Copper for Contrarians

The eternal metal sits at the battery metals top table, meaning it has legs.

There is much more to copper than EVs, though. It underpins construction the world over, and as a highly efficient conduit its current status as a critical component underpinning life as we know it will in no way be diminished as the world transitions to renewables-oriented infrastructure and electric vehicles.

Why Copper?

Clean tech and old-world economic drivers, combined with underinvestment in new mines, a lack of new discoveries, lower grades and sanctions on Russian exports mean copper supplies are already pinched, and will become more so. The politicians know this but are yet to create the appropriate enabling environment.

That they will have to is not in doubt, but the guaranteed time lag means money is there to be made as the gulf between demand and supply becomes ever more acute over the next couple of decades. This is going to set share prices soaring.

Right now, however, select companies in the copper space – companies with strong fundamentals - are heavily discounted, possessing all the credentials to come out the other side of the cycle and deliver excellent returns.

With copper’s market behaviour traditionally seen as a barometer of wider economic prospects, the herd see this as a cue to keep the purse-strings firmly tightened until the storm has passed. Contrarians know different. They know when a mineral as critical as copper is out of favour, the pendulum will swing back. It always does.

Doom and gloom headlines equate to opportunity.

The key to striking on value

Differentiating between the runners and riders is no mean feat, but there is help at hand to isolate the best assets that fundamentally stack up and are likely to be resistant to whatever future curveballs and head winds may come their way.

Development stage copper projects area great place to look, given they offer up a heady cocktail of advanced but as yet unrealised promise.

To effectively drive your investment thesis, it is essential to ascertain whether a copper project can be adequately financed, this being a function of it having either relatively low capital cost or partners in place that can help.

Those projects that aren’t reliant on a high copper price to be viable are the ones to be looking for. For an open-pit mine opportunity, you also want to be looking at a low strip ratio relative to grade to feel good about the prospects for profitability.

Financing - In this moment of high interest rates and high inflation, when looking at a copper developer to back, the level of cash in the bank or the ability to access cheap money is key, to ensure all the upside is not given away, that the company can be relatively easily financed as a standalone, and that you’re not going to be over-diluted.

For Hayden Locke, President and CEO of Marimaca Copper Corp, it’s companies with high operating leverage to the commodity price he’d be looking to get exposure to and those with a margin of safety of at least 20% IRR.

Permitting - It is also essential to establish demonstrable progress on permitting in this era of ESG – especially in tier one jurisdictions where criteria can be especially stringent.

Jurisdiction - A new discovery marked by ease of access, high grade and huge scalability may sound like manna from heaven, but if it’s located in a politically unstable jurisdiction, this presents risks related to prohibitive taxes, expropriation or even worker safety.

When such events come to pass, it serves to spook, sending share prices rapidly south and making capital harder to raise to progress a project. For you, the investor, this isn’t to say your bumper pay day won’t come, but that you need to adopt a longer-term horizon for companies linked to assets in such jurisdictions.

This would be one for the higher risk element of your investment portfolio.

Timing - No one can time the market perfectly, but those copper developers with a pedigree of delivering success when the chips are down, that are focused on materially de-risking, adding incremental value, have key fundamentals in place and a relatively short timeline to production, position themselves well to take full advantage when the winds of investor sentiment change.

You need to be in it to win it before that happens, otherwise you’ll just be following momentum.

Over 20 million tonnes of copper was mined in 2019, according to the British Geological Survey. Without it, modern lifewould grind to a halt. It has a vast array of applications where nothing else will do, and with demand drivers like population growth, urbanisation, decarbonisation, and rising living standards, its star is ever-rising.

Yes, all copper stocks are not created equal, so it’s essential to do your homework, but as the American theologian John Piper says, “If you want to be a conduit for God’s grace, you don’t have to be lined with gold. Copper will do.”