Hunt for ASX copper stocks hots up as investors prepare for supply deficit

There are not many to choose from, but Sandfire’s sum-of-the-parts highlights a value opportunity while shares in juniors such as Stavely and Venturex are already edging up. Plus, early De Grey backer, DGO Gold, wades into a new junior.

Copper has been mounting a challenge to take over from gold as the glamour metal, prompting renewed investor interest in the red metal.

With gold seemingly locked into sideways trade until the US election is decided, copper has been shooting the lights out.

It last traded at $US3.17/lb, which was a 28-month high. The current price compares with the $US2.50/lb average of the June half and the metal’s 2019 (calendar) average of $US2.72/b, and $2.96/lb in 2017.

The strong economic rebound in China – it imports 80% of its copper needs and consumes about 50% of global demand for refined copper metal – is the obvious driver behind the metal’s rebound.

But bigger and longer-term thematics are also at play, namely copper’s key role in global decarbonisation and the structural deficit in supply expected to grow from around 2025 when falling grades/mine depletion becomes a real issue.

All that was reflected in the optimism towards copper in a poll by Macquarie for LME Week. Asked which metal was their preferred long position in the next 12 months, copper was the clear winner with a 40% nomination rate.

Near-term production from the few new copper mines out there, and an increase in scrap availability and South American production as COVID-19 eases, means copper could be challenged before its higher levels become a permanent fixture.

But for the time being at least, the hunt for ASX exposure to the red metal is stepping up.

Copper producers:

As is often bemoaned, there is not much on offer in the ASX copper producer space. It’s a case of OZ Minerals (OZL) or Sandfire (SFR).

OZ has been a star performer thanks to growing production from its Carrapateena copper-gold development in South Australia while Sandfire has underperformed as mine depletion looms at its mainstay DeGrussa/Monty operation in WA’s Bryah basin.

On the assumption that OZ is being priced for perfection, Sandfire comes in from the cold as a value proposition, notwithstanding the two-and-a-bit years or so left at DeGrussa/Monty, assuming no immediate exploration success.

It last traded at $4.65 for a market cap of $827m.

Apart from the volume of post-tax cash to be reamed from DeGrussa/Monty in its latter years – say $500m or so – Sandfire has about $330m in cash at bank, a 16% stake in Adriatic Metals (ADT) worth $60m, and large exploration positions in Australia and overseas that would have to be worth another $100m or so.

All that is before the two development projects that Sandfire has assembled to take over from DeGrussa/Monty – Botswana copper and Black Butte copper in the US.

Sandfire’s current value suggests the market is reluctant to give the projects much value. Fair enough too as they are not in production. But to give them next to nothing as Sandfire’s valuation figures above suggest – and in a rising copper market to boot – seems to be seriously on the mean side of things.

Upcoming derisking events could turn that around in a flash.

A DFS on Botswana is likely in mid-November, with production early in 2023 possible, starting out at 30,000tpa of copper from the first deposit, rising to 55,000tpa within 12-18 months from two deposits.

Exploration upside along Sandfire’s portion of the Kalahari belt is extreme, so the 55,000tpa rate could well be just the start of the story.

The high-grade Black Butte is close to emerging from a feasibility study and is expected to show it is good for 20,000-30,000tpa of copper. Like the initial development in Botswana, it should be thought of as the basis for the development of a regional processing hub, with other deposits tied in over time.

Copper juniors:

Copper’s strength is already rubbing off on the junior explorers, in a big way too.

Stavely (SVY) is a case in point. It popped 8c or 11.7% higher on Thursday to 76c on no news, other than copper’s strong overnight gain.

But after a quiet period, there is a strong newsflow coming from Stavely’s namesake copper-gold project in western Victoria where it has been following up last September’s exciting Cayley Lode discovery.

Results from the drilling program have been delayed by Australia’s exploration boom (for gold at any rate) choking the flow of lab assay results.

Stavely executive chairman Chris Cairns told a webinar on big-time copper porphyry exploration put on by Arlington Group last week that it was like watching a python swallow a chicken.

