Green Economy to Re-energize Copper Prices

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Daniel Greenspan, senior analyst and resource team director, CIBC Asset Management.

Copper went on a wild ride in 2020, hitting below close to $2 a pound in March as uncertainty around the pandemic put a big question mark around what demand would look like for the year. From that low, it was basically a straight line higher through the remainder of the year and into 2021 to a peak of $3.70 a pound in January, and to $3.60 a pound now. Demand in China, who is the critical consumer of copper remains strong through 2020 as the economy rebounded sharply following the lockdowns from early in the year. At the same time, global supplies struggled as miners were forced to deal with issues related to the pandemic, that in some cases limited their ability to produce more copper. Looking into 2021, we see a few factors at work that should continue to support the copper price this year.

Firstly, on the demand side as vaccines roll out, we see potential for a path to something closer to normalcy in the second half of 2021. At the same time, we expect governments and central banks to remain accommodated to support a reopening of the global economy. Under that scenario, we would expect demand for copper and other base metals to remain strong this year. On the supply side, we also see factors that could support the copper price this year as well. We see risks that assets were under-capitalized in 2020 as mining companies were forced to deal with the pandemic by reducing workforces and cutting spending at their operations. This will likely mean that some maintenance needs to be caught up on at the mines this year and that could impact production level.

While we are constructive on the outlook for copper, it’s not without its risks. Specifically, these risks could be slower-than-expected vaccination programs in key markets leading to lower than forecasted economic growth in copper demand. There could be less-than-expected accommodative monetary and fiscal policies. And there is potential for a better supply side response in a strong copper price environment. This could include a more robust scrap market as well than we expect.

Looking a bit further out over the medium term, we believe the outlook for copper remains strong. It’s a metal that will be a critical component to the transition to a lower carbon economy. Copper is going to be a key metal required to build out the infrastructure that will deliver renewable, lower-carbon energy to end users. So with that in mind, we believe significant mine supply response will be required to meet this new area of demand growth and a higher copper price will be needed to incentivize the new production into the market.

In terms of the equities that we like, our top pick in the base metal sector is First Quantum Minerals. This is a company that is ramping up a large new copper mine in Panama and is entering a period of free cash flow generation and deleveraging to repair and completely fix the balance sheet, which we expect will drive the stock to outperform. The management team is strong as is the asset base, and at current commodity prices we expect meaningful free cash-flow generation this year.

Another stock that we like in the base metal space is Teck Resources. While not as levered to copper as First Quantum, Teck is building out a large scale copper project in Chile that will top its portfolio more towards copper from metallurgical coal. In the meantime, we think the met coal market is coming off a bottom as global trade flows rebalance following China’s ban on Australian coal in 2020. We expect Teck to benefit from reopening of the global economy and strengthening in the met coal price this year. And then we expect the company will benefit again over the medium term by opening a new large copper mine into what we expect will be a stronger copper price environment.

And finally, we also like Lundin Mining, which is a company that we view as a higher-quality base metal producer. Lundin maintains a strong balance sheet, a diversified production base and a management team with a proven and disciplined approach to M&A, which all contribute to our quality thesis on the company. We expect free cash-flow generation this year from their asset base. We expect copper production growth from their key mine in Chile. And we expect to see the dividend increase through the year as well.