The growing disconnect between copper stocks and outlook for copper demand-supply

Red metal looking like lithium of two years ago as recession fears offset low inventories and surging demand forecasts; It points to leveraged upside for juniors like Orion and Peel.

Former Pilbara Minerals boss Ken Brinsden was a lone wolf in the lithium space two years ago when prices for spodumene concentrates grading 6% lithia were all of $US360/t.

Despite the miserable pricing, Brinsden said a wave of demand from the battery sector was coming to fuel the electric vehicle and renewable energy storage revolution and that the lithium industry would struggle to keep up.

Pilbara was a sub-$1 billion company at the time. And here we are now with $US8,000 spot pricing for spodumene concentrates and Pilbara sporting a $16 billion market cap.

What Brinsden was talking about was a disconnect at the time between what was taking shape on the demand side of things and the share market’s refusal to look forward to price lithium equities accordingly.

A similar theme is playing out in the copper. The copper price is down heavily for the year but at $US3.40/lb it is still at a level that only the most challenged of mines don’t make money.

More than that though is the parade of non-equity market players that reckon the copper market is headed for a mighty supply deficit as the industry struggles to keep up with the demand coming from the world’s decarbonisation efforts. Sounds familiar.

At some point, the seemingly unattainable supply challenge will force an increase in the copper price to the incentive levels required to encourage more production. Whether that means a 30-50% increase in prices for the red metal remains to be seen.

But higher prices are coming. Why else would BHP have recently sounded out OZ Minerals about a $8.3 billion or $25 a share bid? OZ rejected the approach and was last trading below the bid at $24.55 a share.

By BHP’s reckoning, demand for copper “takes off” in 2025. OZ’s problem in the here and now is that the copper price has weakened because of recession fears and a China slowdown due to its COVID response – all short-term factors in light of the multi-decade decarbonisation challenge.

It means both OZ and copper are disconnected to the bigger story of what is coming in the copper market.

New voices warning that a copper supply crunch is coming include those from the commodity consultancy firm Wood Mackenzie and one of the world’s biggest commodity traders, Trafigura.

WoodMac said that decarbonisation “presents an almost unattainable mine supply challenge, with significant investment and price incentives required”.

Under its accelerated energy transition scenario, 9.7 million tonnes of new copper supply – the equivalent of nine Escondida’s, the world’s biggest copper mine owned by BHP and Rio Tinto in Chile - is needed over 10 years.

“To successfully meet zero-carbon targets, the mining industry needs to deliver new projects at a frequency and consistent level of financing never previously accomplished,” WoodMac said.

“In theory, higher prices should encourage project sanctioning and more supply. However, the conditions for delivering projects are challenging, with political, social, and environmental hurdles higher than ever. For example, social and environmental licences to operate are proving elusive in major producing countries, including Chile and Peru.”

There is also a more current concern that there is actually a supply squeeze already taking shape regardless of the concern in equity markets that the copper price will remain under pressure because of recession and the China slowdown.

At last week’s Financial Times Mining Summit, the co-head of metals and minerals trading at Trafigura, Kostas Bintas, noted that current copper inventories are now measured in days rather than the norm of weeks of coverage.

“While there is so much attention being paid to the weakness in the real estate sector in China, quietly, the demand for infrastructure, electric vehicle-related copper demand, more than makes up for it,” the FT reported Bintas as saying.

“It actually not only cancels completely the real estate weakness, but also adds to their consumption growth increase.”

As per usual, maximum leverage to the coming upside in copper rests with the juniors for the more adventurous. It is not a Pilbara/lithium scenario of two years ago, but there are clear disconnect similarities at play.

ORION (ORN):

Africa will have an increasingly important role to play if the world has any chance of meeting its copper needs.

The continent has its challenges all right but its copper endowment can make it worthwhile. Just ask Robert Friedland from Ivanhoe, and our own Sandfire (SFR). They are trailblazing copper miners in the modern era in the dark continent.

Tiny Orion (ORN) is flying the flag on behalf of the ASX copper juniors at locations in South Africa’s remote Northern Cape province and it has been earning kudos for the way it has been going about things from an ESG and modern mining practices standpoint.

But that has not translated into market recognition in this market, not yet anyway. Orion last traded at 1.5c for a market cap of $70 million. The recognition it has been hanging out for might arrive before long thanks to a breakthrough funding package for its flagship Prieska copper-zinc project.

The Industrial Development Corp - SA’s state-owned bank with a charter to get behind worthy projects, not unlike the soft dollar and sticky funding Canberra is providing to projects in our northern reaches, and those involved in strategic metals – has stepped up to provide $A22 million in a convertible debt facility to get early works started.

The IDC coming in unlocks a $10 million tranche of funding that Canadian royalty/streaming company Triple Flag has previously put its hand up for. So all up, Orion has its foot on $32 million in funding to get cracking with pre-development work at Prieska, a successful historic producer between 1971-1991.

Prieska will be super green too as the historic mine site is hard to see form the air because of all the solar arrays and wind turbines owned by others that surround the property, putting Prieska’s power needs behind the meter as they say.

There is still lots of work to do and lots of funding needed before Prieska in the modern era becomes a reality.

But after years of dogged determination, little Orion looks to be on its way to becoming a producer of significance (the IDC is also a partner in Orion’s Okiep copper project), just as the world could be crying out for all of the metal it can get.

PEEL MINING (PEX):

Canaccord has taken a shine to Peel Mining (PEX) as it closes in on becoming a copper-zinc producer from the deposits that make up its South Cobar project in NSW.

Peel last traded at 15c for a market cap of about $85 million. That’s down from a 52-week high of 28c because of the general market malaise and the market’s blindness to what is coming in the copper market, as mentioned above.

Canaccord has a speculative “buy” on the stock and a 50c price target after noting the recent completion of drilling programs that will lead to resource updates.

Canaccord reckons that all up, Peel could deliver somewhere in the region of 15 million tonnes grading 1.5-2% copper which could be feed into a central treatment plant for annual production of 30,000 tonnes for an initial 7 years.

It is sizeable production potential for a company with Peel’s market cap, that’s for sure.