Hot copper: what’s driving the latest charge?

Three potentially significant discoveries over the past week have returned copper to the radar screens of investors, with the bonus being that demand for the metal appears to be outstripping supply, which can only mean a higher future price.

Recharge Metals (ASX: REC), Tempest Minerals (ASX: TEM) and Culpeo Minerals (ASX: CPO) have all enjoyed spectacular share price boosts from their discoveries in WA and Chile, with their share price moves over the last five trading days the best way of telling the story.

Recharge is up $0.22 (175%) at $0.35 thanks to its promising results from drilling at the Brandy Hill South project in WA’s Murchison district.

Tempest is up $0.054 (131%) at $0.095 thanks to promising drill results from its Orion target in the Meleya project close to the Golden Grove polymetallic mine near Yalgoo in central WA.

Culpeo is up $0.21 (190%) at $0.32 thanks to a 200m intersection of copper sulphides in its first hole at the Lana Corina project in Chile.

Most copper-exposed stocks have shared in what’s shaping as a copper rush sparked by the metal’s multiple uses in the old economy where it has deep markets in transport, construction and electronics and the new economy where it is a key player in energy transition.

Other copper stocks to watch

Among the stocks worth watching for their appealing copper exploration assets are: QMines (ASX: QML), AuKing Mining (ASX: AKN), Peel Mining (ASX: PEX), Alderan (ASX: AL8), Odin Metals (ASX: ODM), Staveley Minerals (ASX: SVY), OZZ Resources (ASX: OZZ), Kingston Resources (ASX: KSN), Zenith Minerals (ASX: ZNC), and New Century Resources (ASX: NCZ).

A few other small caps with some potential copper exposure to keep an eye on, include: Dundas Minerals (ASX: DUN), Nimy Resources (ASX: NIM), and Western Mines Group (ASX: WMG).

While it is discovery news driving the small end of the copper sector, it is events at the top end which will ensure that what’s happening is not a flash in the pan.

Copper market

Multiple factors on both sides of the copper business are at work in the price, including:

An ongoing production deficit, which industry research body Lisbon-based International Copper Study Group (ICSG) said totalled 475,000 tonnes last year – a modest improvement on the supply shortfall of 484,000t in 2020.

On the other side of the business, there is a strong recovery in Chinese copper demand.

Investment bank Citi estimated this drove a 4.4% rise in the first two months of the year – the highest year-on-year growth increase since last June.

Another factor driving the price is a possible significant increase in the cost of copper production in Chile, the world’s largest producer of the metal.

There is also concern that Chile might introduce new laws, which make the country less attractive as a mining investment destination – a point made by BHP (ASX: BHP) at the world’s top copper conference held this week in the country’s capital, Santiago.

BHP is considering a US$10 billion investment to expand its Chilean copper business but only with “legal certainty”, the head of the company’s copper division, Ragnar Udd, told the CRU-CESCO copper conference.

Chile’s new Mines Minister, Marcelo Hernando, promised at the conference that the country will not lose its competitiveness, even as plans to possibly nationalise copper and lithium remain on the agenda of a recently elected left-leaning government.

Growing concerns about future water supplies have added to the pressure cooker, with Anglo American, one of the miners, looking at investing up to US$1 billion in a seawater desalination plant.

Meanwhile, uncertainty remains about the future supply of Russian copper as Ukraine war sanctions start to bite.

Among the Russian projects which could face delays are the US$7 billion Udokan mine in the far east of Siberia and the US$8.5 billion Baimskaya project in the even more remote Chukotka region, which is 3,000km from the nearest railway.

Long-term market changes

Some analysts see the potential for a copper price correction, especially as the current high price might be leading to some demand destruction and substitution.

However, that might not be the case, because copper is an essential metal and substitutes in some applications, such as aluminium, are also close to all-time price peaks.

Wood Mackenzie, a leading research house, is concerned that the overall increase in metal prices could lead to long-term changes in the market.

Robin Griffin, vice president of Wood Mackenzie said mining company profit margins are “way above historic norms” and such a drastic divergence of price and production costs cannot last indefinitely, even if there is an indefinite “stranding” of Russian supply.

But Griffin’s concern about high prices destroying demand are not being reflected in the underlying supply-and-demand fundamentals as shown in the latest ICSG reports and sliding stockpiles on terminal markets such as the London and Shanghai metal exchanges.

The London Metal Exchange copper stockpile has dropped from 250,000t to 80,000t over the last seven months, prompting investment bank Goldman Sachs to warn that the loss of Russian copper from the market could be a significant development.

Goldman Sachs believes investors are “mispricing Russian supply risk” with a million tonnes of Russian copper potential missing in action.

The bank expects copper to rise from its current already elevated US$4.65 a pound to a new all-time high of US$5.50/lb over the next 12-months.

It’s forecasts like this, which appear to justify a number of recent, and very high-priced copper deals, including the $1.5 billion acquisition of the CSA copper mine in NSW by the special purpose business, Metals Acquisition Corp.

The company is backed by former Northern Star Resources (ASX: NST) boss Bill Beament, and former Fortescue Metals Group (ASX: FMG) chief executive officer Nev Power.

Electric vehicles accelerating copper demand

Citi’s latest copper analysis via its China Copper End-Use Tracker found that demand was especially strong in the automotive (electric vehicles), industrial and transport sectors.

The importance of EVs in the copper market has been well reported over the past few years because they use much more copper than internal combustion vehicles, with Citi’s copper tracker fleshing out the theory by calculating that copper demand in the automotive sector rose by 20% in the first two months of the year.

But Citi also warned that China’s copper appetite could decline over the next few months as the latest Covid-19 outbreak forces the lockdown of major population centres, including Shanghai.

Critical mineral

Copper is such an important metal in so many industries that it is fast becoming a commodity of national concern, as seen in Chile’s talk of nationalising (or should that be renationalising) the country’s copper industry.

Just how important copper might become was the subject of a thoughtful column in London’s Financial Times newspaper earlier this year from one of its senior writers John Dizard.

In order to ensure an orderly energy transition away from fossil fuels to renewables Dizard suggested a revised “Circular 5” which most people have never heard of.

The US Government issued a Circular 5 in 1949 to create a guaranteed market for uranium, which was critical for weapons and power generation.

The government plan involved provision of an assured price and a 10-year purchase contract, plus bonus payments for significant uranium discoveries.

It worked for uranium and it’s a plan that might appeal to governments if the copper price rises too far – or if supply is crimped in some way.

This is especially the case as most governments back the transition to renewable energy and are slowly discovering that it can’t happen without a lot more copper.