Aluminium, Copper, Nickel, Lithium: Which ASX miners are nearing the profitability cliff?

There’s been a few of interesting company news announcements over the last week highlighting the challenging times presently faced by many ASX mining companies. On one side, their costs remain stubbornly high in the wake of the supply chain chaos and labour shortages wreaked by the Coronavirus pandemic. On the other side, higher interest rates have crimped global economic growth while the all-important Chinese property sector remains in an acute contraction.

Panoramic Resources (ASX: PAN) announced yesterday it has suspended operations at its Savannah Nickel Project in WA due to low nickel prices. The development isn’t a huge surprise, given management announced a strategic review in November last year citing the then “current and forecast nickel price environment” as the main reason for the company’s financial difficulties, and then it entered into voluntary administration. Around 140 jobs will be lost at Savannah.

Also yesterday, Alumina (ASX: AWC) announced it would fully phase out production at its WA alumina refinery, which has been operating for over 60 years. The “curtailment” as the company put it, was due to ongoing losses at the operation caused by low alumina prices, as well as the refinery’s age and scale. Media reports suggest as many as 750 jobs could be lost as a result of this closure.

Both decisions come on the back of Core Lithium’s (ASX: CXO) announcement last week it intends to suspend mining at its flagship Finniss operation in the NT. Together, these three events provide a disturbing reminder that not all ASX mining companies are going to make it through the current commodity price cycle.

With respect to this cycle, as we’re about to investigate, the trend in prices for many base metals remains down. Let’s take a look at the charts of a few key base metals, and then run the ruler over some of the more popular ASX mining stocks trying to forge through the current low-price environment.

Aluminium

Aluminium prices have gone through at least four price cycles since the early 2000’s

I’m going to focus on weekly charts in my analysis here, simply to get a longer term view of how commodity price cycles often play out. It’s clearly evident in the chart of aluminium over the last 20 years that the swings in a commodity’s price may be massive. I count four major price cycles culminating in the most recent one, which pushed aluminium to record highs. That was caused by a combination of the Ukraine-Russia War, and fallout from the Coronavirus pandemic.

Since the pandemic, the aluminium price has been under pressure amidst a backdrop of recovering supply and a subdued global growth outlook due to higher interest rates. An economic slowdown in major base metals consumer China is an added drag on demand. The aluminium price has slumped to around US$2,200/t (FYI, all charts are based upon London Metals Exchange “LME” prices).

Whilst the longer term trend appears to be rolling over to the downside, the short term downtrend has recently neutralised. The price action since the July low is generally higher peaks and higher troughs. In short, the technicals indicate a market largely in equilibrium, for now.

The congestion in the price action through 2023 around $2,100/t - $2,300/t is probably no coincidence, given the average price of aluminium over the 20-year sample in the chart is $2,100/t – so there’s a very good chance the market has found its sweet spot.

However, should the global economic backdrop deteriorate, and should the price of aluminium close below $2,086/t, then there’s scope for it to seek out much lower retracements in the price cycle, towards historical lows around $1,400/t.

Taking an optimistic view, I feel that a close above the January 2021 high of $2,636/t is required to signal the next upward phase of the aluminium price cycle has begun. The most likely scenario, however, is continued range trading in between these two key levels.

ASX mining stocks with exposure to aluminium

Alumina (ASX: AWC)

Alumina owns 40% of Alcoa World Alumina and Chemicals (AWAC), with the remaining 60% owned by USA’s Alcoa Corporation. AWAC mines bauxite and produces alumina and aluminium at various locations around the world.

In addition to the announcement it would close its WA alumina operations, Alumina also warned of substantial financial losses at its Spanish San Ciprian complex in December. Once again, significant cost pressures and lower alumina/aluminium prices are to blame.

South32 (ASX: S32)

South32 has bauxite mines and alumina refineries in Australia and Brazil, and aluminium smelters South Africa, Mozambique and Brazil. In FY23 it produced 1,133 kilotonnes of aluminium.

The aluminium value chain contributed approximately 50% of South32’s underlying revenue in FY23, with the rest coming from thermal coal (18%), Manganese (11%), and Nickel, Copper, and Zinc-Lead-Silver making up the balance. This implies that a broad-based downturn in base metals prices would likely have a significant impact on South32’s earnings.

