Bad Chinese news seen as good news for copper price

China continues to talk down the prospect of more stimulus measures to fire-up the economy.

But metals markets are betting more stimulus is on the way, with bellwether copper posting some nice gains in response.

The copper price (3-month) rose by 1.18% in overnight markets on Wednesday to $US4.44/lb. That remains well short of recent record levels but is nevertheless 15% higher than last year’s average of $US3.84/lb.

ANZ’s senior commodity strategy analyst Daniel Hynes said the overnight kick in the price was a response to the People’s Bank of China saying it was studying how to implement government bond trading.

“The proceeds from additional sovereign bond issuances could be used to boost infrastructure investment and address risks stemming from the property sector,” Hynes said.

“This comes amid signs of a tentative rebound in demand, with Chinese copper fabricators reporting an increase in orders in recent weeks. Spot copper prices on the Comex in NY have also pushed back above later-date futures, in a sign of tightness.”

In addition, the supply challenge – which is likely more important in the near-term than the demand side of the equation – continues to be supportive, with the seemingly hapless Anglo American saying production at its Los Bronces copper mine in Chile would be down by 30% due to plant maintenance.

ASX COPPER:

Needless to say, the better tone to the copper price thanks to the China stimulus hope thematic was welcome stuff for the local copper stocks, which have given back much of the gains from when the copper price peaked at $US5.20/lb in May.

Forecasts abound that copper will get back to more than $US5/lb in the near-term. But until it happens, perhaps on a full-blown stimulus effort by China, the ASX copper stocks will have to make do with what is still a historically high price.

At least it can be said that the more bearish forecasts of $US3.85-$US4/lb for the next two years – that is before the profound copper deficit BHP and others are forecasting takes effect – are unlikely if China does hit the stimulus button in a major way.

What copper price is plugged into company valuation models obviously has a big impact on share price targets. It’s a point highlighted recently in a research note on FireFly (ASX:FFM), mentioned here last week when it was trading at 69.5c, and which is now trading at 76.5c.

Barrenjoey initiated on the stock this week and set a price target of $1.60, using a long-run copper price of $US5/lb, recently increased from $US4/lb.

“We see upside risks to historical demand growth and supply constrained by capital and operating cost inflation,” Barrenjoey said.

Add in the developing prospect of China stimulus and the $US4/lb copper that some in the market are still using in their stock valuations is almost certainly a thing of the past (Goldman Sachs has tipped $US5.45/lb by the end of the year), suggesting the copper stocks have some serious valuation upside.

DEVELOP:

Talking about copper, Bill Beament’s $10.5m options exercise this week in Develop (ASX:DVP) likely presaged that financing for the return of the Woodlawn copper-zinc mine can’t be far off now.

Wrapping up the financing – Beament has made clear in the past that it will be debt and not equity, just as you would expect from a 25% (fully diluted shareholder) – presents a significant re-rating event.

Beament is the underground mining engineer who previously took Northern Star (ASX:NST) from junior gold explorer to what is now the biggest listed gold producer in Oz with a $15.2 billion market cap.

Life post Northern Star is all about Develop, a Mineral Resource’s (ASX:MIN) style hybrid with a cashflow-producing mining contracting business and a bagful of hard mining assets which apart from Woodlawn, include the Sulphur Springs copper-zinc project in WA and the Pioneer Dome lithium project, also in WA.

Woodlawn had $250m spent on it by previous owners and exploration and development work since its acquisition by Develop means it is pretty much all dressed up and ready to go, sans financing.

But as suggested, this week’s option exercise suggests financing completion for what is a low- cost development anyway (maximum cash down of $67m) is close at hand. In a $US4.44/lb and rising copper market, it should be a snack.

Beament has raised the prospect previously that financing Woodlawn could include traditional project finance, and offtake financing, and potentially selling a minority interest to a strategic investor.

Selling a minority interests makes sense after the financing is complete. And as Beament has said previously, selling a minority interest would enable the company to recycle some capital.

Recycled capital would be nice but assuming demand for copper exposure spills over into Develop receiving full see-through NPV in selling a minority interest, a re-rating of the stock would be triggered.

Assume the sale of 20% of Woodlawn for $132m (20% of its pre-tax NPV of $658m), implying $526m value for the remaining 80%.

Develop last traded at $2.22 for a market cap of $540m. In the above scenario then, there is next to nothing in the market cap for the mining contractor business, Sulphur Springs or the Pioneer Dome project.

ORION:

Another budding copper-zinc producer on the ASX, Orion Minerals (ASX:ORN, trading at 1.5c for a market cap of $90m), is cock-a-hoop over the recent South African election, which has resulted in the African National Congress having to share power for the first time since the end of apartheid in 1994.

“The sun is finally shining on us,” was how Orion’s South African-based CEO Errol Smart put it during a company webinar on Wednesday. Strong copper and zinc prices are adding to his sense of elation.

The stock market has taken off, the rand is appreciating and the likes of JP Morgan have upgraded SA assets from underweight to overweight.

So there is a lot of hope that the new Government of National Unity can deliver on promised structural reforms to address basic infrastructure (electricity) and service delivery shortcomings, and rein in fiscal deficits.

It is just the sort of investment backdrop Orion could hope for as it sets about having two projects in production within 18-24 months.

The projects – Prieska copper/zinc and Okiep copper - sit 450km apart on either side of the upper reaches of SA’s Northern Cape province. Orion plans to have definitive feasibility studies (DFS) for both projects ready for release in September.

Earlier studies suggested the potential for Prieska to become an annual producer of 22,000t of copper and 70,000t of zinc. Okiep too is a historic producer which could well relive its former glory as a high-grade producer of 50,000t of copper.

Needless to say, that sort of upside is yet to be reflected in Orion’s market cap.