Morning Note: Market news and an update on Copper and miner Antofagasta.
Market News
US equities enjoyed a buoyant session last night – S&P 500 (+1.0%); Nasdaq (+1.4%) – amid bets the Federal Reserve will soon signal it’s ready to start cutting interest rates. The Magnificent 7 hit positive territory for August (+2%), having been down as much as 10%.
US Leading Indicators are down for their 29th consecutive month at a level worse than the trough of COVID lockdowns. According to a Reuters poll, the US Federal Reserve is predicted to deliver three quarter-point rate cuts this year. The central bank will cut the federal funds rate by 25 basis points in September, November and December taking the range to 4.50%-4.75% by end-2024, according to 54% of those polled, 55 of 101. The 10-year Treasury yield slipped to 3.88%.
In Asia this morning, equities were more mixed: Nikkei 225 (+1.8%); Hang Seng (-0.5%); Shanghai Composite (-0.9%). The FTSE 100 is currently trading 0.3% lower at 8,330, while Sterling moved up to $1.2989 and €1.1726.
Gold continued to march higher, and currently trades at $2,520 an ounce. Chinese gold imports fell 24% to 44.6 tons in July, the lowest in more than two years, as record prices deterred buyers. Still, banks including UBS and ANZ expect further gains in bullion. Iron ore’s rout continued as China’s steelmakers reduce production. Brent Crude slipped back to $77.25 a barrel with the market now anticipating a lower risk of futures spiking amid lingering Chinese demand concerns and the potential for an Israel-Hamas cease-fire.
Source: Bloomberg
Commodity News - Copper
Copper is an amazing metal: it is corrosion resistant, extremely malleable, and an exceptional conductor of heat and electricity, making it a key input for a wide range of technologies including power generation and transmission, motor vehicles, domestic appliances, and industrial machinery. Demand is forecast to grow by between 2% and 3% per annum through to 2030, driven by:
- emerging markets – urbanisation and industrialisation in India and Southeast Asian countries are expected to dominate copper consumption growth as the rate of Chinese demand growth begins to slow. A growing middle class in emerging economies is also boosting sales of copper-rich consumer goods such as electronic devices and cars.
- renewable energy – needed to tackle global warming. Solar and wind technologies need four to six times as much copper as conventional energy mainly owing to the need to connect larger numbers of smaller units to the grid.
- electric vehicles – take-up is being driven by stricter environmental standards to restrict emissions and reduce air pollution. Electric vehicles contain on average more than three times the amount of copper as conventional ones owing to their use in batteries, high-voltage wiring, windings, and rotors. Charging stations will also boost demand.
At the same time, the outlook for supply is uncertain. The world’s largest copper mines have all been in production for decades and are in decline. There is plenty of copper ore, but it is of lower grade which means it is more expensive to mine. In addition, new discoveries of copper are declining – most of the good stuff has already been found. In recent years, only a handful of mines have come into production. Furthermore, the industry is increasingly being forced to take on technically complex projects in countries where foreign ownership and exploitation of natural resources are highly sensitive issues. Supply is also being undermined by past and ongoing reductions in maintenance activity and sustaining capital expenditure. Finally, inflation has pushed up costs throughout the supply chain, so that a higher copper price is needed to incentivise production.
Although we believe the long-term outlook for the copper price is positive, we expect periods of volatility and price weakness like we have seen over recent months. Over the summer, the price has retreated on concerns about an imminent recession in the US and signs of weak demand from top consumer China.
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This morning, Antofagasta released results for the first half of 2024 which were in line with market expectations as higher copper prices more than offset lower sales. Guidance for the full year was reiterated and in response the shares are little changed in early trading.
Antofagasta is a FTSE-100 listed mining company based in Chile focused on copper and its bi-products. The company has a significant mineral resource base of more than 21bn tonnes of resources, including more than 6bn tonnes and 5bn tonnes at Los Pelambres and Centinela respectively. The shares provides a way to gain exposure to the copper price, albeit with the operational and political risks involved with the exploration and production.
In the six months to 30 June, copper production was 284,700 tonnes, 4% lower than last year mainly due to lower production at Centinela concentrates offset by higher production at both Centinela Cathodes and Los Pelambres. Copper sales volumes fell by 6%, while the average realised copper price rose by 10% to $4.40/lb.
Gold production decreased by 22% to 66,900 ounces, reflecting lower gold grades at Centinela. Gold sales volumes fell by 23%, while the average realised gold price was up 16%.
Revenue rose by 2.3% to $2,955m mainly because of lower copper and by-product sales volumes and lower realised copper prices.
Cash costs before and after by-product credits were $2.65/lb and $1.94/lb, 7% and 11% higher than last year, due to lower ore grade and recoveries at Centinela concentrates and lower grades at Los Pelambres.
The group’s Cost and Competitiveness Programme generated savings and productivity improvements of $130m, mainly related to operational efficiencies ($74m), throughput run time ($34m), and contract management ($22m). This was in line with plan and equivalent to 20.7c/lb of unit cash costs.
EBITDA increased by 4.8% to $1,394m, with margins up 110 basis points to 47.2%. Cash flow remains strong, up 14.5% to $1,484m, following a positive movement in creditor balances. The group’s balance sheet is very robust, with a net debt to EBITDA ratio at the end of the period of only 0.46x.
Capital expenditure rose by 4% to $1,060m, with full year guidance of $2.7bn confirmed. The group proceeded with key projects that provide a strong platform for future growth – the Centinela Second Concentrator is moving forward ahead of schedule and initial work has started at new Los Pelambres projects.
In line with its policy to pay out 35% of earnings as dividends, the company has today declared an interim dividend of 7.9c, 33% lower than last year.
As previously announced, total production for 2024 is expected to be at the low end of the company’s 670-710,000 tonne guidance range. Given projected production for the full year, cash costs before by-product credits are expected to be $2.40/lb and net cash costs expected to be $1.70/lb (based on current copper spot prices).
Source: Bloomberg