December 3, 2021
Jonathan L. Brandt, CFA, is a Senior Equity Research Analyst covering Global Metals & Mining, as well as the LatAm Pulp & Paper sector, at HSBC Securities (USA) Inc. He was previously head of HSBC’s LatAm cement, construction and real estate equity research team. He joined HSBC in February 2010 as a LatAm metals and mining analyst, before transitioning to the pulp and paper sector in March 2013. Previously, Mr. Brandt was a buy-side analyst for six years at a major U.S. investment firm, covering commodity companies in LatAm and EMEA.
In this 2,689 word interview, exclusively in the Wall Street Transcription, an experienced metals and mining analyst from HSBC Securities analyst details his prediction for copper consumption and which stocks will benefit.
The demand for copper is coming from a variety of things. And copper is seen as the global bellwether, in that the better global GDP does, typically the better copper does.
Specifically, the uptick in manufacturing that we’ve seen not only in China, but in other parts of the world, the uptick that we’ve seen in manufacturing capacity, the increase that we’re seeing in some residential and real estate construction is all helpful.
And the continued investment in things like EVs, because EVs tend to use somewhere between four to five times more copper than traditional ICE.
And the increase in renewable power is certainly beneficial. If you look at power-generation companies — coal and traditional power companies — they’re using maybe 1 to 2 tons of copper per megawatt. But if you look at something like offshore wind farms, those can use 15 tons to 17 tons of copper.
So, as the renewable power base increases, that is very beneficial for copper consumption. And certainly, we see that expanding not just in China, but really globally, across Europe, the U.S., in emerging markets. So, we think that trend will continue, and that’s all very positive for copper.
But certainly there are headwinds. From the supply side, the Latin America countries, Peru and Chile, account for about 40% of copper production. They have had a variety of potential political and regulatory changes that could make it more costly to produce copper and have caused some concern over whether or not supply growth will continue from there, or certainly cause some concern over the timing of it.
So I think from a supply/demand standpoint, the market continues to look pretty tight.
We’re expecting the market to be in deficit for the next couple of years.
We do see some supply growth coming to meet the incremental demand [for copper consumption] that we’re forecasting. But if you look out five, six years, the market is going to need more projects. And the projects are becoming more and more difficult to bring online.
They’re costing more, so that the incentivized price for copper continues to rise. So from our standpoint, copper is one of the preferred metals that we think investors should be exposed to.”
HSBC Securities has a bit more counterintuitive prediction about mining companies with low ESG scores, not only in copper consumption.
“So there’s potentially more opportunity in a company that has poor ESG scores, if you believe that the board and management are making changes in order to improve their score. It’s better for the environment if they can improve, and typically it’s better for alpha generation as well.
So to highlight, obviously, there have been some issues at a company like Vale (NYSE:VALE), where I know some of the scores from independent and third-party ESG companies — they don’t score very well. But they have put a significant amount of emphasis on improving their ESG score.
Certainly, they’ve done it over the past four or five years from the governance side. And we think they’re doing it now on the “E” and the “S” side. And that’s everything from building backup structures along their dams — they have moved primarily away from tailings dams and to dry processing.
They are creating new iron ore products that are less CO2 intensive in the blast furnace. So there are a variety of different things that they’re doing.
The other thing to highlight is they have discussed their Scope 3 emissions targets, which very few companies have done.
So I think that even though they’re coming from a lower base than their peers, they’re putting a lot more emphasis on ESG and I think that there’s value in something like that.”
The HSBC Securities analyst likes the risk/reward for some specific names, particularly those exposed to copper consumption:
“Obviously, the Chinese economy is slowing, which given 50% to 60% of metals end up in China, that’s obviously a concern.
Now, our team in China is expecting some targeted stimulus, so that we don’t see a collapse and they’re able to keep GDP growing. But it’s always a risk — what China is doing from a macro standpoint and a policy standpoint.
…You take Grupo Mexico and their exposure to copper from their Southern Copper assets, they will produce at $0.70, $0.75 per pound.
Even if you include SG&A and freight and everything else, they still have 50%, 60% margins. So even if copper prices were to go from spot of $4.50 or $4.60, or even if they dropped to $3, they’re still making very, very good margins, great cash flow.
It would be less cash flow than what they were making before, and the share price would obviously correct in a lower copper price environment, but because of their ability to repair balance sheets — and I think this goes for pretty much all of my coverage, because balance sheets have been significantly repaired from just five or six years ago — the likelihood of a company having to sell assets to survive bankruptcy is very, very low at this point.”
Get all the details for these and other stock recommendations from HSBC Securities particularly with regards to copper consumption by reading the entire 2,689 word interview, exclusively in the Wall Street Transcription.