To keep this discussion consistent with the aluminium chart shown above, I’ll just note South32’s aluminium costs of production and leave it to you to do the research on bauxite and alumina. Based upon the company’s results, in the second half of FY23 aluminium costs of production ranged from US$2,092/t at South32’s Hillside operation in South Africa, to US$3,747/t at its Brazil aluminium operation. This would imply that the company’s aluminium production is marginal at best around the current LME aluminium price.

Rio Tinto (ASX: RIO)

Rio calls itself a “global leader in aluminium” having made significant investments in the commodity since it acquired Alcan in 2007. The aluminium value chain ranked second in terms of contribution to underlying EBITDA in Rio’s most recent annual report at 14%, behind Iron Ore’s 69% contribution. Decent, but clearly iron ore is the main show here. I couldn't find any specifics on Rio's aluminium value chain production costs, but according to the company's most recent half-yearly report, the segment runs at a 21% EBITDA margin.

Copper

Copper was touted as the next big boom story in 2023 due to a looming supply shortage, yet nothing happened!

Much has been said about the looming supply shortage for copper. It was one of the most notable, and possibly least fulfilled, narratives mining investors pinned their hopes on in 2023! The reality is the copper price peaked in late January at US$9,436/t and suffered a steady decline through the course of the year, touching $7,812/t in October. A modest bounce since – which to be fair coincided with a global rally in assets – has only delivered a slight recovery to around $8,300/t.

The technicals are mixed on whether copper can be the “next lithium” (that is, the boom part – not the bust part!). The short term trend has flattened against what remains a sliver of a long term uptrend. But the price action is concerning because, for the most part, lower peaks and lower troughs appear to be entrenched.

I believe the October 2023 low of $7,.812/t is now the crucial downside support level. A close below it could see copper plumb the July 2022 low of $7,000/t. Failing that, it could make a fuller completion of the copper price cycle towards the 2020 lows around $5,000/t.

Taking an optimistic view, a close above the July 2023 high of $8,671/t is essential to confirm the short term trend has realigned with the long term uptrend. But I suggest it won’t be until a close above the January 2023 high of $9,436/t that we can be confident the next big copper price cycle has truly begun. If this occurs, it will set the current level as a base from which to commence the cycle, which in the last two occurrences exceeded a gain of $6,000/t.

ASX mining stocks with exposure to Copper

BHP Group (ASX: BHP)

By acquiring OZ Minerals in April last year, BHP added two more mines (Prominent Hill and Carrapateena) to its Olympic Dam mine in South Australia and its Chile copper assets which include Pampa Norte, and a 57.5% stake in the world’s largest producing mine, Escondida. They don’t call it the “Big Australian” for nothing! BHP claims to hold “the world’s largest copper mineral resources”.

BHP produced 1,717 kilotonnes of copper in FY23, making it the world’s biggest listed copper producer. Copper kicked in approximately 24% to BHP’s bottom line (compared to 60% for Iron Ore), and this is expected to grow as development projects come on stream. Put simply, copper is big bikkies for BHP.

But BHP’s cost of copper production is the key number for our commodity price cycle investigation. This is currently around US$1.40/lb or roughly US$3,100/t for comparison with the LME price in the copper chart above. So, it’s clear BHP enjoys excellent margins at the current copper price and would likely still be comfortably profitable at the lower range of the copper price cycle.

Rio Tinto (ASX: RIO)

Copper is presently third in terms of contribution to Rio’s underlying EBITDA at 8.5%. Ho-hum, I hear you say! Well, copper is going to be one of Rio’s bigger bets over the next decade as it positions itself to cash in on the electrification boom. Rio’s Oyu Tolgoi copper mine in Mongolia started producing in March last year and continues its ramp up. At its peak production, which is expected by around 2028, it will help boost copper’s contribution to Rio’s underlying EBITDA to around 27% (aluminium is expected to remain roughly the same at 13%, while Iron Ore is expected to fall to around 57%).

Considering the current delicate nature of copper’s present technical outlook, could Rio’s growing exposure to copper end up being a double-edged sword? The key number you want to watch out for is Rio’s copper cost of production guidance of US$1.80/lb to US$2.00/lb, which translates to a rough range of between US$4,000/t and US$4,400/t. So, it would take almost the worst-case scenario in terms of the copper price cycle for Rio’s copper production to become marginal. Still, given Rio’s increasing dependence on copper, it will logically become increasingly sensitive to swings in the copper price.

