How to navigate copper's breakout: 29Metals, Aeris Resources, Hillsgrove and Sandfire Resources

The fundamentals supporting copper (low inventories, a lack of new supply and bullish demand tailwinds) are well-documented and understood, yet price performance has struggled to follow through. Last week, investors got a glimpse of upside when prices rallied above US$4.0/lb for the first time since April 2023.

Between 12 and 19 March, copper surged 5.2% to a brief high of US$4.19/lb after Chinese smelters jointly agreed to cut production at loss-making plants to cope with a shortage of the raw material.

Over the same period, the returns for local copper mines varied dramatically. Here, we'll delve into the factors driving both outperformance and underperformance among local copper names.

Copper Stock Performance

29Metals and Aeris Resources

29Metals and Aeris Resources should stand out for both the right and wrong reasons – Shares in the two juniors have been smashed in the past 12 months but soared in the past week. So let's take a closer look why.

Aeris operates as a relatively marginal producer. In the second quarter of FY24, it produced 9,700 tonnes of copper at an all-in sustaining cost of A$5.40/lb (US$3.53/lb). Copper spent most of Q4 2023 around the US$3.5 to US$3.6 level, which places Aeris in a rather challenged position.

Interestingly, the company entered into a $50 million debt facility on 2 August 2023. The facility accrues cash interest at BBSY (Bank Bill Swap Rate is a major interest rate benchmark which currently sits at around 4.35% pa) plus 11% per annum. Aeris has drawn down $38.8 million as of 31 December 2023.

I suppose a capital raise would have been difficult given market conditions (things weren't so euphoric back in mid-late 2023). A raise of around $50 million would also almost double the company's shares on issue.

While raising capital might have been a safer option – Taking on debt crates a lot more leverage. If you can service that debt and make it out in one piece, then you would have avoided the above situation (massive dilution).

And one way to make it out in one piece is through ... higher copper prices.

29Metals' Capricorn copper mine was suspended on 9 March 2023 after unprecedented floods ravaged mines along the north-west Queensland. The company reported a net loss of $440 million for the year ended 31 December 2023, largely attributed to the $220 million in costs and impairments for Capricorn. The project produced approximately 6,000 tonnes of copper in 2023, down from 24,000 tonnes in the prior year.

Capricorn copper mine (Source: 29Metals)

The company's Golden Grove copper project in WA is also struggling to get costs down, with analysts expecting all-in sustaining costs for 2024 to be around US$4.50/lb.

At the end of 2023, the company had net debt of $109 million ($162 million cash and $217 million debt). Analysts believe a further equity raising could be required to boost its balance sheet.

Putting it all together – These are two high cost producers (Aeries 2Q24 AISC of US$3.53/lb and 29Metals 2023 AISC of US$4.96/lb) – So a swing in copper prices can make a big difference to the bottom line and their ability to remain a going concern.

Hillsgrove: Australia's Newest Copper Mine

Hillsgrove produced the first copper from its Kanmantoo mine on 12 February 2024, joining the rare breed of pure play copper producers on the ASX. The company's stage one mine plan includes:

• All-in sustaining cost of A$8,051 a tonne (or approximately US$2.4/lb)

• Copper production of 44,000 tonnes per annum

• Mine life of four years

Interestingly, Hillsgrove delivered the smallest gain among its peers between 12-19 March. Here's some food for thought as to why it isn't capturing as much upside.

• The project is progressing but the market struggles to see exactly what is going on. Hillsgrove should report revenue from production in its next quarterly update

• 3,000 tonnes of production have been hedged at a realised price of A$12,500 a tonne (US$3.70/lb) which is below current spot prices

• Raised $10 million via a two tranche placement on 26 February 2024. New shares will be issued at 6 cents per share (10.5% discount to pre-raise close)

• Relatively short mine life (but mineral resource estimate being updated and mine extension drilling underway)

All-in-all: Copper exposure has become a bit of a rarity after BHP acquired Oz Minerals back in mid 2023. Sandfire is the largest pure play copper exposure on the ASX and expected to produce some solid cash flows as it ramps up key MATSA and Motheo projects.

Towards the smaller end of town, you've got two heavily leveraged and embattled small caps – 29Metals and Aeris. Hillsgrove is the new kid on the block and the stock is currently working its way through the recent capital raise. It will be interesting to see what kind of numbers it reports for the March quarter.