Outlook for copper tightly bound to economic activity in developing markets
by: Virginia Harrison
From: The Australian
May 01, 2012 12:00AM
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AMP Capital senior investment strategist Nader Naeimi said a handful of recent indicators pointed to China's economy bottoming before the end of the second quarter.
"There's a good correlation between Chinese monetary measures and industrialisation. China has an underlying consumption uptrend," Mr Naeimi said.
UBS, JPMorgan and Merrill Lynch all recently upgraded their view on the resources sector on improved confidence in the Chinese economy. The world's fastest-growing economy is also central to boutique resources fund manager Limestreet Capital's bullish stance on copper.
Limestreet research analyst Andrew McLeod, whose fund invests in miners other than BHP Billiton and Rio Tinto, said supply pressures and deteriorating grades were the biggest challenges facing the copper market.
"Mine supply is more of a concern than demand. The bigger copper miners are struggling to increase their capacity and grades are falling," Mr McLeod said.
Grades tend to deteriorate as mines age, and declining grades drive up costs for copper producers. As the higher-grade deposits run out, operators have to move more dirt and invest more capital to keep production steady.
"People have to run very hard just to stand still in the copper space," said Prasad Patkar, portfolio manager at Platypus Asset Management in Sydney.
For this reason, fund managers recommend investing in stocks with a solid growth pipeline.
Platypus manages some $1 billion in funds and names PanAust as its top copper pick.
Mr Patkar said OZ Minerals had solid future growth prospects at its South Australian Carrapateena project, "but there's a bit of a hole in the growth profile in the medium-term".
Limestreet holds three smaller copper plays with increasing production profiles: Africa-based Tiger Resources and Discovery Metals, as well as Hillgrove Resources, a junior producer with operations in South Australia.
Tiger's copper project in the Democratic Republic of the Congo went into production last year. Discovery's Botswana mine is due to move into production later this year. The project boasts high copper grades of 1.5 per cent above decreasing global averages of about 1 per cent.
"Investors should keep all these little companies on their radar," Mr Patkar said.
"It's not that hard for these companies to double production, but for BHP Billiton to is near impossible. The leverage is enormous for these guys."
Consolidation in the copper sector is also on the industry's radar. AMP Capital's Mr Naeimi, who helps manage $123bn in multi-asset investments, said junior copper producers were appealing takeover targets.
"In this
"Some of the smaller firms will be targeted when you see green shoots and good valuations. You're going to see corporate action and acquisitions."
Last on the shelf in the resources-rich Congo, Limestreet's Mr McLeod identifies Tiger Resources as the No 1 takeover target in the copper space. "All of the surrounding mines in their region have had corporate activity over the past 12 months," he said.
"A likely candidate is major shareholder Trafigura. I'm sure they'll be involved in some capacity with any corporate action."
www.theaustralian.com.au/business/wealth/...gac6-1226343109483
"Prognosen sind schwierig, besonders wenn sie die Zukunft betreffen."
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