Comparative review
Recommendation
Economic woes, institutional disaster and a slowing China have done little to whittle investor enthusiasm for copper. Enthusiasts of the red metal delight in pointing out that average copper grades have been falling for a decade and that extraction costs are rising with demand. The bulls say copper prices will march higher.
We've long been sceptical of that claim. Copper has risen from less than $1 a pound at the start of the boom to over $3.50 a pound today. Every copper producer in the world still generates exceptional rates of return and, while that's the case, supply is bound to increase. We expect prices to fall and would be interested in copper producers when the red metal trades at well under $3 a pound. Which producer to target, however? The earth is rich with copper and the market rich with mining hopefuls. Let's identify the best.
At today's prices there are no obvious buys but four stocks – PanAust, Sandfire Resources, Discovery Metals and Rex Minerals – that are worth holding.
With mining operations in Laos and exploration in South America, PanAust is a $2bn producer with low operating costs, a strong balance sheets and an excellent track record of production. It's no bargain today but represents a quality exposure to copper. HOLD.
Sandfire Resources has been an outstanding success story, rising from penny hopeful to billion dollar business in a few years. The key has been an outstanding discovery; the Degrussa mine is the highest grade copper deposit found in decades. Sandfire's valuation reflects its quality but this is the finest independent copper business on the market. HOLD.
With a quality copper mine in Botswana and exploration in a newly identified Kalahari copper belt, there is little wonder why Discovery Metals is currently a takeover target from Chinese suitors. Its share price has risen markedly but we still recommend you HOLD.
Rex Minerals is developing a copper project in South Australia. It is in its infancy and grades are reasonable rather than spectacular but early indications suggest the Hillside project could grow much larger and it has several logistical advantages. HOLD.
Cudeco has been both loved and pillaged by investors but we find little get excited about. Governance and disclosure are appalling and little about project economics have been released. So far, this appears to be high on hype and low on quality. A major disappointment. AVOID.
With stakes in the huge Ramu nickel mine and Frieda copper project, both in Papua New Guinea, Highlands Pacific boasts large potential. Yet as the operators of Ramu are finding, operating in PNG is hard. Although valued cheaply, there is little to suggest why Highlands will differ from scores of other PNG hopefuls who have failed before it. AVOID.
Indophil Resources and Tiger Resources boast outstanding deposits in awful locations. The Philippines government currently has banned Indophil and its partner, Xstrata, from open pit mining, leaving their huge mine in limbo. Tiger operates in the Congo about which no more needs to be said. For both, we suggest you AVOID.
Metminco is developing an enormous project in South America but funding requirements and enormous capital costs make in too high up the risk curve. With small Australian operations, copper producer Aditya Birla's projects are unremarkable. We'd rather risk cash in better quality prospects. In both cases, we recommend you AVOID.