossego copper mine, which produces ~70kt p.a., has been suspended by the state of Pará. 
  • Codelco – the world’s largest copper producer has seen its output drop to 25-year lows, and all four of its megaprojects have been delayed by years while facing billions in cost overruns. 

In total, an estimated >750kt of expected 2024 copper supply, or ~3% of global supply, has been removed from the market since late 2023 due to production downgrades and mine closures, which has driven a rapid swing in expectations from a healthy surplus to significant deficit in the copper market in 2024. 

Ultimately, recent challenges on the supply front highlight the difficulties in building reliable, large-scale copper supply. This is supportive of our positive structural view of copper, which is poised to experience growing deficits long-term as supply fails to keep pace with strongly rising demand (more below). 


Structural Outlook – Growing Deficits are on the Horizon

The long-term fundamental outlook for copper is attractive, underpinned by a favourable supply/demand dynamic with a growing structural deficit in the copper market likely to support higher long-term copper prices.

The energy transition will drive a step change in copper demand 

To achieve net zero, copper will be required in substantial and growing quantities to reconfigure electricity grids, build out low-carbon power generation capacity, and transition to electric vehicles. Given renewables are significantly more copper-intensive than fossil fuels, demand from decarbonisation (in combination with traditional uses) will drive a step change in the rate of demand growth relative to history. 

Figure 2: The energy transition will be the key driver of copper demand growth to 2040

New Supply Will Struggle to Keep Pace with Demand Growth

1. The pipeline of supply is insufficient amidst ‘discovery drought’

There has been a downward trend in the rate and size of major copper discoveries. In the five years to 2022, copper discoveries have totalled 4.1Mt, representing a significant decline from the 70.6Mt of discoveries between 2013-2017, and an even greater decline compared to the long-run trend, according to S&P Global. 

As such, the existing pipeline of new copper supply will be insufficient to meet future demand. The IEA forecasts a ~2.8 Mt supply deficit in 2030 under the net zero scenario. Moreover, there are downside risks to supply amidst widespread delays and cost overruns on planned developments, as evidenced in recent months. 

Figure 3: Major discoveries are at multi-decade lows as copper is becoming increasingly difficult to find…
Figure 4: …driving an undersupply this decade – and beyond

2. Long lead times are another challenge to long-term supply

Developing a copper mine from exploration to commissioning takes many years to complete and recent evidence demonstrates that lead-times are trending upwards. Average copper lead times are currently 16.8 years, presenting an obstacle to the industry’s necessary ramp up in supply to fulfil future demand, even if there is an end to the ‘discovery drought’. 

Figure 5: Copper lead times average ~17 years

3. Costs are rising as resource quality declines

The industry cost curve has been structurally rising for 2+ decades amidst falling ore grades, as many of the world’s highest quality (and easiest-to-mine) resources have been depleted. 

Declining ore grades drive higher operating costs as it requires a greater amount of material to be mined and processed, often from deeper mines (requiring more CAPEX), to produce the same amount of copper product. 

Escondida, the world’s largest copper mine, has seen its average copper head grade decline from 1.6% in 2008 to 0.9% in 2023, coinciding with its unit cash costs doubling from ~US$1/lb to >US$2/lb in the same period. This trend is likely to continue across the market in absence of high-grade project discovery. 

Therefore, future higher cost projects will likely have higher incentive prices, which would put upward pressure on the long-term copper price. 

Figure 6: Ore grades are declining…

Exploring ASX Opportunities in the Copper Sector

Given our positive fundamental view of copper, the Focus Portfolio is overweight the commodity with a ~7.3% look-through* exposure (vs the ASX 300 at ~4%) via both pureplay and diversified miners, with our preferred pureplay exposure being Sandfire Resources (SFR) and our preferred diversified exposure being BHP (BHP). 

