The cliche is that copper has a PhD in economics, that it is a bellwether for economic trends. So investment tends to be as much a reflection of assessment of sentiment and economic conditions as stock picking. Deutsche is advising that cost pressures are likely to rise at 5-10% per annum, and that low cost operators should be the focus. It is predicting a copper price of $3.90/lb. Oz Minerals and PanAust are assessed as buys:
PanAust (PNA.AX) – Buy, PT $4.21/sh, quarterly due 12th of April We forecast CY12 production of 65kt copper, 130koz Au and 700koz Ag following the successful start of Ban Houayxai this month. PNA remains our preferred copper stock with medium to long life, low cost assets (US$1-1.10/lb for Phu Kham and US$600/oz for Ban Houayxai), and newsflow due from 1) Ban Houayxai production ramp-up (ongoing), 2) Phu Kham expansion (mid year), Inca de Oro DFS (3Q) and 4) ongoing exploration (Nam San results are well anticipated in 2H). PNA’s growth pipeline should see production increase towards 100ktpa copper and 200kozpa gold by 2015.
OZ Minerals (OZL.AX) – Buy, PT $11.70/sh, quarterly due 26th of April CY12 production guidance is 100-110kt (DBe 106kt) Cu and 130 -150koz (DBe 140Koz) gold at cash costs of US$1.00-1.10/lb (DBe US$1.15/lb). While production is steady out to 2018, for the market to get excited about the stock will require a clearer growth strategy prior to Carrapatenna (2017). Exploration is ongoing and with a cash balance of ~$900m and US$200m of undrawn debt it has flexibility in its search for the right acquisition. Given its recent sell off, we have a Buy on valuation; the company also continues to pay out dividends between 30-60% of earnings and has a $200m ongoing buyback.
Sandfire Resources (SFR.AX) – Hold, PT $8.70/sh DeGrussa is on schedule (76% complete overall) with first revenue due from Direct Ship Ore (DSO) sales in April and plant commissioning due 3Q12. Funding appears adequate ($255m spent of $384m budgeted total with $118m cash and $90m debt available). While DeGrussa is economically very attractive, we believe the stock is currently fairly valued with exploration success from its $35m FY12 budget the next step needed to drive the share price higher.
PanAusts forward earnings multiple of 7.9 times is about half the level of Oz Minerals, suggesting that its fundamentals are better. But much dpeends on what happens to the copper price and that in turn depends on what is happening globally, especially in China.