Slowing demand for copper, most notably in China, led the copper price to fall to its five-year low in January. Although the price has recovered slightly in recent months, some analysts still see further upside correction. The medium-term outlook for the copper looks better than most other commodities. Older mines are showing signs of depletion, with copper grades declining, which raises the net costs of extraction. This will likely move the market from a small surplus this year, to a supply deficit by around 2017. Unlike the iron ore market, supply from new copper mines will likely fail to satisfy…
Slowing demand for copper, most notably in China, led the copper price to fall to its five-year low in January. Although the price has recovered slightly in recent months, some analysts still see further upside correction. The medium-term outlook for the copper looks better than most other commodities. Older mines are showing signs of depletion, with copper grades declining, which raises the net costs of extraction. This will likely move the market from a small surplus this year, to a supply deficit by around 2017. Unlike the iron ore market, supply from new copper mines will likely fail to satisfy the projected growth in global consumption.
Further forward, the outlook on copper is more uncertain and many analysts are divided. There are many factors that can affect its price, including: whether demand from China will pick up quickly enough, the rate of investments in new projects and the impact of any potential supply disruptions caused by weather and labour disputes.
Here are four miners that will benefit most from higher copper prices, even if it is short-lived:
Glencore and Anglo American
Glencore (LSE: GLEN) is a diversified mining and commodities trading company, with copper representing 36% of its operating profits. The miner is also attractive for its exposure to zinc and nickel, which represents another 12% of Glencore’s operating profits. The market for these base metals also appear to be transitioning towards deficits, because of medium-term supply constraints. In addition, the outlook on Glencore’s trading operations is improving, and those earnings are less correlated with commodity prices.
Anglo American’s (LSE: AAL) copper operations represent about a quarter of its operating profits last year. Had it not been for disruptions and higher costs, its share from copper would be closer to 30%. The miner is looking to sell some of its peripheral projects, but remains committed to developing its larger Quellaveco project in Peru. Quellaveco will have an annual peak production of over 200,000 tonnes.
Antofagasta and Kaz Minerals are copper pure plays
Antofagasta (LSE: ANTO), the Chilean-based miner, is the safer option. It has little net debt and low operating costs. The miner does, however, own a small water utility operation; but it only represents about 4% of its operating income. Antofagasta faces less execution risks, because of its large existing production base and growth relies more on “brownfield” expansions near existing mines and infrastructure.
Kaz Minerals’ (LSE: KAZ) high level of indebtedness and its focus on growth projects makes it the most leveraged play on higher copper prices. This will likely mean that changes in the price of copper have the greatest impact on the share price of Kaz Minerals. The company completed its restructuring in October 2014, with the transfer of its ageing and less efficient mines to Cuprum Holding, its largest shareholder. Currently, it owns only 84,000 tonnes of copper production, and the bulk of its assets are concentrated on its two new projects, Bozshakol and Aktogay. These two mining projects are large scale, mechanised open-pit operations; and once completed, they will have highly competitive net cash costs of production. Kaz Minerals expects to have 300 thousand tonnes of copper production by 2018.
Capital spending at its growth projects would likely raise net debt to more than $3 billion by 2017, about twice the value of its current market capitalisation. But, Kaz Minerals should have sufficient liquidity to cope, as it has $2.1 billion in cash, and undrawn debt facilities of around $800 million. This exceeds the company’s estimated capital spending requirements, but cost overruns and project delays are very common with copper mines. Project execution is the main cause of uncertainty.
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Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.