OT: Copper
How Low Can It Go?
27 September 2011 ¦ 80 pages
ir.citi.com 
The copper market conundrum – In this report we aim to address the short-, medium- and longer-term outlook for copper.
We have completed a snapshot of the top 22 mining projects and current mine supply. While in the short term we believe that
copper could trade lower due to macro uncertainty, in the longer term the copper market looks well supported by a structural
demand story and the difficulty of bringing on new supply
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Global Copper Book
Buying Quality Growth
27 September 2011 ¦ 132 pages
ir.citi.com
The copper market — The copper price is likely to trade down to $7,000/tonne on a
3 month view, driven by a weakening global economic outlook and financial uncertainty.
We believe this opens up a buying opportunity and that a fundamental floor price for
copper could emerge around $6,400; this is based on the cost of production and we
calculate this would translate to Chinese GDP growth of around 5.6%. The medium-
term outlook remains robust and we have raised our medium- and long-term copper
price forecast to $5,800 (real), to reflect the supply response over the next ten years
and our analysis on the demand drivers.
A global approach — Citi analysts cover over 25 copper companies globally, which
equates to over 65% of the world’s copper supply and around 53% of all new projects
that are expected to be built over the next ten years. We have used this knowledge to
determine the timing and likelihood of new projects with a detailed analysis of incentive
pricing. We have also analysed the global copper names under coverage using 5 key
themes; 1. Contribution of by-products, 2. Political risks and royalty dangers, 3. Cash
costs and incentive prices, 4. Absolute volume growth and 5. Asset longevity.
The results of our analysis — We recommend investment in companies that are able
to combine volume growth to offset potential price declines, along with defensive
characteristics, including low gross cash costs, significant by-product credits, and low
political risk. Few companies combine all of our desired attributes, with the exception
of Rio Tinto, our favoured name in the space. Other names that screen well are;
Anglo American & Glencore — on strong copper exposure and attractive valuation;
Jiangxi Copper —due to the defensive nature of its low cost operations and strong by-
product contribution; Kazakhmys — attractive valuation and by-product credits;
PanAust — attractive valuation for strong volume growth. Another stock that screens
strongly on these metrics is First Quantum.
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Thirty years ago I used to trade copper mining stocks and made some money. I haven't closely
followed them for more than two decades. Even though copper is off topic, many still
consider the price of copper an important macro-economic indicator, so this off-topic
post may have some redeeming social value. |
