Garimpeiro doubts BHP (ASX:BHP) chief executive Mike Henry takes much notice of his mumblings. But you’ve got to wonder.
Just three weeks after Garimpeiro mentioned that the copper stocks were over-sold, Henry lobbed an $8.3 billion takeover bid for OZ Minerals (ASX:OZL).
The spurned offer was a pitched at $25 a share – a 32% premium to OZ’s share price on the day of the offer (August 5).
That allowed BHP to present the offer as being generous. OZ has other ideas, with BHP now having to decide to increase the offer or walk away.
Whatever the outcome, BHP’s initial attempt to snatch OZ was opportunistic in the extreme.
It sought to take advantage of the over-sold situation in copper stocks in response to earlier general equity markets weakness due to global interest rates/economy fears, and the accompanying commodity price retreat.
Copper fell to low as $US3.17/lb in mid-July. That was down from the FY2022 average of $US4.37/lb. So copper stocks like OZ should have been feeling some pain.
But the pain was over-done, leading to Garimpeiro’s call at the time that the copper price was set to rally, and that copper stocks would bounce back. The argument was that copper’s key role in global decarbonisation had not gone away and if anything, it was accelerating.
Copper has since rallied to $US3.61/lb and there has been no better confirmation that the copper stocks had been over-sold than BHP’s attempt to snare OZ for a 32% day one premium or $8.3 billion (OZ is now trading well ahead of the bid price in anticipation of a higher offer).
BHP is a super bull on copper’s outlook.
Apart from the OZ tilt, this week’s commodity outlook report accompanying BHP’s FY2022 said as much.
BHP said a “durable inducement pricing regime’’ is expected to emerge from the mid–to–late 2020s for copper, with a “take–off” in demand from renewable power generation, the electrification of light duty transport, and the infrastructure that supports them both, expected to be a key feature of industry dynamics.
“Looking even further out, long–term demand from traditional end–uses is expected to be solid, while broad exposure to the electrification mega–trend offers attractive upside. Grade decline, resource depletion, water constraints, the increased depth and complexity of known development options and a scarcity of high–quality future development opportunities are likely to result in the higher prices needed to attract sufficient investment to balance the market,’’ BHP said.
Sounds like a good reason to try your hand with an $8.3bn bid for a company like OZ that expects to more than double its annual copper equivalent production in coming years (it gives nickel and gold a copper value) to 344,000t.
What about the copper juniors?
Down in Garimpeiro’s end of the market, picking up copper explorers at mid-July’s distressed levels was the preferred response to the longer term copper thematic. If he had focussed on the copper producers like OZ, he would be up by more than one-third.
Still, Garimpeiro reckons leverage to the upside in copper continues to rest with the juniors. Sunstone Metals (ASX:STN) was mentioned in mid-July when it was trading at 4.2c. It has since recovered to 4.8c for a 14.2% gain.
Lefroy Exploration (ASX:LEX) was also mentioned. It was trading at 29c at the time and this week it was at 27c. Highly anticipated results from the drilling of 1km deep hole at its Burns copper-gold project can’t be far off now.
New World Resources (ASX:NWC) was the last of the copper juniors mentioned in mid-July. It was trading at 3.1c and has since moved to 3.4c.
Sunstone, Lefroy and New World share price charts
From that rundown, the idea that the copper space had been oversold in mid-July holds true. So Garimpeiro is expanding his watch list by adding Caravel Minerals (ASX:CVV).
It is trading at 24c which is up from its mid-July low of 14c. When the copper price was running hot in March it was 35c. All of that goes to the company’s extreme leverage to the copper price because of its low-grade but large scale copper project two hours north of Perth.
A recent pre-feasibility study defined a project capable of producing 62,000 tonnes of copper annually for an initial mine life of 28 years at a cash cost of $US1.72/lb. Its long-life and tier 1 location are big ticks in a world increasingly worried about just where future supplies of copper are going to come from.
Caravel share price chart
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