DURING the recent profit reporting season, there was a sense of indignation from the likes of BHP Billiton and Rio Tinto when they got around to talking about the sharp retreat in copper prices in the back half of last year.
Little wonder. Between them, they produce more than 5 billion pounds of the red metal. So when copper got the wobbles last July and proceeded to fall some 25 per cent by late January to $US2.45 a pound, they were feeling some real pain.
Copper has since recovered to $US2.65 a pound. That’s down from last (calendar) year’s average of $US3.10, and it is around the level that the indignation of it all for the biggest of our miners came through loud and clear in their profit briefings.
Doesn’t the market understand demand for copper remains compelling as emerging economies transition to consumption-led economies? And doesn’t the market understand the supply side will become challenged because of declining ore grades at mines and the lack of quality new development options?
Those two questions were posed by BHP, which also reckons that more than 60 per cent of the potential new supply available to meet long-term demand requires an “inducement’’ price of more than $US3.50 a pound.
Rio’s view on copper’s long-term outlook is pretty much the same. But for the moment at least, the copper price is what it is, Ârobbing the big producers of what had been a handy offset to price weakness in the other commodities which they are long in, notably iron ore (BHP and Rio), and oil (BHP).
The taking down of copper in the back half of 2014 was a response to the broad expectation that 2015 would see the market in surplus by upwards of 500,000 tonnes.
But recent hits to supply — including the production loss at BHP’s Olympic Dam because of a ball mill failure — have changed the surplus expectation to one of a balance in supply and demand, possibly a supply deficit if US house sales get a move on and China cranks up its power infrastructure spend.
That’s why copper has picked up in recent weeks from that $US2.45 a pound low in late January. BHP and Rio don’t need words of comfort on copper’s outlook from others but there is no denying it doesn’t hurt when those words come from Glencore, with its second-to-none market intelligence from its global trading activities.
Glencore, a copper producer itself with a fourth biggest global ranking, talked about the potential for the copper market to come in to balance quicker than most were thinking back in December. More interesting though was this week’s commentary around the price weakness, which it put down to a “tremendous’’ amount of shortselling in the metal.
That was compounded by tighter credit in China and the annual demand pause around Chinese New Year, according to Glencore’s copper boss Telis Mistakidis. The result was a “void’’ in terms of Chinese buying from the middle of December until the end of February. “Now, the Chinese are back,’’ Mistakidis said. Now the proud owner of a $90 million London “flat’’, he is not about to move in next door to any of us. But at least his insight in to the copper market comes for free.
AusQuest (AQD)
ON the basis that copper is in line for a price rebound, and that there will be a resultant greater understanding of the need to find the next round of mine developments, the active junior explorers in the red metal could be in for a better year.
The use of active is deliberate because the cash squeeze on the sector has greatly reduced the number of juniors looking for the stuff, itself a positive for the long-term supply/demand equation.
There is an alternative for them — find someone else to spend the money.
That is exactly what AusQuest has managed to pull together in Peru, with its gutsy initiative to spend some money on geophysical work uncovering big copper-gold targets on Peru’s southern coastal belt, parlaying it in to free carried joint venture deals with some local heavyweights, Southern Copper and Zahena. The agreements cover up to $34 million in option payments and in-ground exploration expenditure on four targets identified by AusQuest in return for the majors earning 70 per cent interests, with the first of the drilling programs to kick off in the first half of the year.
All very interesting for a stock trading yesterday at 2.1c for a market capitalisation of $6.3m. But AusQuest also has Canada’s Semafo funding a pretty intense gold exploration push in Burkina Faso, starting about now, and it is a player in the nickel hunt in WA’s Fraser Range.
The Fraser Range ground position is to the east of Sirius’ Crux prospect which may or may not be the next best thing to Sirius’ world-class Nova-Bollinger discovery 60km up north. While AusQuest is working up some drill targets of its own, good news from Crux won’t hurt market interest in the stock.
Altona Mining (AOH)
THIS space has banged on before about Altona Mining (AOH) following the sale of its copper project in Finland to Sweden’s Boliden.
After it returned some $80m to shareholders, Altona was left cashed up and with the undeveloped Little Eva copper/gold project in Queensland as its main go.
Michael Slifirski at Credit Suisse has crunched the numbers and reckons that at Altona’s current share price of 10c, the market is giving only $7.6m above cash backing for Little Eva.
He reckons that is on the mean side as his net present value-derived value for Altona is more than twice the current share price at 22c a share.
