UBS upgrades copper forecasts to $6/lb but downgrades Sandfire on valuation concerns
UBS lifts copper forecasts 13% to $6/lb on supply shocks but says Sandfire's 80% rally has run too far despite earnings upgrades.
Source: iStock
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KEY POINTS
- UBS now expects copper to reach $6.00/lb by June 2027, a 13% upgrade driven by major supply disruptions at Grasberg, Quebrada Blanca, and other key mines that will create deficits of 670,000 tonnes by 2027.
- Sandfire Resources downgraded to Sell despite a 21% FY27 earnings upgrade, with UBS arguing the stock's 80% year-to-date surge leaves it trading at 7.2x FY26 EV/EBITDA, matching larger and higher-quality global peers.
- Australian investors face limited pure-play copper options on the ASX, with Sandfire deriving 70% of revenue from copper compared to just 21% for Evolution Mining, supporting premium valuations despite execution risks.
UBS upgraded its copper price forecast earlier this week, with expectations for prices to reach US$6.00/lb by June 2027. This marks a 13% increase from previous estimates.
The revised outlook was driven by fresh supply constraints at Indonesia's Grasberg mine, which will remove approximately 470,000 tonnes from the market over 2025-26.
Despite the bullish price forecast, UBS remains cautious on Australia's limited copper exposure and has downgraded Sandfire Resources to Sell, even while lifting its price target.
Supply squeeze intensifies
The Grasberg suspension adds to a growing list of disruptions plaguing global copper production, including:
Quebrada Blanca (Teck): This week, Teck lowered the production of QB2 from 210-230,000 tonnes to 170-190,000 (a 19% cut at the midpoint) for 2025. The guidance for 2026 was also cut by approximately 100,000 tonnes alongside downgrades for 2027-28.
Grasberg (Freeport-McMoRan): In September, operations were suspended following a mudslide that trapped seven workers underground. This incident led Freeport-McMoRan to declare force majeure and revise its copper and gold sales forecasts downward for 2025 and 2026. The latest update from Bloomberg (Oct 6) noted production remains suspended amid a rising death toll.
Kamoa-Kakula (Ivanhoe/Zijin JV): In May, seismic activity caused widespread flooding deep below ground. The impacted areas account for at least 70% of the complex's current production, according to Citi.
Cobre Panama (First Quantum): The mine was shut down in November 2023 after Panama’s Supreme Court declared its contract unconstitutional, leading to widespread protests. First Quantum has suspended international arbitration proceedings and is engaging in discussions with the Panamanian government regarding a potential restart.
UBS now forecasts global copper deficits of 250,000 tonnes in 2026, growing to 670,000 tonnes in 2027.
"Copper markets are seeing further supply disruptions and spot copper continues to trade robustly despite ongoing global economic uncertainty, including in China," the report noted.
Earnings upgrade for Sandfire and Evolution Mining
The higher copper price forecasts deliver material earnings upgrades for ASX-listed producers.
Sandfire Resources' (ASX: SFR) EBITDA estimates have been lifted 10% for FY26, 21% for FY27, and 24% for FY28.
Evolution Mining (ASX: EVN), with its smaller copper exposure, sees more modest increases of 1%, 3%, and 5% over the same period.
Copper represents roughly 70% of Sandfire's FY26 revenue but just 21% of Evolution's, while major diversified miners globally are targeting around 40% exposure. This scarcity of copper options on the ASX supports a valuation premium, allowing Sandfire to trade at multiples comparable to larger global peers like Freeport-McMoRan despite being a smaller and lower-quality operation.
Valuation concerns trump commodity outlook
Despite the bullish copper outlook, UBS downgraded Sandfire from Neutral to Sell (but raised its price target to $14.50 from $13.10). This represents 10.2% downside compared to Tuesday's close of $16.15.
With the stock soaring 80% year-to-date, the analysts believe valuation support has evaporated even with upgraded near-term price forecasts.
On current forecasts, Sandfire trades at 7.2x FY26 EV/EBITDA and 5.3x FY27, matching the multiples of larger, higher-quality global peers.
The US$6.00/lb scenario
UBS acknowledged that further supply disruptions could push prices higher. Under a US$6.00/lb scenario, Sandfire's NPV would jump 30% to $17.80 per share, while Evolution's would rise 15% to $9.00.
The analysts expect Sandfire to reach net cash by early second-half FY26 (vs. $253m debt in FY25), shifting the investment narrative toward capital returns. However, UBS believes there's limited upside left to price in from operational improvements, noting it has already modelled generous mine lives for the MATSA operations (to FY42) and Motheo (to FY38), and included the Black Butte development project in its valuation.
Black Butte represents Sandfire's primary growth opportunity, though a pre-feasibility study isn't expected until the second quarter of FY26.
Limited pure-play options
The scarcity of copper exposure on the ASX continues to support premium valuations, even as UBS questions whether current share prices adequately reflect execution risks and commodity price assumptions.
While major miners globally are increasing copper exposure and some offshore producers offer pure-play exposure, Australian investors have limited options to access the structural copper supply deficit.
With spot prices holding firm despite economic headwinds and China demand concerns, the fundamental case for copper remains intact. The question for investors is whether current valuations already reflect the supply constraints that appear increasingly entrenched in the market.
