Copper Markets Approach Tipping Point Despite Major Supply Disruptions Going Unnoticed

• Olive Resource Capital reported over $1.1 million net return (1 cent per share), with portfolio up 17% and net asset value per share up over 20% due to share buybacks
• The fund reduced portfolio positions to focus on high-conviction bets like Omai and Troilus, moving away from diversified holdings to concentrated positions in companies with strong fundamentals
• Despite Ivanhoe's Kamoa-Kakula mine issues (a top-five global copper asset experiencing operational problems), copper prices haven't moved significantly, potentially creating an entry point for copper investments
• The investable universe of mid-cap copper companies is narrow (5-8 names), with each having specific drawbacks, leading to stretched valuations due to limited choice for copper exposure
• Olive Resource maintains exposure through junior developers like Arizona Metals (with Rio Tinto and Hudbay backing) and Sterling Metals (which recently announced strong drill results with 359m of 0.36% copper equivalent)

Derek McPherson (Executive Chair) and Sam Pelaez (President, CEO, and CIO) of Olive Resource Capital, provides valuable insights into both the company's exceptional Q1 2025 performance and their strategic positioning in the copper market, which has become increasingly relevant given recent supply disruptions and long-term demand projections.

The firm reported what they characterized as a "record quarter" since restructuring operations, with net returns exceeding $1.1 million after all expenses and fees, translating to over one cent per share. Given that their stock trades between three and four cents per share, this represents significant value creation relative to their market capitalization.

Portfolio Strategy & Risk Management

Concentrated Positioning Approach

Olive Resource Capital has fundamentally altered their investment approach, moving from a diversified portfolio to concentrated positions in high-conviction opportunities. Sam explained that while they achieved "some really good picks and had some good wins" in previous periods, they discovered "we weren't winning enough." This realization prompted a strategic shift toward fewer positions with higher conviction levels.

The firm now maintains a dual-portfolio structure: liquid, larger-cap positions that can be traded in and out quickly when market conditions change, and fundamental positions in smaller-cap names where they take concentrated risks on quality assets, jurisdictions, management teams, and upside potential. This approach allows them to maintain flexibility in liquid markets while positioning for longer-term opportunities in less liquid securities.

Performance Attribution

The strong Q1 performance was primarily driven by precious metals exposure, particularly gold, rather than broader precious metals including silver or platinum group metals (PGMs). However, the firm notes that gold's momentum continued through April but has remained relatively flat through May, prompting their increased focus on copper opportunities.

Companies like Omai and Troilus were specifically mentioned as top performers contributing to the quarter's success, representing the type of concentrated, high-conviction positions that have driven their improved performance metrics.

Copper Market Analysis & Supply Disruptions

Ivanhoe Mines and Kamoa-Kakula Impact

A significant portion of the discussion centered on recent operational issues at Ivanhoe Mines' Kamoa-Kakula operation in the Democratic Republic of Congo, which ranks among the world's top five copper assets. The facility got flooded, requiring temporary shutdown of certain areas, yet copper prices have not responded with the typical supply-driven rally that would normally accompany such disruptions.

Darek noted the unusual market response: 

"Normally when a top five copper asset shuts down the market moves [but in this instance] we just watched a top five asset come offline and the market really didn't move." 

This disconnect between supply disruption and price response has created what the managers view as a potential entry opportunity. The situation is particularly significant given the broader context of copper supply challenges. The discussion referenced the previous closure of First Quantum's Cobre Panama operation, another top-ten global copper asset, highlighting a pattern of major supply sources coming offline while demand projections continue to grow.

Long-term Supply-Demand Dynamics

The fund managers emphasized their conviction in long-term copper supply-demand fundamentals, noting that the market requires 

"One Cobre Panama every x number of months from here till the year 2050 to satisfy the predicted commodities demand." 

With major assets going offline rather than new production coming online, the supply deficit appears to be accelerating. However, they distinguish between long-term conviction and optimal entry timing, with Derek stating: 

"Our long-term belief in supply demand doesn't necessarily mean when the entry point is." 

This nuanced view reflects their risk management approach and recognition that fundamental conviction must be paired with tactical timing considerations.

Olive Resource Capital's Derek McPherson (Executive Chair) and Sam Pelaez (President)

Mid-Cap Copper Investment Challenges

Limited Universe & Valuation Concerns

One of the most significant challenges identified in copper investing is the extremely limited universe of mid-cap investment options. The duo estimate only five to eight meaningful mid-cap copper companies exist, with each presenting specific drawbacks that could deter potential investors.

