Copper … the Comeback Kid of 2023!

In this Investor Webinar we discuss:

– Centrex (ASX:CXM) and
– The comeback of copper.

 

See full transcription below.

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You can watch last week’s Investor Webinar here

 

 

Transcription

 

Marc: Good morning, and welcome to our weekly webinar. It’s the 11th of January. Stuart, are you feeling bullish?

Stuart: There’s always a good reason to be bullish. In fact, when I’m feeling bearish, my wife says you are not looking the best, you ought to go to the doctor. But today we’re gonna give the viewers a few good reasons to be bullish. A little later on in this webinar, we’ll look at the big opportunity in copper. But Marc, I propose we kick it off with a stock we’ve been talking about for a while, Centrex (ASX: CXM).

Marc: Yeah, good idea. Centrex is one we really like. But the last couple of weeks has been hovering sort of around 12 cents, but we think there’s a reason to be optimistic in the near future actually. So, Stuart, let’s jump in.

Stuart: Right. So, what is Centrex? So, I’ve titled this presentation “Rocking Phosphates.” Centrex is a would-be producer of phosphate rock. Now, I don’t have to tell you that fertilizer was big news in 2022. As soon as the shooting started in Ukraine, Russia and Belarus, who are major producers of fertilizer products had to go offline. The result was big jumps in the price of fertilizer. And I’ve included an old chart there on the right-hand side to show you what happened. Just go to the supermarket and see what’s happened to the price of food these days. There are reasons why things are more expensive amongst other things, floods in the producing regions, but increases in the price of fertilizer has a lot to do with it. So, if you wanna offset the fact that you’re having to spend more at the supermarket here’s a good way to do that.

Marc: It’s a good hedge against food inflation.

Stuart: Absolutely. Let’s talk about phosphates first. So, phosphate rocks, any mine with a high phosphorus content, you dig the rock out to get the raw material. You react the rock with sulfuric acid. You’ve got phosphoric acid and ammonia, and then you’ve got monoammonium phosphate and diammonium phosphate. That’s a mouthful, but in a nutshell, that’s one of the mainstays of fertilizers for farmers right around the world. Largest produced in China, United States, and Morocco. Morocco is the Saudi Arabia of phosphate rock. But there are concerns that with something like 8 billion people on the planet now, we’re running out of phosphorus. We might have hit peak phosphorus.

Well, let’s turn now to Centrex with the Ardmore Project, and we’ll talk about their opportunity. So, here’s Ardmore, south of Mount Isa in North West of Queensland. They’ve got a large hitherto undeveloped phosphate rock deposit that they did a definitive feasibility study on recently. The company originally proposed to develop this with an 800,000-ton-per-annum operation. Then they built a pilot plant and discovered that pilot plant was so good in terms of its efficiencies that possibly they didn’t need to go all the way to 800,000 tons, they could spend less capital and get started with a much lower cost operation. And here’s the thing that maybe a lot of people are missing with Centrex. This is a replacement product. At the moment Australia imports all its phosphate rock. It’s got to ship here from places like Morocco. This could be produced locally and therefore establish a little more food security for Australia as a result.

Marc: So, Stu, just out of curiosity, how much is Australia importing at the moment from jurisdictions like Morocco?

Stuart: It would be around 600,000 to 800,000 tons. And the reason is this can replace the entire import bill for Centrex. Sorry, Centrex can replace Australia’s entire import bill.

Marc: All right. That’s a big deal. Absolutely.

Stuart: So, what do we like about Centrex? This project is now up and running. It secured a lot of tentative offtake partners for the project, including Samsung’s commodity trading division up in Asia, and a couple of farm cooperatives in New Zealand. It’s now shipping rock out via the port of Townsville to those customers and intends to get to about 30,000 ton a month during the course of this year. The definitive feasibility study, we call it Ardmore 2.0, 800,000 tons, and we reckon that’s worth at least 21 cents a share. But probably more given that that [inaudible 00:04:20.282] was priced just 125 ton for phosphate rock and phosphate rock is about 300 a ton at the moment.

