Copper prices are soaring: The state of play for ASX copper miners

Copper prices topped US$4 a pound on Wednesday after major Chinese copper smelters jointly agreed to cut production at loss-making plants to cope with a shortage of the raw material, according to Reuters.

"Chinese smelters have been rapidly expanding their capacity over the past year to get ahead of an expected surge in copper demand ... but several mine disruptions globally ... have meant copper concentrate is now in short supply," the article notes.

Copper prices have not traded above these levels since April 2023. Despite the well-documented nature of growing demand, a lack of new supply and ongoing supply disruptions – It's taken a rare production cut from China to drive up copper prices.

Copper futures chart (Source: TradingView)

The state of play for ASX copper stocks

Let's set the scene for local copper stocks.

1. There's not much to choose from in terms of pure play copper stocks. BHP completed its acquisition of Oz Minerals in mid-2023, leaving us with just one larger cap player – Sandfire Resources (ASX: SFR)

2. The other names are struggling: 2022-23 was a rough year for emerging copper miners and developers amid soaring capex costs, labour shortages and adverse weather conditions. We'll take a closer look at two key stragglers below.

3. US$4/lb copper is not US$4/lb copper: Copper prices are back at US$4/lb ... which is exactly where it was three years ago. But what about costs? The unit costs for copper production at BHP's Escondida Project was US$1/lb in FY21. The latest half-year FY24 results flagged unit costs of US$1.51/lb. While prices have gone nowhere, unit costs for one of the world's largest copper mines has risen 50% (and it's much more for smaller players).

4. Maybe its time to look at ETFs: Given the lack of pure play exposure, it might be worth taking a look at the Global X Copper Miners ETF (ASX: WIRE). This ETF provides investors access to a global basket of copper miners. Its top three exposures include Chile's Antofagasta, Canada's Ivanhoe Mines, and Lundin Mining.

5. Higher prices are higher prices: While the above points paint a bearish picture for the copper scene – Higher prices will inevitably lift valuations, irrespective of any challenges in operating conditions.

Sandfire Resources (ASX: SFR)

Mines: MATSA operation in Spain, Motheo Project in Botswana, DeGrussa mine (production ceased in late 2022) in WA and Black Butte (undeveloped) in US

Production: FY24 guidance of 97,000 tonnes of copper, 88,000 tonnes of zinc and 135,000 tonnes of copper equivalent.

Broker views: Macquarie retained an Outperform rating and $8.10 target price following the company's half-yea FY24 result. "Sandfire's 1HFY24 was largely in line with Underlying NPAT of (US$37m) within US$8m of consensus estimates of (US$29m). Sandfire's transition to ex-capex at Motheo in FY25 should drive stronger cash generation," the analysts said in a note dated 26 February.

Key takeaways: Sandfire is currently ramping up production at MATSA and Motheo (MATSA accounted for 67% of Group copper production in FY23). Macquarie's modelling expects capex to ease from US$325 million in FY23 to US$100 million in FY25. The ex-capex scenario will bump free cash flow from -$217 million in FY23 to $267 million in FY25.

Sandfire Resources 12-month price chart (Source: Market Index)

29Metals (ASX: 29M)

Mines: Golden Grove in WA and Capricorn Copper in Queensland.

Production: Reported FY23 (for the year ended 31 December 2023) copper and zinc production of 24,200 tonnes and 51,500 tonnes respectively. Copper production was down 40% year-on-year due to an extreme weather event at Capricorn. Costs and impairments associated with Capricorn Copper totaled approximately $220 million in FY23. The resulted in a net loss of $440 million for the calendar year.

Broker views: Citi has a Neutral rating on the stock with a 45 cent target price. The analysts expect an $80 million capital raise in this half to support the Capricorn's phased recovery.

Key takeaways: Citi expects the $80 million capital raise to be conducted at a 15% discount and dilute the company's net asset value by around 14%. That's a bit of an overhang for the stock.

29Metals 12-month price chart (Source: Market Index)

Aeris Resources (ASX: AIS)

Mines: Tritton Copper operations in NSW, Cracow Gold operations in Queensland, Jaguar Operations in WA, North Queensland Copper operations and Stockman Project in Victoria.

Production: Maintained FY24 production guidance of 28-35,000 tonnes of copper, up from 27,400 tonnes in FY23.

Broker views: Macquarie has a Neutral rating on the stock with a 13 cent target price as of 1 March 2024. "1H FY24 losses were lower than expected, but we remain cautious due to the leveraged balance sheet with net debt of A$40 million."

Key takeaways: Aeris has seen its share price fall almost 80% in the past twelve months, largely due to soaring production costs. The company reported a net loss of $140 million in FY23. What's interesting is that Aeris opted to take on more debt on 2 August 2023 (as opposed to a capital raise). The $50 million debt facility has some rather brutal terms including:

• Interest rate: BBSY (basically short-term floating interest rate which is currently around 4.35%) plus 11.0% per annum

• Establishment fee: 3.5%

• Undrawn commitment fee: 5.0% per annum

With a cash balance of only $22.7 million (as of 31 December 2023), there is the risk of another capital raise of draw additional debt should copper prices weaken or if there are more headwinds at one of its projects.

Aeris 12-month price chart (Source: Market Index)

Bottom Line

Copper stocks are carrying plenty of baggage in the form of a heavy capex cycle, recovering from adverse weather conditions and challenged balance sheets. While a rising copper price environment generally lifts miner valuations – It's important to stay mindful of these potential risks.