Sandfire Resources (ASX: SFR)

BHP and RIO are both massive copper producers, sure, but let’s face it, they’re both really Iron Ore companies! Sandfire is predominantly a copper company, with 70% of its FY23 earnings coming from copper (21% came from Zinc, and the rest from Silver 4%, Gold 3%, and Lead 2%). Copper’s contribution to Sandfire’s bottom line will only grow as the company’s new Motheo copper mine in Botswana continues to ramp up.

In all, Sandfire owns three copper mines across three countries. DeGrussa in WA is being phased out, so we’ll leave this out of our cost of production analysis. MATSA in Spain has a cost of production of US$1.99/lb or roughly US$4400/t, and Motheo’s cost of production is US$1.65/lb or around US$3,650/t. So, like BHP and RIO, Sandfire’s production won’t be anything close to marginal unless we see a major breakdown in copper prices.

Sandfire is the largest mainly copper play remaining on the ASX since BHP swallowed OZ Minerals. So, it’s worth keeping an eye on as it could become a takeover target regardless of whether copper prices plunge or boom!

Nickel

It’s all cycles! Nickel prices are plumbing the lows if its price cycle pushing some producers over the profitability cliff

Clearly Nickel is the worst looking base metals chart we’ve reviewed so far. The current cycle potentially resembles the major cycle pre-and-post GFC, and the steepness of the angle of the prevailing short term trend suggests the low of this swing could be towards US$10,000/t. There are few redeeming features in terms of my technical model, with little in the way of clear chart support until the March 2020 low at $11,055.

Taking an optimistic view – and this is hard to do, even if Nickel can stage a rally here – it will likely be impeded by chart resistance at the July 2022 low of $19,100/t and then at the long term trend ribbon around $20,000/t.

ASX mining stocks with exposure to Nickel

BHP Group (ASX: BHP)

BHP’s PR machine loves to tout the company’s focus on what it calls “global megatrends” like decarbonisation and electrification. So, in its FY23 annual report, there are over 200 references to nickel (FYI, there’s 340 to copper!). But in actual fact, nickel contributes only a tiny fraction of BHP’s underlying profits – around 0.6%.

BHP boasts that it holds the “second-largest nickel sulphide resources globally”. Most of this is in WA at its Nickel West operation which comprises open-cut and underground mines, concentrators, a smelter and refinery, and which produced 80 kilotonnes of nickel in FY23. I couldn’t find any information on Nickel West’s cost base, but BHP does state that a +/- US$0.01/lb move in the nickel price equates to a +/- US$1 million impact on its bottom line. This equates to a US$22/t move. This doesn’t sound like much but as indicated in the LME chart above, but nickel regularly moves in the thousands.

Mt Keith, just north of Nickel West, and West Musgrave, which BHP acquired in the OZ Minerals takeover, are BHP’s other major nickel development projects. The company wants to increase its nickel exposure, noting “We are continuing to seek more nickel resources through exploration, acquisition and early-stage entry.”

IGO (ASX: IGO)

Like BHP, IGO is hardly a nickel pure-play. Whilst it is the most substantial onshore producer after BHP, with FY23 production of around 35 kilotonnes, over 80% of IGO’s underlying profits come from lithium.

IGO’s nickel business comprises the Nova Operation, Forrestania Operation, and Cosmos Project, each located in WA. It acquired the latter two after its takeover of Western Areas (WSA) last year. In July, IGO wrote down the value of these assets by nearly $1 billion (it paid $1.3 billion for WSA) due to substantial development delays and cost blowouts. Production at Nova has about five years to run.

Despite its current operational issues, IGO has done its best to transform itself into a battery metals focused producer, and nickel will remain an important part of its portfolio. For our discussion today, the important piece of data is IGO’s FY23 nickel production and cash cost, which was $5.63/lb or roughly US$12,400/t. The current LME nickel price is US$15,930 and its current short term trend is definitely not IGO’s friend.