Ardmore 1.5 is where you put maybe $30 million into the demonstration plant and expand that. And then you don’t have to spend the amount of capitals required for Ardmore 2.0. And if you go to the next slide, Marc, you’ll see that 2023 is when it all comes together. Next week we’ll have the quarterly report. We might get some insight as to what the pricing of this product and how much they’re shipping at the moment. But in the course of 2023, they’ll work at nailing down definitive offtake agreements, after which the banks can kick in with whatever financing is needed. FEED, front-end engineering and design for the definitive feasibility study plant through the course of the year. But they reckon they can actually get the Ardmore 1.5 plant fully built before the year is out.

So, why has the stock been relatively weak lately? Look, I think people have gotten bored with stocks that benefited from the Ukraine war last year. The assumption is maybe peace will break out sooner rather than later, and suddenly fertilizer prices will return to normal. They may return to normal, but this project is still quite economic at whatever normal looks like in terms of phosphate prices. And in the meantime, it’s got some serious competitive advantage as I said, being able to replace the import bill for phosphate rock is a really big deal. So we think there’s a lot that’s coming for the stock in 2023 and encourage investors to go take a look at it.

The way to think about the current decade we’re in as fertilizer prices will be a lot stronger than they were in the 2010s. You’ve just gotta look at a different commodity, the Jansen Potash project that BHP is working on in the Canadian province of Saskatchewan. The reason BHP felt confident selling their oil and gas business to Woodside was they can more than make that up once Jansen gets up and running. So the smart money is now moving into fertilizers in a serious way, knowing that well, for one thing the world’s looking for capacity from safer jurisdictions other than China and Russia and so forth. So, even leaving the contemporary events out of the picture, there’s still a good environment for these kind of projects generally.

Marc: Last question, Stu, before we move on. So, the current production, where is that being shipped to? Because you talk about definitive off-take agreements, but there must be something in place already.

Stuart: Yeah, so they’ve got off-take agreements in the sense of there are partners that’ll take everything that this thing will produce. What you want is a take-off pay arrangement or something like that, where even if the commodity isn’t actually shipping, the company is paying or something like that, but nail it down in a binding kind of way. And there’s still some spare capacity in the 800,000-ton-a-year operation that they can sell to potential vendors. So there’s that element as well. So I think we’ll see that nailed down, particularly once the test customers that are using it now have had a chance to use it and realize this is a good quality product.

Marc: All right. So, we’ll know more by the end of next week then with the quarterly, especially in terms of pricing and volumes.

Stuart: Let’s see what they have to say. But yeah, I’d encourage readers to go take a look at this one because it’s unusual in terms of the options that this company has.

Marc: Yeah, it closed at just 11 cents yesterday. So yeah, we think there’s a lot of upsides. So have look at that one. All right, then something else too, we’ve been bullish on copper for the biggest part of ’21 and a bit of ’22. That is until the recession fears started to kick in with the rise in interest rates and China basically sort of, well, I wouldn’t say switching off, but close to it. But things seem to be turning around now.

Stuart: Right. So, copper the metal bottomed in July of this year. Why should investors be paying attention to copper? Copper is probably the most important industrial metal that we have right now. When copper is high, it’s generally because the economy is strong and vice versa. Now, copper is a volatile metal. There’s a 12-month chart showing that the metal was up near about 4.80 a pound back in March of last year, but it bottomed about 3.25. That’s a pretty strong up trend you’ve had since July, getting a head of steam since November. And as Marc points out, that’s because it’s apparent now that China is really opening up and China consumes about half the world’s copper. So, if China’s economy is doing well, then copper’s doing well.

But in addition to that there are a few other factors that investors need to keep in mind. One is that a lot of the copper that we use right now comes from very old mines that were developed in the ’80s. I think, for instance, the Chuquicamata copper mine in northern Chile that BHP developed a long time ago. A lot of those producers are under pressure because the mines are getting old and therefore not as robust in terms of the production profile. The reason that I’ve put the flags of Peru and Chile up there is because they’re major producers and they’ve seen a bit of political unrest in the last two years as well. So, it’s not unreasonable that could hamper output going into the world copper market.

Look around the world, there’s not many new monster copper mines coming on stream, and it generally takes about seven years, soup to nuts to develop a large new copper mine. So, Marc, if you’ve got a spare copper deposit somewhere, I’m very happy to take it off your hands right now because we’ve got a sellers market for the commodity. And in about the year 2030, I’ll be a rich man as a result of that.

