After a strong performance during the first half of 2018, copper has been weak and is currently trading at close to its lowest levels since mid-2017. Having hit peaks of more than $7,200/t last June it is now around the $6,000/t area, and although an improvement on the $5,800/t level it started the year at, I would hardly call this slight resurgence a proper bounce just yet. But I do think that is going to come as the metal is too important to stay at these levels for long, especially in light of the fact that many analysts are forecasting a supply deficit in the coming years due to the increasing use of the metal – as I’ve mentioned in the past, electric vehicles will be a factor and use far more wiring than the cars that are currently in common use. For example, a typical car now has up to 49lb of copper in it, whereas a hybrid contains 85lb, a plug in hybrid vehicle 132lb and a battery electric vehicle 183lb. This means that at some point we are going to see a shortage as not that many mines are coming online.
That will change if the price does reach higher levels as more projects will become economically viable, but also means that those that are able to operate in the current price environment will become far more profitable. This is definitely a metal that I would want to have exposure to in my portfolio going forwards over the longer term, and I would argue that the current dip presents a buying opportunity – both as a proper investment and also for anyone just looking to trade any decent recovery in the coming months. Equities offer the perfect leveraged play on the metal, and I see KAZ Minerals (KAZ) as being a decent option at the current share price of 533p. This Kazakhstan-focussed miner has had its share of problems in the past and I accept that some will be wary about investing in a company operating in that part of the world, but it has been doing so successfully for many years and does seem to have overcome the issues it faced in the past, and the completion of its Bozshakol and Aktogay mines has had a large positive impact on the business – with more upside potential from both.
It has got rid of its higher cost operations which in the past had been a drain on the resources of the company, and although the debt levels here are high - around $2 billion of net debt - it has been reducing that and would have done so even quicker if it hadn’t been for the investment in making its newer operations, such as the Aktogay extension, the success that they have already become. Working capital isn’t exactly a problem either as it had more than $1.5 billion available at the end of September. Its Q4 production report is due in a few days time and although there is always some risk involved in holding shares when something like this is released, I would expect it to be positive and show that the company has achieved the upper end of its 270-300kt guidance, which would be a significant increase on the previous year. It is also on track to easily achieve gold production guidance of 160,000 to 175,000 ounces, and although it has seen a decline in zinc output that is more than made up for by the increases in these other metals - silver is also slightly down, but really the main focus here is the copper.
There is also potential here for significant growth moving forwards and Aktogay II will add 80kt per annum to its output by 2021, and the acquisition of Baimskaya should see 250kt per annum potentially added to output, although that will be some way off in 2026. Not only does the business look good to me currently, especially now that production costs have been reduced to such a low level, but the company looks to be investing for the future, which should be very bright indeed if we do see copper at much higher levels, as is widely predicted. So, I would definitely consider this as a proper long term investment and it could also be one that has potential for inclusion in a SIPP.
Filed under: KAZ Minerals, Luke Johnson, Frontera, Metro Bank, Burberry, Tim Martin, Dillistone, Escape Hunt
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