Minefield: Hunting for copper targets

Summary: Three mid-tier copper explorers and their circumstances to consider before investing in this high-demand material.

Key take-out: It can be a minefield trying to find a good copper target. Consider the history and current global position of companies before investing.

As with every edition of Minefield, this article is not providing investment advice. For all of InvestSMART's stock recommendations, click here.

OZ Minerals stoked interest in mid-tier copper explorers last month when it paid a whopping 119 per cent premium for control of Avanco – an Australian project developer which has its best assets in Brazil.

The $418 million off-market deal confirmed what several copper-market observers have been saying for some time; that a worldwide shortage of copper appears to be developing even as demand for the most widely-used base metal rises.

Over the past two years the price of copper has risen by 50 per cent to $US3.03 a pound with Goldman Sachs, a leading investment bank, forecasting a rise to around $US3.60/lb later this year.

The world's biggest mining companies, including BHP, Rio Tinto, Anglo American and Glencore, all see copper as an important part of their future growth, despite that leading to a question of whether there are enough potential projects to satisfy demand.

Macquarie Bank noted last month in a report titled: 'The Future's Copper' that the metal was not easy to find and mine economically, and ‘there is little out there in greenfield project land that is comparable to today's tier one assets'.

That lack of big new copper projects is forcing miners to look further down the pecking order for growth opportunities, which is why OZ was prepared to pay a handsome price for Avanco despite it being a mid-tier company, and why other copper explorers are being closely watched.

Rex Minerals (RXM) 

Seven-years ago its share-price soared past $3, before plunging to less than 5c in 2016, but Rex has started to climb out of a hole as interest returns to its Hillside copper and gold project on South Australia's Yorke Peninsula.

At recent sales around 18c Rex still has a long way to go before reclaiming the high ground of 2011, when a strong copper price of around $US4/lb seemed more than enough to justify the rapid development of Hillside as a mine producing copper, gold and iron ore.

In hindsight, it was the plan to try and sell the low-grade iron ore found in association with the copper and gold which played an important role in delaying development of Hillside, which contains one of Australia's biggest deposits of copper. Re-working the design of the project has taken Rex three years, culminating last month with the lodging of a final environmental protection and rehabilitation plan with the government of South Australia.

The 2500-page document is one step towards development approval. The recent election of a pro-business government in SA is another step forward, and growing investor interest in undeveloped copper assets presents a third positive pointer.

The biggest change in the new plan for Hillside, located on a geological structure just off some of SA's better-known copper deposits, including the Prominent Hill mine of OZ, is abandonment of iron ore as a by-product and a focus of the copper and gold.

The iron ore, which has to be mined in conjunction with the other minerals, will be returned to the open pit as fill.

In theory, Hillside could become a significant copper and gold producer, yielding 35,000 tonnes of copper a year plus 24,000 ounces of gold over an initial 13-year mine life, which will cost an estimated $480 million to develop.

The challenge now is to fund the project, a process during which Rex might become a tempting takeover target.

Nzuri Copper (NZC) 

Copper might be in its name but the key to Nzuri is the cobalt found in association with the copper in its Kalongwe project in the Democratic Republic of Congo.

That location is a negative factor for more cautious investors, not simply because the Congo is prone to civil wars but also because the government has proposed changes to its mining law which will add to costs.

Judging which is more important, the positive appeal of an orebody with high grades of copper and cobalt or the negative influence of an unstable country, means that Nzuri is not an easy stock to value.

Canaccord Genuity, a Canadian-based investment bank, took a close look at Nzuri earlier this year when the stock was trading at 26c. Since then the share price has risen to 35c, potentially on its way to the 50c tipped by Canaccord.

But, to keep moving higher, Nzuri will have to demonstrated that it can develop a mine in Congo, a job which doesn't look technically challenging given the simple process method proposed for an orebody assaying a very attractive 3.03 per cent copper and 0.37 per cent cobalt.

The most recent mine plan has a low capital cost estimate of $US47 million and a life-of-mine operating cash cost of $US1.35 per pound of copper equivalent (combined copper and cobalt).

If Nzuri can get started with the first stage of Kalongwe it has the added appeal of a tenement holding in one of the world's most richly mineralised regions, albeit in a country desperately in need of good government.

Aeon Metals (AML) 

A lot has been written about Aeon over the past few months as it prepares for a major drilling campaign at its Walford Creek copper prospect in Queensland.

Discovered more than 20 years ago by Western Mining Corporation there have been multiple owners of the project, none able to find a development solution.

Aeon could be the company to unlock commercial value in an orebody already known to contain 194,000 tonnes of copper and 24,000 tonnes of cobalt in material grading 1.24 per cent copper and 0.15 per cent cobalt.

But, before making develop plans Aeon is keen to expand the size of the project, which is why it has just started a major exploration effort that will see three-rigs target 30,000 metres of drilling.

Early work in the six-month operation will be inside the current resource, with the aim being to increase tonnage and grade of potentially mineable material. A second aspect of the drilling will be to expand the resource by extending the search outside the known mineralised zone.

Aeon's managing director, Hamish Collins, said when announcing the current drilling program that it was an important step in moving Walford Creek to a development decision.

News flow from the field work will make Aeon an interesting stock to watch over the rest of the year.