[miningmx.com] — METOREX has been tipped as the stock of choice for South African investors who seek to gain exposure to the rallying copper price in a market that doesn’t offer punters much choice.
The company has in the past 18 months completed a process of selling non-core assets and restructuring its balance sheet to cut down on debt and sharpen focus on its copper and cobalt projects in the Democratic Republic of Congo and Zambia. In the year to end-June, the group derived 76% of its revenue from copper sales after it pushed up production by 60%.
Analysts have tipped the price of copper to surge by more than 25%, fuelled by a supply shortage that wouldn’t be able to keep up with demand – driven in most part by China’s resource-intense economic growth.
On Thursday, research firm RBC Capital Markets said copper production was likely to meet demand only by 2014, with shortages of about 3% to 8% expected for this year until 2013.
On Monday, metals and research consulting firm GFMS predicted copper to peak well above $11,000 per tonne in 2013. The metal was trading at $8,370 per tonne on Tuesday on the London Metal Exchange.
In an interview with Miningmx in November, Barclays Capital’s director of commodities research Kevin Norrish said he had a particularly bullish outlook on copper.
“In our opinion, copper will be at a great deficit. Inventory levels will descend to all-time lows during 2011 and we can see prices going well over $9,000 per tonne (in 2011),’ said Norrish. “China’s appetite is growing very rapidly; they need copper for everything, be it electricity infrastructure to consumer durables like washing machines and television sets.’
In its forecast report on copper, GFMS said even though the higher-price environment might spur miners to boost output, supply growth would continue to be offset by persistent structural constraints which include political and operational risk, falling grades and labour disputes.
Metorex’s share price has jumped by 41% since the beginning of 2010, succeeding in persuading the market about the quality and sustainability of its turnaround strategy.
By contrast, shares in the only other listed company which derives the majority of its earning from copper production, Palabora Mining Company, have stayed almost flat over the same period. A main concern over Palabora is the limited life expectancy of its flagship mine, while about 30% of its expected production for the next few years is hedged at low prices.
Investors would also gain exposure to copper via the JSE’s diversified mineral giants such as BHP Billiton, Anglo American and African Rainbow Minerals, although such exposure would be diluted by the stakes these groups hold in the production of other commodities.
Base metals analyst at Afrifocus Securities Richard Hart said Metorex wouldn’t be tied down by hedges from 2012, while existing hedges were favourably priced. The most onerous of these is a $5,972 per tonne hedge on 16,200 tonnes production at the group’s Ruashi mine that will mature by June 2011. Another 12,000 tonnes is hedged at the same mine at an average of $7,200 per tonne from July 2011 to June 2012.
The group’s Chibuluma mine has hedged 6,000 tonnes of production for between $6,805 and $8,060.
“It (Metorex) has got a big portion (of production) hedged for now; but going forward it would not be significant,’ said Hart. “For a pure copper player, one can’t go any further than Metorex.’
Imara SP Reid mining analyst Steve Meintjes concurred, saying Metorex has good management and owns promising properties. “As long as its shares don’t get too diluted, it should be a strong bet,’ he said.
