Is Dr Copper worth a look?

Copper is a sort of middle of the pack commodities play, and Australian copper companies are in the middle of the pack in global terms, according to UBS. The price has been weak in recent months because of the general nervousness, risk aversion, and concerns about Chinese growth. There are predictions of limited mine growth and, if Chinese demand intensifies, it is likely to lead to price rises. UBS does some comparing of Australian copper companies, saying it likes PanAust:

On P/NPV, Australian sector sitting in middle of pack (except OZL)
Based on UBS data, the average P/NPV multiple for the global copper sector is 0.72x. This is 7% above the 0.67x at the end of August, but still 14% lower than the 0.84x multiple at the start of July. For the Australian names, OZL (0.88x) is trading at a significant premium to its domestic peers, which are generally close to the global average (SFR 0.69x, PNA 0.67x, DML 0.65x and IVA 0.54x).

Australian reserve multiples higher than the rest of the globe
Analysis of EV/Reserve multiples (on a copper equivalent basis) indicate that Australian stocks are generally trading at higher multiples than their global peers,in contrast to the Australian gold sector. The average multiple across the global sector is US¢45/lb, with the Australian coverage universe averaging US¢60/lb(OZL at US¢97/lb, DML at US¢60/lb, SFR at US¢59/lb and PNA at US¢48/lb).

Lower commodity prices being factored in to equities
Based on our analysis, Australian share prices are factoring in Cu prices lower than the spot price of US$3.36/lb. Our analysis shows that share prices are factoring in flat copper prices of US$2.50/lb for OZL, US$2.25/lb for PNA, SFR and DML and US$2.00/lb for IVA (which also assumes zero for its exploration value).

Our preferences – PNA for production and growth, SFR for development
Our order of preference for the Australian copper stocks is PNA (for its strong growth profile and least demanding multiples), SFR and DML (both have potential for developer-to-producer re-rating and strong corporate appeal), IVA (for exposure to some of the best exploration ground in Australia) and OZL (stretched multiples, but comes with capital management appeal).

PanAust is expected to produce about 60,000t of copper at a price of between US95c and $US1.05/lb after precious metals credits. It has interest cover of 26 times, and EBIT margins of about 40% according to Deutsche. For middle of the road plays, which in the current gloom may be one of the safest courses, copper may be worth a look at.

UBS – Thur (1)

Comments

  1. global comparisons require normalizing data to a common share price unit, presumably the US dollar.

    The “high” values you mention might indicate that the australian dollar is much higher than it should be on fundamentals rather than the local miners being overpriced per se, i.e. it is not so much the local market bidding up the price as the forex market doing this for them on a US dollar per share basis. This doesn’t change the fact that to international investors overseas producers may look more attractive but for a definitive statement of whether local producers are priced high in a local context I’d like to see local historical data of these ratios.

    You would also need to run the ruler over how the copper equivalent is calculated, i.e. the price assumptions for other metals such as molybdenum etc

  2. Interesting. On first read, I thought the Olympic Dam expansion must surely have been ignored in the research being referred to. So I went and had a look. The expansion is expected to increase copper production from Olympic Dam from 180,000 tons to 750,000 tons a year. Yet even with that, plus the output from Escondida, the world’s biggest copper mine, BHP is expected to account for only 3 per cent of world copper production in 2020.

    It sure is a big market.