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Industrial metal prices have struggled to find firm footing. Stefan Ioannou of Haywood Securities tees up near-, medium- and long-term scenarios for three industrial metals—copper, zinc and nickel—and explains why he is most enthusiastic about zinc. In this interview with The Gold Report, Ioannou discusses companies that stand to benefit from the coming supply squeezes and China’s role as both supplier and consumer of all three metals.
The Gold Report: In January, Haywood Securities forecast a copper price above $3.60/pound ($3.60/lb) for the remainder of 2013. Six months later, copper is struggling to remain above $3/lb. What is causing the weakness?
Stefan Ioannou: A lot of it relates to uncertainty regarding the global economic situation. Early in the year, the price hovered around $3.25–3.50/lb and recently nosedived to $3/lb. That happened on the back of Federal Reserve Chairman Ben Bernanke’s hints that quantitative easing in the United States may end in mid-2014, raising concerns that U.S. demand for raw goods will decline. Because copper goes into a lot of raw goods, that supposes less demand. In addition, copper inventories are well over 600,000 tons (600 Kt), which is high on a historic basis.
China is the other big concern. Its manufacturing numbers are weakening. People are worried that China, which really drives a lot of the metal stories, is not growing as fast as expected.
TGR: Have you revised your price deck?
SI: In early June we lowered copper’s average price for 2013 to $3.35/lb. Year to date, the average copper price is $3.43/lb.
TGR: Is that why the landslide in early April at the Bingham Canyon copper mine in Utah, operated by Rio Tinto Plc (RIO:NYSE; RIO:ASX; RIO:LSE; RTPPF:OTCPK) subsidiary Kennecott Utah Copper Corp., has not had more of an impact on the copper price?
SI: It is probably a combination of two things. One, investors are very focused on the global economic data and general market sentiment. Two, there have been a handful of mine-specific issues, Bingham Canyon being an important one.
Bingham Canyon was about a 165 million ton (165 Mt) failure, which is quite large. It will take a long time to dig out and get the mine back up to steady, safe production. There has not been much disclosure into what the impact will be. I anticipate the Q2/13 results will include commentary, now that the company has had time to assess the damage.
There have been two other mine-specific issues in the copper space. Twenty-eight people were killed at Freeport-McMoRan Copper & Gold Inc.’s (FCX:NYSE) Grasberg mine in Indonesia in mid-May. The mine was shut down for several weeks and is just now ramping back up.
The third mine-specific issue happened in China in early June. One of Jinchuan Group Co. Ltd.’s smelters declared force majeure due to a major equipment failure that prevented it from producing enough refined copper for its end users. Again, there is not a lot of information on that.
But, overall, I think most investors are focused on the global macroeconomic issues, not on specific issues at copper projects.
TGR: Some of the world’s biggest miners, like Rio Tinto and BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK), have posted “for sale” signs on noncore assets. Some midtier base metals players have bought what might be considered bargains. Is this an investment thesis worth following?
SI: There is definitely a shift in what the majors are including in their quarterly results, their management discussion and analyses, and the question periods during their conference calls.
They are shifting focus to their existing mines, emphasizing cost-cutting and efficiency measures. There is less talk about pursuing larger, capital-intensive development projects. These are being shelved or put up for sale, creating buying opportunities for midtiers.
A recent example is Capstone Mining Corp.’s (CS:TSX) purchase of the Pinto Valley mine in Arizona from BHP, for about $650 million ($650M). Based on our analysis, Capstone did not overpay, but it definitely was not a bargain.
TGR: Can Pinto Valley be profitable at $3/lb copper?
SI: Yes, I think so. It is a low-grade mine, but with an estimated US$1.80/lb average total copper cash cost over the next five years, it has space.
For the rest of this interview, click here: http://www.theaureport.com/pub/na/15413