Today, shares in Antofagasta (LSE: ANTO) and KAZ Minerals (LSE: KAZ) rose 7.7% and 7.5%, respectively. Copper prices have recovered strongly over the past two weeks and Glencore (LSE: GLEN) today announced that it would suspend about one-fifth of its copper output, as falling copper prices has meant production from its African Katanga and Mopani mines are no longer profitable. Other high cost producers could follow suit, and the withdrawal of production would help to support copper prices in the short term.
Unlike with iron ore and many other commodities, the supply of copper has been growing at a very slow pace over recent years. Average copper grades have been declining as large existing copper mines are depleting, and this raises the average net costs of extraction. The combination of the supply constraints at existing mines and delays with the development of some major new copper mining projects, including Rio Tinto’s (LSE: RIO) expansion of its Oyu Tolgoi mine in Mongolia, should mean supply growth over the next two or three years would be limited
The copper market is currently in a small surplus, but as high cost production is withdrawn, analysts expect the market should balance soon. Whilst steel demand in China appears to have peaked, demand for copper should continue to grow because of the non-cyclical nature of investments in its state power grid infrastructure, which accounts for a significant proportion of copper demand. In addition, copper demand is likely to be steady outside of China.
Analysts continue to be optimistic that the market will transition to a deficit by around 2016/7, as they expect supply growth would fail to meet the projected growth in global consumption in the medium term. Thus, the prospect for higher copper prices is far more likely than that for iron ore prices.
Antofagasta
Antofagasta reported disappointing interim results in August, as EBITDA fell 48.6% to $561.6 million in the six months ending 30 June. Although falling copper prices had much to do with the decline in profitability, a series of one-off factors had caused production disruptions. Group copper production in the first half declined 13% to 303,400 tonnes, primarily because of protests at Los Pelambres and heavy rains.
Looking forward, Antofagasta is in a strong position to weather the price environment. It has net cash of $744 million, and it is one of the lowest cost producers in the sector. Net cash costs of production were $1.53 per pound of copper in the first half of 2015, well below today’s market price of around $2.53 per pound. Although the miner’s outlook is positive, its valuations are not. Shares in Antofagasta currently trade at 27.9 times its expected 2015 and have a projected dividend yield of just 1.2%.
KAZ Minerals
Kazakhstan based copper miner KAZ Minerals has divested its high cost copper production assets to focus on a series of low cost growth projects. It plans to more than triple its current production rate with the development of its Bozshakol and Aktogay projects. Once completed, these highly-mechanised open-pit operations should be highly competitive, with net cash costs of production estimated to be around $1.50 per pound.
Although, there is much promise to KAZ’s new mining developments, net debt is projected to rise to more than $3 billion by 2017, and falling copper prices would mean the miner could struggle to meet its debt repayments. The prospect of lower operating costs from the devaluation in the Kazakh Tenge has acted as a support for its share price in the short term, but shares in KAZ Minerals already seem to be fully priced.
