The junior copper stocks have had no joy on the copper price front in the year to date.
While the current price of $US3.67/lb is widely seen to be depressed, it is in fact an historically high price which should be enough to have sentiment to the key industrial metal riding higher than it is.
Fear not, the copper bulls are beginning to rise, none more so than Citi, which stirred things up at the recent LME Week in London by presenting a bull case for copper to average $US6.80 a pound in 2025 as supply comes under increasing pressure from the demands of global decarbonisation through electrification.
Citi’s bull scenario got a leg up during the week with the joint statement by the US and China after the meeting of their leaders that they supported the G20 push for global renewable energy capacity to triple by 2030.
Citi’s utilities research unit crunched some numbers on the tripling target becoming a reality and more particularly, what it would mean for copper demand. It found there would be extra demand from power generation of 350,000t in 2025, rising to 2.5 million tonnes in 2030.
The 2030 figure is the equivalent of 2.5 Escondida-sized mines. Escondida is the world’s biggest copper mine owned by BHP and Rio Tinto. So the challenge of the required ramp up in global production is clearly huge.
There is obvious exposure to the copper upside thematic with BHP and Rio Tinto in this market. But if it is outsized leverage to the upside that it is sought, that rests with the junior copper stocks.
It is a message that came through loud and clear at the RRS Summer Series this week from AuTECO (ASX:AUT) and Caravel (ASX:CVV).
AuTECO acquired the high-grade Green Bay copper-gold project on the Baie Verte peninsula in Newfoundland, Canada, earlier this year for the knockdown price of $65 million in staged payments.
The knockdown price reflected past difficulties at the mine under the previous under-capitalised owner which spent some $250m getting the project into production. AuTECO is taking a step back first by planning to grow the resource base, which already has a handy 811,000t on a copper equivalent basis.
Given all the existing infrastructure, there is the potential for an early restart from particularly high grade material within the resource, a grade not all that different to what Sandfire (ASX:SFR) use to mined at the fabulously profitable DeGrussa mine in Western Australia.
The potential to re-establish Green Bay as a 40,000 tonne-a-year producer, just as the copper market moves in to the forecast long-term bull phase, is yet to be reflected in AuTECO’s $170 million market cap.
There are not many 40,000tpa producers around. Two valid comparisons – the CSA mine in Cobar and Foran Mining’s operation in Canada – give a feel for what AuTeco is pitching for in the next couple of years.
The CSA mine was recently acquired for $1.7 billion by the former special purposes vehicle and now US-listed Metals Acquisition, while Foran has a $C1 billion market cap.
Normally at least, all that might be considered an over the top comparison. But AuTECO boss Steve Parsons is the guy who took Australia’s newest gold producer, Bellevue (BGL), from an exploration project to a 200,000oz-plus producer (after ramp up) in the space of 4.5 years.
He came out of executive retirement to head AuTECO and the Green Bay acquisition and reminded those at the conference that he and his team have a record of delivering on what they promise.
Meanwhile, Caravel has just upgraded the resource for its low-grade but big tonnage namesake project in WA to more than 3Mt of copper.
It makes it one of the biggest deposits held outside of the major miners, with the latest update also coming with 895,000oz of gold and 46 million ounces of silver – a possible source of by-product credits.
The stock, and its extreme leverage to the copper price thanks to 65,000tpa production potential, has been mentioned here previously. Canaccord has a 65c price target on the stock. It traded on Thursday at 15.5c.
While the copper bulls are on the rise, the gold bulls are in stampede mode now that the price shackles of rising US interest rates looks set to be broken early next year.
At the head of the herd is UBS. It reckons gold is now ready to scale new heights in 2024 and 2025.
During the week it lifted it gold price forecasts to $US2,085/$US2,200/$US1,950oz in 2024, 2025 and 2026 respectively.
“We expect gold to benefit from Fed cuts, US recession, lower rates globally and a weaker US dollar over the next couple of years,” UBS said.
The forecast and commentary is not great for the broader market but clearly a positive for the gold price which is currently hovering around $US1,960/oz. That is up from the June half average of $US1,934/oz.
So there has been frontrunning of the interest shackles being broken. But not necessarily in the gold stocks. UBS nominated Evolution (ASX:EVN), De Grey (ASX:DEG) and Gold Road (ASX:GOR) as buys.
Should the gold price work its way back over $US2,000/oz, investment dollars will drift down to the mid-tiers and juniors. A better year in 2024 is in the offing for sector.
Patriot Battery Metals: The Canadian disconnect
The three-way battle – it could be five-ways if speculation around Pilbara Minerals (PLS) and China’s CATL is on the mark – for Azure’s and Mark Creasy’s Andover lithium discovery has carried the implied valuation of the barely 12-month old find to a dizzying $3 billion.
