Rare Earths and Copper

Simon Turner

Senior Equity Analyst

8.00 am 21 September 2020

Raw materials demand accelerating

With over 300% growth expected by 2040, renewables will become a far larger portion of the global energy mix. This renewables boom will lead to significant demand growth for certain raw materials over the coming two decades. As briefly covered in our introduction to green energy, the raw materials most needed to meet growing renewables demand are copper and the rare earth minerals.

In this report we take a deeper look at these commodities and at some of the stocks producing them.

Growing copper demand

The long term demand for copper will be boosted significantly by the future growth in electric vehicle numbers globally, with one in six cars expected to be electric by 2025. Electric vehicles use 83 kg of copper on average, compared to 23 kg for an internal combustion engine car, so electric vehicle copper demand is expected to increase from 185,000 tonnes in 2017 to 1.74 million tonnes by 2027. And the more advanced electric vehicles become, the more copper will be required.

Copper is also a critical raw material for the renewable energy sector as it is used in all solar and wind projects. A single wind farm can contain up to 15 million pounds of copper.

As shown below, these growing demand drivers are happening concurrently with falling copper supply from base-case global production and possible new projects. This is bullish for long term copper prices.

We review five ASX-listed copper stocks below:

1. OZ Minerals (OZL) owns Prominent Hill, one of the world’s lowest-cost producing copper mines, and has a large portfolio of operating mines, mines in construction and exploration projects. The company reported a strong June half result and is on track to meet raised 2020 full year guidance due to improved gold production and lower mining costs at Prominent Hill. The company provides good exposure to both rising copper and gold prices, with further guidance upgrades looking likely.

2. Sandfire Resources (SFR) is a copper, gold and silver producer delivering solid cash flows. Whilst not in the same guidance upgrade cycle as OZL, SFR has a strong balance sheet with $291 million in net cash, and is paying attractive dividends (14 cents fully franked in the 2020 financial year). The company is well positioned to invest in its exploration portfolio and project development, at the right stage in the cycle.

3. Aeon Metals (AML) owns the Walford Creek copper-cobalt project near the Queensland-Northern Territory border. The project has an indicative internal rate of return of 34%. Management is focused on defining and expanding the resource, and further resource growth is likely. Mining companies that expand their resource and progress to first pour tend to provide particularly leveraged exposure to the underlying metals. Aeon offers good exposure to two critical metals, copper and cobalt.

4. KGL Resources (KGL) owns the Jervois copper and silver project near Alice Springs. KGL is a micro-cap and recently raised $4 million to fund pre-development modelling and costings on the project. Whilst KGL’s resource has been growing and is likely to continue growing, the company is relatively high risk at this early stage of the project’s development.

5. Bougainville Copper (BOC) owns copper assets on Bougainville Island in Papua New Guinea. However, the company’s outlook has become connected with Bougainville’s move towards independence and is uncertain. The company is currently in court trying to reverse a decision to refuse an extension of its exploration licence. Given the country’s troubled history of fighting over copper resources, this stock should be considered very high risk.

Big supply deficits loom in rare earths

Rare earths, particularly neodymium and praseodymium (NdPr), are used in electric vehicles and wind turbines. Most of the world’s supply comes from China, which raises supply security issues. Fortunately, Australia has abundant rare earths resources it can develop.

The commodity research group CRU expects demand from the wind sector to more than double during the 2020s. Electric vehicles will also drive significant demand growth, with a 350% increase in rare earths used by the sector expected between 2018 and 2025.

CRU expects the market to record supply deficits in the order of 13-15% of prevailing demand in the early 2020s, which is significant for any commodity market. Consequently, CRU see prices for magnet metals rising sustainably in this period, as relatively few western producers have projects ready for financing and construction prior to 2025.

The forecast large supply deficit in neodymium and praseodymium can be seen in the chart below, indicative of rising prices ahead.

We review three ASX-listed rare earths stocks below:

1. Lynas Corp (LYC) is a profitable rare earths miner which recently raised $425 million of equity to fund its ambitious Mount Weld expansion program in Western Australia. Mount Weld is expected to provide a long runway of revenue and earnings growth for Lynas. The company has a solid track record of growing production and stands out as the most attractive rare earths stock listed in Australia.

2. Arafura Resources (ARU) is a micro-cap progressing its Nolans neodymium and praseodymium project in the Northern Territory. Management has made progress extending the mine life and lowering operating costs. The Nolans project appears to be a solid asset likely to reach production, but the company remains high risk at this early stage.

3. Pensana Metals (PM8) is progressing its Longonjo Project in Angola where it recently received a mining licence. It has also been granted an exploration licence for a 7,456 square kilometer area adjacent to the project with confirmed rare earth mineralization. Management recently upgraded the resource estimate and further upgrades are likely. Mining in Angola should be considered high risk.

Conclusion

Strong growth in renewable energy and electric vehicles will accelerate demand growth for copper and rare earths. Rare earths in particular are positioned for strong price increases because of large supply deficits in coming years.

Lynas Corp offers the best exposure to rare earths. Of the listed copper stocks, OZ Minerals looks best positioned because of its low-cost operations and potential for earnings upgrades.

Disclosure: The author does not hold shares in any of the above companies.

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