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Liberum upgrades Glencore, Antofagasta, KAZ to 'Buy' on brighter copper outlook

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Liberum upgrades Glencore, Antofagasta, KAZ to 'Buy' on brighter copper outlook

Copper prices have maintained an upward trajectory since the start of the year in anticipation of the "phase one" trade deal signed between the U.S. and China, which offered relief in the nearly two-year trade conflict between the countries.

London Metal Exchange copper closed Jan. 16 at US$6,300 per tonne, up about 2.4% from US$6,155/t on Dec. 16, 2019.

In a Jan. 14 note, Liberum Capital analysts upgraded Glencore PLC, Antofagasta PLC and KAZ Minerals PLC stock to "Buy" from "Hold" based on the improved outlook for copper prices in the first half. The analysts upgraded their 2020 price forecast for the red metal to US$3.00 per pound from US$2.70/lb, versus a consensus of US$2.78/lb.

Liberum analysts increased price targets for Glencore to 270 British pence from 220 pence, for Antofagasta to 1,100 pence from 840 pence, and for KAZ Minerals to 770 pence from 525 pence, saying the recent improvement in copper prices has not been fully reflected in the equities.

Credit Suisse also expects Glencore to outperform its peers during the next six to 12 months, but it cut the target price to 300 pence from 310 pence to account for the impact of a potential fine of about US$3 billion related to a bribery probe by the U.K.'s Serious Fraud Office.

A possible turnaround at the diversified miners troubled assets could lead to about US$2.5 billion in free cash flow by 2021 versus 2019 at spot pricing, the Swiss investment bank's analysts wrote in a Jan. 16 note.

Credit Suisse expects a significant part of the free cash flow to come from Glencore's African copper business, where delayed cobalt volumes are finally sold, and the cost profile at the Katanga Mining Ltd. and Mopani Copper Mines PLC operations is also expected to significantly improve.

China recently increased its copper imports, after being flat to negative for most of 2019, at a time when fundamentals and sentiment for the red metal appear to be turning in a positive direction, Liberum analysts wrote.

"The data coming out of China implies that the period of destocking is over and end use demand trends are encouraging. The setup for price rises is decent, with low levels of visible inventories on exchanges and speculative positioning relatively neutral," Liberum said.

China's unwrought copper imports for December 2019 grew 22.6% from a year ago to 527,000 tonnes, while concentrate imports surged 31.9% to 1.93 million tonnes, according to a Jan. 14 note by ANZ Research.

A lack of strength in physical premiums in China, despite low inventories on exchanges, implies that market participants are unconcerned about the availability of materials, but analysts at Liberum believe that the sentiment can change quickly and help drive prices higher in the case of a disappointing seasonal rebuild.

Meanwhile, the recent improvement in trade relations between the U.S. and China has helped flip the speculative position from "very bearish to moderately long," so there is little chance of sharp changes in price. "Negotiations between the U.S. and China could of course breakdown again and take the copper price down again, but with the U.S. now in an election year, Republicans are unlikely to risk economic growth," Liberum added.

Additional supply in the market as copper projects come online over the next few years appears to be the biggest obstacle for prices in the medium term. If copper maintains a price of under US$3.00/lb, it can result in project delays as higher-cost, shorter-life projects fail to attract funding.

Prices may also face headwinds from an expected slowdown in China's economy and real estate market toward the second half. According to preliminary Chinese government estimates, GDP grew at an annual rate of 6.1% in 2019. Although this was within the government's target range, growth in 2019 was at the lowest in 29 years.