Andover is a great find all right but a maiden resource is still some way off. Still, WA billionaires Gina Rinehart and Chris Ellison have been building their positions on the Azure register in opposition to the now out-of-the-money bid from SQM.
Then there is the talk that Pilbara and CATL have joined the party. Where it ends up is anyone’s guess. What is more certain is that WA billionaires and the lithium corporates are valuing lithium assets at much higher levels than the market had been.
WA lithium assets at any rate, because the $3 billion implied value of Andover (a 60:40 joint venture between the $1.85 billion Azure and Creasy privately) suggests a major disconnect has emerged with the Canadian lithium market.
Patriot Battery Metals (ASX:PMT) is the prime example. It has a $1.2 billion market cap yet unlike the $3 billion value of Andover, it already has a Top 10 in the world hard-rock resource under its belt at its Corvette project in the James Bay region of Ontario.
The 109.2Mt tonnes at an impressive 1.42% lithia is the start of the story, with drilling ongoing to extend the current mainstay CV5 pegmatite and to see if it actually links up with the CV13 pegmatite off in the distance.
The apparent valuation disconnect between PMT and Azure/Andover is no surprise to Ken Brinsden, the guy who got the now $11 billion Pilbara into production, and who. after taking a short sabbatical on leaving the company, signed up as chairman of PMT.
Speaking on the sidelines of the RRS Summer Series conference, Brinsden said Rinehart’s Hancock Prospecting and Ellison’s Mineral Resources (ASX:MIN) were looking for both diversification and projects with longevity beyond that which iron ore perhaps offers.
“You can then backfill the valuations being paid by the scale of the projects and their location in the Pilbara, a favoured location and very much in their backyard,” Brinsden said. “All those reasons justifies what they are up to.”
Brinsden then started punching:
“But if you were thinking about value, I don’t think you can look past James Bay and Patriot,” he said. “I mean our project is probably a lot more advanced having printed a maiden resource, and now heading down the development journey.
“And I have got to say North America is a pretty good place as well. I think James Bay is really well placed for the build out in the North American and European supply chain and that‘s where there is going to be a lot more growth.
He said the US inflation reduction act was motivating the building of chemical conversion facilities which will have to be fed with raw material.
Patriot is moving down the mine-to-conversion pathway in a non-binding study into a chemical conversion plant in Canada or the US with Albemarle, the US lithium giant and the failed recent bidder for the Kathleen Valley lithium developer, the $3.6 billion Liontown (ASX:LTR).
The study is part of a broader deal announced in August when Albemarle took up a 4.9% (fully diluted) stake in Patriot.
Some have suggested the stake means that Patriot is immune from the sort of M & A activity sweeping the WA lithium scene, and could be a reason for the apparent disconnect between its market cap and that of its Aussie peers.
Brinsden does not agree. “We think there is a lot more value to be added for our shareholders so we have been very deliberate in our strategy and only allocated them a minority stake,” he said.
“To understand the big picture you have to understand how important is to connect the mine to a chemical facility. It is an important conversation to have, especially in the emerging North American supply chain, because the truth is that there are no chemical plants there today.
“We like the idea that can be done constructively and in a friendly manner, and ultimately, good commercial outcomes for everyone involved, including our shareholders.’’
“That’s why we were prepared to give Albemarle a minority stake subject to a standstill agreement. We are definitely not a closed shop, put it that way.’’
PMT was trading lower in Thursday’s market in line with the broader market while Azure was up. Go figure.
Finally, it can be said that by extension, the disconnect between valuations between the WA and Canadian lithium market extends to those ASX juniors that have gone hunting in Ontario and elsewhere in Canada rather than compete for prospective ground in the crowded WA market.
The run up in the iron ore price to 8-month highs of around $US130/t has attracted a lot of commentary because it is counter to the discussion on the economic slowdown in China.
But the reality is that the run up in the price is a supply story, not a demand story. It means that iron ore buyers will continue to give all the encouragement they can to bring forward new supplies, and a $US130/t does just that.
BHP, Rio Tinto and Fortescue are the most exposed to iron ore’s price strength but it is the juniors that have the greatest leverage to the upside.
Mark Creasy’s 53%-owned CZR Resources highlighted that in its recently released definitive feasibility study into the development of its Robe Mesa iron ore project in the Pilbara. The base case used $US90/t iron ore prices and out popped NPV of $256 million, upgraded to $820 million at $US117/t iron ore.
And here we are with $US130/t iron ore. It is interesting stuff for a company with a $50m market, even more so when corporate appeal is added in to the mix. The project sits on either side of Rio Tinto’s Mesa F project.
Piggy-backing CZR’s project off Rio’s existing infrastructure would work wonders for CZR’s project’s already impressive economics. So it has got to be thought Rio could well make the shared deposit its own by taking out CZR, or bidding for its Robe Mesa asset.
If it doesn’t, Rio runs the risk of some other group making the play.