Sam explained that 

"When you look at each one of them, you could give yourself excuses not to buy any of them because they all have something.”

This scarcity has led to stretched valuations across the sector, creating a situation similar to silver mining stocks where limited options drive higher multiples. The duo noted that 

"Because there isn't a lot of choice, valuations are stretched and if you want copper exposure you got to buy one of these things."

Consolidation Trends & Asset Absorption

The limited mid-cap universe stems partly from consolidation patterns where 

"Anytime you have a tier one or tier two asset, it gets sucked up by one of the larger companies." 

This dynamic prevents many projects from reaching independent production status, instead becoming absorbed into major mining companies' portfolios.

Historical examples include Copper Mountain's acquisition by Hudbay Mining, demonstrating how quality assets transition from independent operators to major company subsidiaries, further constraining the investable universe for copper-focused investors.

Current Portfolio Positioning & Screening Criteria

Fundamental Screening Process

Olive Resource Capital employs a systematic approach to evaluating potential investments, beginning with fundamental screens focusing on debt levels and operational margins. High debt levels represent an automatic exclusion criterion, with the duo noting that 

"High debt in mining companies never works over the full cycle."

The screening process then progresses to relative valuation analysis within the copper and base metals sectors, followed by qualitative assessments focusing heavily on management quality. The firm places significant weight on management capabilities, believing that 

"Tier one management can make a tier three asset work while tier three management may be able to destroy a tier one asset."

Growth Profile Evaluation

Beyond traditional financial metrics, the firm evaluates companies' growth profiles, particularly distinguishing between organic growth opportunities and the need for inorganic expansion through acquisitions. Companies with organic growth pipelines are preferred, as they avoid the risk of making potentially dilutive acquisitions during market upturns when competition for assets intensifies.

This preference has influenced their avoidance of certain companies that may be forced to pursue external growth through acquisitions, potentially at unfavorable valuations during market peaks.

Specific Investment Positions

Arizona Metals Corporation

Arizona Metals represents the firm's largest meaningful copper exposure, featuring a US-based project with favorable infrastructure and permitting characteristics. The project has achieved scale and economics that position it in the tier-one to tier-two category, making it an attractive acquisition target for larger companies.

The investment thesis is supported by strategic partnerships, including Rio Tinto's involvement through Nuton and Hudbay's 9.9% stake, providing validation and potential development support. The location offers significant advantages in terms of existing infrastructure and regulatory framework compared to many international copper projects.

Sterling Metals Corporation

Sterling Metals recently generated significant attention with drill results showing 359 meters of 0.36% copper equivalent starting just one meter below overburden. The project benefits from exceptional infrastructure access, positioned between the Trans-Canada Highway and Lake Superior in Ontario.

The location provides substantial advantages over comparable projects in British Columbia, where infrastructure development costs would be significantly higher. The management team has substantial financial and emotional investment in the project, providing alignment with shareholder interests.

Following the announcement of drill results, the stock appreciated 80-90% in a single day, though it has since experienced some pullback. Despite this appreciation, the duo believe the valuation remains attractive given the early-stage nature of the discovery and the project's infrastructure advantages.

Market Outlook and Strategic Implications

The discussion reveals a nuanced view of copper market dynamics, where fundamental supply-demand imbalances exist alongside tactical timing considerations. The unusual market response to supply disruptions at major operations suggests potential inefficiencies that sophisticated investors might exploit.

The firm's approach of maintaining junior exposure for fundamental plays while remaining flexible on liquid mid-cap and large-cap exposure reflects a sophisticated understanding of how different market segments behave during commodity cycles. Their willingness to wait for optimal entry points in liquid names while maintaining longer-term positions in development-stage assets demonstrates disciplined capital allocation.

Olive Resource Capital's analysis suggests that copper markets may be approaching an inflection point where supply disruptions and long-term demand growth create attractive investment opportunities. However, the limited universe of quality investment options requires careful selection and timing. The firm's concentrated approach and strong Q1 performance demonstrate the potential benefits of focused, high-conviction investing in resource markets. Their dual-strategy approach of maintaining tactical flexibility in liquid securities while taking concentrated positions in development-stage assets provides a framework for navigating volatile commodity markets while positioning for long-term supply-demand imbalances.