More near-term pain for copper companies despite strong fundamentals, analysts warn

Against a testing backdrop for base metals equities, analysts will be hawkeyed during the upcoming third-quarter earnings reporting, looking for key metrics such as cash flow and cash on hand amid an unforgiving funding environment.

According to Haywood Capital Markets analyst Pierre Vaillancourt, considering the economic prospects and pressure on the equities in its coverage universe, Haywood remains cautious about the sector.

"Following our metals price revisions, we have adjusted our earnings and cash flow estimates lower, impacted by higher costs and lower realized prices," the analyst wrote in a note to clients on Tuesday.

Haywood expects results to reflect weakening metals price trends, with earnings impacted by further negative provisional price adjustments, as was generally seen in the June-quarter earnings reports.

During the September quarter, base metals equities continued to fall, as reflected in the Global X Copper Miners ETF retracting 7% quarter-on-quarter, and the S&P/TSX Global Metals index falling 2.2%, compared with the S&P 500, which fell 5.3% over the same period. The S&P/TSX 500 composite index dropped 2.2%.

Inflation will also impact results, which continued at an annualized 8.2% rate for the quarter, resulting in increased operating mine costs.

"On the other hand, we note that operating conditions and mine sequencing were more favourable for some companies, which will help mitigate the impact of inflation and declining metals prices," Vaillancourt said.

Base metals prices have eased considerably in 2022, as demand has weakened while the dollar has strengthened.

Copper scheduled for delivery in December on Monday fell 1.1% on the Comex market in New York, touching US$3.43 per lb., compared with the March 6 record price of US$5.4.93 per lb.

"Given the risk of a recession and a more subdued outlook for growth, we recognize prices may moderate more sharply in 2023. We believe commodity prices will continue to be supported by China as the world's leading commodity consumer; however, in a much more muted fashion as further interest rate hikes, ongoing Covid issues and the effects of the Russia-Ukraine war take a toll on the global economy," Vaillancourt said.

Haywood is adjusting its price forecast as the fundamental outlook remains negative, flagging the potential for further market headwinds in 2023. It now expects the copper price to average US$3.75 in 2023, down from a prior forecast of US$4.25 per lb.

As a result of the economic risks ahead, Haywood believes base metals equities have not found a bottom yet, even though at these metals prices, producers continue to generate cash flow and have good balance sheets.

"In this risk-off environment with declining metals prices, the focus for producers will stay on cash flow and balance sheets as we look to seasoned operational management to maintain consistent revenues," Vaillancourt said. "Development projects may be delayed or even cancelled in this environment as growth becomes a lower priority.

"For juniors, the focus will be to conserve cash and avoid coming to market to finance, which means more modest exploration and development programs, or even stopping activities altogether," Vaillancourt added.

Fundamentals remain strong

In the longer term, Haywood believes fundamentals remain supported by growing demand driven by decarbonization, electrification and alternative power sources. However, the lack of supply growth driven by an insufficient pipeline of projects and the timeframe for their development is at odds with the approaching wall of demand.

Fitch Solutions Country & Industry Research expects global copper mine production to be set for strong and consistent growth over the coming years. It expects several new projects and expansions to come online, supported by historically elevated copper prices and a positive demand outlook, as outlined in a Sept. 26 report.

Fitch guides for global copper mine production to rise by an average annual rate of 3.2% over 2022-2031, with yearly output rising from 21.1 million tonnes in 2022 to 28.2 million tonnes by 2031.

Credit: Fitch Solutions Country & Industry Risk.

Meanwhile, MINING.com reports that the miners, traders and financiers attending the annual LME Week conference are more cautious on the near-term prospects for copper, given concerns about the global economy.

But many in the market say they are braced for price spikes when the macroeconomic news eventually improves. And without its buffer of bonded stocks, any pickup in Chinese demand could have an explosive effect on the market.

"The physical market is so tight, it's like a room full of gunpowder - any spark and the whole thing could blow," said David Lilley, CEO of hedge fund Drakewood Capital Management in the report.

Analysts at JPMorgan said they still expected prices to fall in the short term. "Copper - which is still trading well above cost support at the moment - looks vulnerable to another leg lower in prices towards US$6,500," MINING.com reports.