The other thing is regular demand for copper is ticking up. You’ve not just got the usual industrial uses in copper wire and so forth, as I’ll talk about in a moment, there’s a lot of copper wire going into electric vehicles. And as a result of that, we might see a secular step up in terms of the demand profile. As things stand now, the stocks of copper in LME warehouses, so these are places that the London Metal Exchange knows about, that you put copper ready to be sold to an end customer. LME keeps track of that on a daily basis. And the sucking sound you can hear is the world running out of copper in warehouses.

So, I mentioned that there’s a lot of copper in electric vehicles. Here’s a chart that I managed to pick up that illustrates that. Basically internal combustion engines, maybe 48 pounds of copper. Something like triple that and more in a typical electric vehicle. Basically, because you’ve got a lot more electricity that you’ve gotta move around. So as the world’s car fleets move over to be electric, and this is the decade when that’s gonna happen, you’re gonna see a lot more copper needed just for that demand. Maybe just the part of Sydney I live in, but I’m seeing a heck of a lot of Teslas on the road. So, I get the feeling this whole electric vehicle revolution is getting up a head of steam. That’s gotta be good for copper at the right… You know, so long as there’s no other factors in the game, like, you know, China alternatively opening up or closing down.

So who benefits from that? BHP just bought OZ Minerals and they’ve got a few copper mines in their portfolio. So, copper’s probably the second most important metal within the BHP stable after iron ore. So, if copper’s doing well, BHP is generally doing well. One that I’ve liked for a long time is Copper Mountain Mining. That company owns a large copper mine in Southern part of British Columbia in Canada. The Copper Mountain Mine actually had a bad year. Its production was about 50% of normal capacity because they were working through some areas of low grade, that starts to fix itself in 2023 at the same time as the copper prices coming back, that’s gotta be good for Copper Mountain Mining.

Australia’s Resources up in Queensland with Lady Annie Mine, they’ve bought that mine on at a very good time. Only about four years worth of copper in that mine, but the opportunity to leverage that into the next big thing in terms of the exploration plate that they’re working on up there.

29 Metals owns a copper mine in Queensland, and then there’s Sandfire, which is working on big copper mines in Spain and then developing one in Botswana as well. So, there are a few producers that are focused on copper in a serious way that would benefit from this at the moment.

Marc: Right. I have a question Stu, looking at share prices, Sandfire is ranked quite high recently. Of those five companies, which one do you prefer?

Stuart: Copper Mountain Mining is the one to look at because it got hampered by production issues in the last four quarters. So ordinarily this mine produces about 100 million pounds of copper equivalent. In the year that we’re just about… Well, that is now completed that they’ll report on shortly. That came down to about 55, 60 million pounds. So, the numbers don’t look good for 2022, but they snapped back quite nicely in 2023. And this company on the drawing board has a major expansion in the works. There’s about 30 to 50 years’ worth of copper at Copper Mountain. And on the expansion, the new NPV for the mine is about 1.2 billion U.S. dollars, which is considerably more than the share price. So the day when they start to press the button on that expansion, and you’ve gotta think in the sort of environment we’re moving into now, that’s gotta be good for Copper Mountain Mining.

Marc: All right, good stuff. So there you have it, copper is roaring back to life, basically. We like Centrex a lot and maybe next week we can talk about some of the other drivers for investors in 2023. Obviously, interest rates are a big part of that. Maybe the war in Ukraine could be a part of that, but for now yeah, I think if you wanna do your homework, have a look at those copper plays that Stuart just talked about and have a look at Centrex and especially because Centrex will have some news next week. I think that’s all we have time for, Stu, some final words from you?

Stuart: So, investors have gotta lean to the upside this year in terms of being bullish rather than bearish. That’s not just this uber bull saying that, you’re seeing interest rates beginning to peak out from the current cycle, and if they haven’t peaked out, they’ll have peaked out within the next few months. You’re seeing stabilization in key commodities, like what we saw in copper, gold is another one. As you know, Marc, I’m a gold bull, and the price of gold is coming back quite strongly as well. And you’re seeing an end to the wreckage in technology stocks. So when you add it all up, now is a good time to be bullish.

Marc: Absolutely. On that bombshell Stu, we’ll sign off and see you next week.

Stuart: See you later.