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In This List

UBS prefers Southern Copper, OZ Minerals as copper development grows

Mining Exploration Insights - April 2020

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State of the Market: Mining Q2-2019


UBS prefers Southern Copper, OZ Minerals as copper development grows

While copper production is experiencing short-term disruptions, an influx of new projects is expected to add more than 3 million tonnes of copper supply globally.

UBS said its preferred copper pure plays include Southern Copper Corp. and parent company Grupo México SAB de CV as well as OZ Minerals Ltd. with a "buy" rating, while Antofagasta PLC and Boliden AB offer lower-risk copper leverage.

The analysts believe that Glencore PLC and PJSC Norilsk Nickel Co. also offer large-cap equity exposure to copper, while the ratio of risk to reward is better in the pure plays.

A delay in the restart of Codelco's 320,000-tonne Chuquicamata smelter in Chile until mid-April is expected to impact about 100,000 tonnes of refined copper supply, UBS wrote March 20.

The Chilean state miner suspended operations in December 2018 for a US$997 million upgrade at the smelter, which processes ore from the Chuquicamata mine where underground operations are expected to start by midyear.

Meanwhile, copper production from Glencore's operations in Zambia and the Democratic Republic of the Congo has been hit by various factors including new tax policies.

The company recently suspended operations at its Nkana copper mine in Zambia following two worker fatalities, after three workers were killed in a fire at the site in February. In the DRC, Glencore cut production at its Mutanda copper-cobalt operation by 50% due to mining depletion of oxide ore, with sulfide processing to require new investment.

However, the last 18 months have also seen development progressing on about US$50 billion worth of copper projects that could add more than 3 million tonnes of new supply in the long term.

This includes Ivanhoe Mines Ltd.'s 325,000-tonne, feasibility-stage Kamoa-Kakula joint venture in the DRC; First Quantum Minerals Ltd.'s 150,000-tonne, preproduction-stage Cobre Panama mine in Panama; Antofagasta's 140,000-tonne Centinela mine expansion in Chile; Southern Copper's 120,000-tonne, preproduction-stage Tia Maria mine in Peru; OZ Minerals' preproduction-stage Carrapateena mine in South Australia; and Nevada Copper Corp.'s preproduction-stage Pumpkin Hollow mine in Nevada.

In a separate March 21 release, UBS downgraded KGHM Polska Miedź SA to "neutral" from its July 2018 upgrade to "buy" after an increase in the Polish miner's share price.

A 30% increase in KGHM's share price since October 2018 has created a balanced risk versus reward profile for the company, leading to a "less compelling" spot valuation, according to the analysts.

KGHM is expected to achieve higher sales volumes and lower unit costs in 2019, but UBS said its "conviction levels are low" due to a lack of clear cost guidance from the group.

UBS also noted that a bill aiming to decrease Polish copper taxes by 15% could reduce the company's tax bill by 180 million Polish zlotys in 2019 and about 240 million zlotys in 2020.

Bernstein Research believes that Rio Tinto is "significantly undervalued" compared to the market and its peers in terms of total shareholder returns. The analysts said only about half of the volatility seen in the company's total shareholder returns is related to commodity prices, and the remainder is driven by capital allocation decisions.

"Rio is not an undervalued outperformer only against the FTSE100, but against all major broad indices," Bernstein said in a March 18 note. "Rio Tinto has outperformed every major global index by at least 2% since 1988."

Analysts assigned a target price of 5,000 British pence per share for the diversified miner, a 17.7% increase over the current share price of 4,169 pence.

"We believe that the current strategy is working and that over the longer term it certainly has the potential to lead to a rerating in the stock," the analysts said.

As of March 21, US$1 was equivalent to 3.78 Polish zlotys.