“We know the assays are coming through, but they haven’t got through to the other end yet,’’ Cairns said.

“(But) I expect we will have a very good newsflow once they start to come through.’’

Stavely’s drilling has been focussed on defining a near-surface resource for part of the Cayley Lode which would be an addition to the long known-about shallow chalcocite-enriched blanket of 28 million tonnes at 0.4% copper at the Thursday’s Gossan prospect. The idea is to get going on a shallow development.

That is exciting enough, but excitement levels will go up another notch next month when the company gets going with two deep (1500m) holes to test the big porphyry targets at depth presumed to be the source of the metal in shallower positions.

Venturex (VXR) was another junior to benefit from copper’s glow, rising 1c or 8.3% to 13c on news it had started an exploration program at its Sulphur Springs copper-zinc project to the south-east of Port Hedland. It closed at 12c.

Sulphur Springs is a development candidate as it stands in the rising base metals market (17.4mt grading 1.3% copper and 4.2% zinc) but a new discovery along the prospective 27km of the Panorama trend would be a handy sweetener.

The same goes for Orion (ORN) which has brought in two diamond rigs to test some high-priority targets on its Areachap tenements in South Africa’s Northern Cape, home to its development ready Prieska copper-zinc project (30.4mt at 1.2 copper and 3.7% zinc).

It is a proven mineral belt (Prieska itself was a big producer from 1971-1991). One of the targets, the Kielder prospect, is all of 15km from the planned Prieska mill and was “discovered’’ by Newmont in 1976, returning shallow copper and zinc hits worthy of following up now with modern exploration techniques.

Orion last traded at 2.9c.

One of the most leveraged juniors to copper’s price strength is Caravel (CVV), trading at 10.5c.

Its namesake project 150km northeast of Perth in WA’s central wheatbelt comes with a big but low-grade copper resource.

A scoping study in May last year suggested the deposit could produce 45,000tpa of copper in the first five years, rising to 65,000tpa in years six to 23.

At a $US2.70/lb copper price, the net present value was estimated at $616m, trebling to $1.49bn at $US3.30/lb copper.

Not all that interesting at the $US2.50/lb copper average of the June half. But real interesting now that copper is on the march.

DGO Gold/Yandal Resources:

If there was such a thing as the “Stockpicker of the Year” award it would have already been minted and dispatched to Ed Eshuys, executive chairman of the Melbourne-based explorer/investor DGO Gold (DGO).

DGO was an early arrival on the share register of De Grey (DEG) which has rocketed from a 5c to $1.24 since its Hemi gold discovery in the Pilbara in December last year.

De Grey is now valued at $1.56 billion, and DGO’s 16% stake - assembled at a cost of $43m before and after the Hemi discovery – is now worth a cool $251m, an amount that matches DGO’s market cap, even though DGO is much more than its De Grey investment.

Today’s interest though is in DGO’s recent acquisition via a placement of an 8.7% shareholding in Yandal Resources (YRL), with the 8m shares picked up at 50c as part of Yandal’s $6m placement to accelerate its WA gold exploration effort, including a campaign on the Yandal greenstone belt.

It represents a bit of a homecoming for Eshuys as back in the early 1990s when he was exploration director of Great Central Mines, he discovered Jundee at the northern end of the belt, and Bronzewing down south.

The multi-million ounce finds continue on today inside of the recently enlarged Northern Star which can also be found on the Yandal register.

Yandal last traded well above the placement price at 61.5c, presumably on the basis that it if it is good enough for Eshuys/DGO, then it is good enough for me.

Yandal has just started an air-core drilling program across a number of brownfield target areas on a big chunk of the belt which sits between Jundee and Bronzewing.

In announcing the new position in Yandal, Eshuys said: “We rate very highly the work done by the Yandal team and look forward to contributing our technical expertise and strategic thinking alongside our capital backing.”

And just to emphasise DGO is more than its De Grey investment, the company has kicked off a drilling program looking for DeGrussa-style copper-gold targets and sediment hosted gold at its Bryah project. Results could be available next month.

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