Copper threatens to outshine lithium, putting leveraged juniors in the frame

Forecasts of big supply deficits by the likes of Glencore suggest the red metal is about to get red hot, making smaller stocks such as New World Resources an investor’s playground.

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The ASX copper sector is laying down a challenge to the hot-again lithium space as the place to be in 2023.

Last year was a topsy-turvy time for the red metal. It soared early in the piece to record levels of $US5/lb only to crumble to $US3.30/lb in July, with the price then going into recovery mode in the back half of the year.

So much so that copper closed 2022 at $US3.80/lb, which was also its average for the December quarter. The price has taken off since on optimism around China’s end to COVID lockdowns and supply disruptions across Latin America.

Copper was last quoted at $US4.20/lb. While not at the record levels of early last year, it is a fantastic price. The question now is can it become more fantastic and do something like lithium did in 2022 and go off the charts.

The investment bank types who fancy themselves as commodity price forecasters would say not. But industry types like Glencore, with its deep knowledge of the real world it gathers through its commodities trading arm, suggest otherwise.

Glencore doesn’t give out price forecasts but its CEO Gary Nagle did the next best thing at a company briefing in December.

“There’s a huge deficit coming in copper, and as much as people write about it, the price is not yet reflecting it,” Nagle said. Copper was $US3.85/lb on the day and its 9% price improvement since suggests people were listening.

Glencore estimates a there could be a cumulative gap between projected demand and supply of 50Mt between 2022 and 2030. That’s scary stuff.

Ever the supreme trader, Nagle said Glencore won’t be proceeding with its bagful of copper expansion options until the world “ is screaming for it”.

That says something about its price expectations for the metal central to the world’s decarbonisation.

As it is, exposure options to the copper thematic on the ASX will look decidedly thin once BHP wraps up its $9.6 billion takeover of OZ Minerals. BHP and Rio Tinto are big producers but remain heavily weighted to iron ore.

That necessarily diverts what attention OZ used to get as the number one copper counter on the ASX to Sandfire (SFR) and 29Metals (29M) which become the number one and two copper plays on the ASX once OZ disappears.

Nothing wrong with that but there is even greater leverage amongst the ASX copper juniors to copper prices that a world “screaming” for supplies could deliver in coming years.

New World Resources:

Copper’s price bounce to $4.20/lb since the start of the year has been enough to turn investor attention to the juniors.

One to benefit has been New World Resources (NWC), which has moved up since the start of the year from 3.3c to 4.5c this week, giving it a market cap of $95m.

It makes for a happy bunch of subscribers to its $8m raising from a placement in December at 3.2c a share.

The funds will enable NWC to keep up a cracking pace at its Antler copper project in Arizona. The former small-scale mine (last production was in 1970 when copper was US45c/lb) was only picked up by NWC in March 2020.

Drilling by NWC since led to a maiden resource estimate in November 2021 for the VMS deposit which was upgraded in November 2022 to 11.4Mt grading 4.1% copper equivalent (2.1% copper, 5% zinc, 0.9% lead, 32.9g/t silver and 0.36g/t gold).

NWC used the smaller maiden resource estimate to complete a scoping study that pointed to a 1Mtpa mining and processing operation costing $US200m and capable of generating annual EBITDA of $US135 million in years 2-9.

That is interesting itself for a $95m market cap company. But the latest resource upgrade and exploration upside – both at Antler and along strike at nearby prospects that are about to be tested with the drill bit – points to a bigger story emerging.

It starts to all come together in 2023, with funding from the placement to fund Antler and nearby drilling, completion of a pre-feasibility study, and the submission of an underground mine permit application in what is a mining friendly jurisdiction.

Blue Ocean Equities has initiated coverage on the stock, setting a 25c price target.

“As a high-grade deposit with excellent vertical and lateral continuity, Antler points to the magical combination of a high resource to mining inventory conversion, low capital intensity and low opex (negative copper C1 cash costs after co-product credits) – arguably the sweet spot for a junior miner),” Blue Ocean said.

Lithium:

The lithium stocks have found their feet again after being oversold in response to a 10-15% lithium chemicals price fall price towards the end of 2022.

A number of factors are behind the recovery – sensational EV December quarter growth figures, China’s lifting of COVID lockdowns, and a realisation that the price weakness only took prices back to fantastic levels from the super-fantastic.

And just like the copper market, the over-riding thematic is that a huge supply deficit is taking shape, such is the demand coming from EVs.

US lithium major Albemarle has been in the business for decades and has a better fix than any other on where the lithium market is headed. During the week it increased its global demand forecast by 15% to 3.7Mt in 2030 on EV demand, and the energy transition impacts of America’s Inflation Reduction Act.

It means 100 new projects are needed to meet the fivefold increase in demand from the here and now. It is not going happen, creating a supply deficit to underpin elevated pricing for the long-term. And just as is the case in copper, the required supply response needs to be incentivised by high prices.

Even with elevated prices for the long-term, there is no guarantee that new projects will come forward in a timely manner to close the supply gap.

It was a point made by Pilbara’s MD Dale Henderson at the group’s recent December quarterly briefing. He said bringing supply to market is incredibly hard.

“We know that because we've done it and it will not be easy, it is not straightforward, it does not matter which raw materials lithium supply that you're dealing with whether it be brines, hard-rock or clay, they're all difficult, they're all bespoke. Capital helps, but it does not guarantee speed,” Henderson warned.

Those analysts out there tipping that their (overly optimistic) supply response forecasts will bring lithium prices back to earth have been told.

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