Nickel Mines (ASX: NIC)

Nickel Industries is the only other major ASX-listed nickel producer of note. It has majority interests in the Angel Nickel (80%), Hengjaya Nickel (80%), Oracle Nickel (70%), and Ranger Nickel rotary kiln electric furnace (80%) projects located in Indonesia.

The company produces nickel pig iron (“NPI”), which is a key ingredient in the production of stainless steel. In Nickel Industries’ most recent quarterly report, it reported attributable production of 28 kilo tonnes nickel metal, which puts the company on track for annual production of around 120 kilotonnes – making it a major global producer.

Indeed, many argue the influx of Indonesian NPI production is contributing to a supply glut in the nickel market, and it’s at least partially to blame for the slump in nickel prices. Regardless of whether Nickel Industries is part of the problem, it remains a significant listed nickel pure play, and therefore it is the most leveraged in this list to the nickel price.

Costs of production at Nickel Industries various operations ranged from US$9,467 to US$11,379/t meaning it still has plenty of margin at the current nickel price. It would take a price swing in nickel to close to the 2020 low to wipe this margin out.

Lithium

2023 was an annus horribilis for lithium bulls...Source: SMM

Nothing screams commodity price cycle like the recent fortunes of lithium! Everything good 2021 and 2022 gave Aussie lithium investors was taken away in 2023. There are several important lithium minerals, but I’ve chosen to go with the chart of Lithium Carbonate as it tends to be the lowest common denominator in the lithium minerals-electric battery supply chain. As in, literally the lowest common denominator, given many pundits talk in terms of “Lithium Carbonate Equivalent” or “LCE”.

This chart is perhaps the best case study of how my trend ribbons can help identify when a bull market is coming to an end. Firstly, the price will move below the short term trend ribbon, which eventually turns down, changing its colour in my traffic light system from light green, to amber, to light pink. You’ll also find the short term trend ribbon flips from a zone of dynamic support to dynamic resistance.

Eventually, the same occurs with my long term trend ribbon. The price also moves below it, and it also transitions from green, to amber, and to dark pink. The long term trend ribbon will also start to offer dynamic resistance, impeding short term rallies. Indeed, the most recent rally to RMB  314,000/t in June 2023 terminated just below the long term trend ribbon.

Short term or long term trend ribbons, either way, there was plenty of warning about the lithium carbonate trend for those who cared to listen! To be forewarned is to be forearmed, so don’t ignore what the trend is telling you about lithium.

Lithium Carbonate’s short and long term trends are both well-entrenched to the downside, but there are some tiny glimmers of hope for lithium bulls.

1. The price action appears to be flattening out since it reached RMB 100,000/t.

2. There is some historical price support at this level (it’s just off the chart there on the far bottom-left at RMB 90,000/t). 

3. This isn’t in the chart, but there is a strong view that the lithium carbonate price

   could bottom out around RMB 80,000/t*

   (*as noted in a UBS broker report mentioned in the linked article)

Finding the bottom in lithium prices doesn’t automatically mean a big rally is coming. It’s possible the price bumps along the bottom for a considerable period, building a “basing pattern” before rallying. Given the severity of the current downtrend in lithium mineral prices, I feel this is a more likely scenario than a miraculous V-shaped rally.

ASX mining stocks with exposure to Lithium

Instead of listing the usual suspects here along with their production cost values, I’ll refer you to this article I recently wrote, which contains all of this information.

Needless to say, crunch time came last week for Core Lithium, and given the last print for S&P Global Platts Spodumene 6% is US$850/t, surely it can’t be long until a few other higher cost Aussie producers begin to rethink their production plans. (*FYI, UBS also noted the equivalent price for Spodumene versus its RMB 80,000/t low call on Lithium Carbonate is US$800/t).

Recent falls in spodumene prices will put substantial pressure on several higher-cost ASX lithium producers. Source: S&P Global Platts

Some things change, some stay the same

Commodity price cycles come and go, but one thing remains the same: Many investors get swept up in the convincing bottom-left-top-right supply deficits for the next decade narratives, as well as the euphoria which comes with soaring stock prices.

I believe there’s nothing wrong with buying into a great story as long as there’s a great uptrend on a chart somewhere to back it up. But! When the party’s over, and the trends have turned, it’s usually a good time to go searching for the next big commodity price cycle just about to begin.