Figure 7: …driving average production costs higher
Figure 8: Focus Portfolio copper exposures

Sandfire Resources – High Quality Copper Exposure (Still) on a Discount to Peers

Sandfire Resources (SFR) was added to the Focus Portfolio in November 2023 and remains a 2% position, and our preferred (pureplay) copper exposure.

Read Copper's Road to a Supercycle

The company operates MATSA in Spain, which currently accounts for the majority of SFR’s production; and Motheo in Botswana, which is in the early stages of ramp-up.

The investment thesis remains intact, underpinned by:

  1. Strong production growth –
    SFR’s copper equivalent production is expected to increase from ~130kt in FY23a to >150kt in FY25e, driven by the ramp-up of Motheo. Recent updates have reaffirmed the delivery of Motheo continues to be first-class, with the project delivered on-time and on-budget thus far. Motheo’s ramp up underpins consensus EBITDA growth of 33% p.a. to FY26e, with risks skewed to the upside given our positive copper price outlook. 
  2. Discount to peer group –
    notwithstanding its rally since late 2023, SFR continues to trade on an attractive FY25e free cash flow (FCF) yield of ~11%, which is nearly double the global peer group at ~6%. As Motheo ramps up to its ultimate output in FY25e, and the investment thesis is ‘de-risked’, SFR’s valuation should re-rate further. 
  3. MATSA optionality offers additional valuation upside –
    there is scope for SFR to extend MATSA’s reserve life (~6-7 years currently) to ~30 years (Wilsons Advisory Research base case) given the geological potential (and hence exploration potential) within the Iberian Pyrite Belt and MASTA’s strong track record of resource additions and resource-to-reserve conversion. Mine life extensions provide significant valuation upside potential for the stock. 
Figure 9: Strong medium-term earnings growth will be underpinned by Motheo’s ramp up
Figure 10: SFR continues to offer attractive value despite the recent rally


    BHP – An Underappreciated Copper Giant

    BHP was recently increased by +2% in the Focus Portfolio to a weight of 10%. 

    Despite sometimes being pigeonholed as an iron ore miner, BHP’s exposure to copper should not be overlooked. BHP has the world’s largest copper endowment across a portfolio of high-quality, low-cost, long-life assets, and in FY24e the company is expected to produce ~1.8Mt of the metal, or roughly ~7% of global supply. 

    Copper is expected to account for ~40% of group EBITDA by FY26e with risks skewed to the upside (given our positive copper price outlook), and in the fullness of time we expect BHP’s copper earnings to surpass its iron ore earnings. 

    BHP’s ‘future facing’ focus is a key source of relative appeal that is still underappreciated by the market. 

    Well-funded for more copper acquisitions 

    BHP’s strong balance sheet gives it the capacity to engage in further M&A to bolster its copper portfolio. The company has demonstrated its willingness to divest non-core assets (aluminum, oil/gas, coal) to free up balance sheet capacity for investments into future facing sectors like copper. Following BHP’s successful acquisition of OZ Minerals in FY23, and the sale of the Blackwater and Daunia coal mines in 1H24, the stage is set for further copper acquisitions over the medium-term. 

    Figure 11: BHP’s gearing remains low vs global peers
    Net Debt / EBITDA
    Sandfire Resources 1.37 0.48 -0.03
    Global Diversified Mining Peer Group Average 1.12 0.74 0.72
    Anglo American 1.18 1.25 1.16
    Glencore 1.85 1.56 1.39
    Grupo Mexico 0.19 -0.06 -0.15
    Rio Tinto 0.15 0.16 0.07
    Ivanhoe Mines 0.88 0.55
    Saudi Arabian Mining Company 2.04 1.63 1.44
    Teck Resources 0.60 -1.05 -0.71
    Vedanta 2.10 1.92 1.80

    Source: Refinitiv, Wilsons Advisory. 

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    Written by

    Rob Crookston, Equity Strategist

    Rob is an experienced research analyst with a background in both equity strategy and macroeconomics. He has a strong knowledge of equity strategy, asset allocation, and financial and econometric modelling.

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