HAYWOOD Securities Mining Analyst Stefan Ioannou says that increasing demand and near-term supply shortages make base metals a bargain that won’t last. In this interview with The Mining Report, Ioannou argues that juniors with good deposits and low costs are in a unique position to benefit, and lists several companies that look to do just that.
The Mining Report: What effect is the strong U.S. dollar having on base metal prices and base metal equities?
Stefan Ioannou: Base metals are priced in U.S. dollars, so as the dollar rises in value, base metals fall in value. Right now, copper is testing the $3 per pound ($3/lb) level, and zinc is drifting down toward $1/lb. And, of course, lower base metal prices are reflected in lower valuations of base metal equities.
TMR: What are your forecasts for base metal prices?
SI: Our metal price forecasts for 2015 forward include $3.25/lb copper, $8.50/lb nickel and $1.15/lb zinc.
TMR: What are the economic assumptions underlying these forecasts?
SI: We try to pick metal prices that are arguably conservative, but we do take into account some of the major supply-demand fundamentals coming down the pipe. For example, zinc is facing a significant supply deficit into 2016, so we could see zinc rise above $1.50/lb fairly quickly. Would it stay there for more than two or three years? Probably not, given the anticipated increase in higher-cost Chinese production that higher zinc prices would trigger. Nevertheless, we see a medium-term investment opportunity emerging.
TMR: Why do you believe the world faces a copper deficit in the near future?
SI: On the supply side, the majors have in the last few years focused on cutting costs at existing operations. That’s obviously great for their bottom lines today. However, it also means new mines and greenfield developments are being deferred. So by 2017–2018 we will face the consequence of a lack of new supply, which is demand outweighing supply.
TMR: What’s your view of the junior copper space?
SI: Everything I cover has come down in valuation. I think there is opportunity here. The best place to start is with the producers because they are generating cash flow and have positive balance sheets. One such company is Copper Mountain Mining Corp. (CUM:TSX). Its Copper Mountain mine in British Columbia—owned 25% by Mitsubishi Corp. (8058:JP)—has had a long start-up. The company has just installed a new secondary crusher, which is finally going to bring it to nameplate capacity: 35,000 tonnes per day (35 Kt/day) of throughput. This is the turning point, and I think Copper Mountain Mining is poised for a rerating.
TMR: What other producers did you want to discuss?
SI: Capstone Mining Corp. (CS:TSX) and Nevsun Resources Ltd. (NSU:TSX; NSU:NYSE.MKT). Capstone has three mines which, for the most part, are operating well: Pinto Valley in Arizona, Cozamin in Mexico and Minto in the Yukon. Pinto Valley was bought from BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK) last year for $650 million ($650M). The market was skeptical at the time, but the company immediately drilled and expanded the project’s five-year reserve, which now supports a mine plan through 2026. This has been a game changer for Capstone’s capacity.
TMR: Is Nevsun an example of the perils of overstating political risk? The Bisha mine is in Eritrea, but it is nonetheless a success story, right?
SI: Very much so. I give the Eritrean government a lot of credit. It established a well-defined and well-considered mining code that lays out exactly how the government will participate and the steps that need to be taken to move a project into production. Bisha is now 60% owned by Nevsun and 40% by the government. The government got 10% for free, which is pretty standard across Africa, and proceeded to pay fair value for the other 30%.
Nevsun has close to $400M in cash and no debt. That works out to $2/share, and so half of the company’s share price is actually cash. Nevsun’s biggest issue going forward is what its next acquisition is going to be.
TMR: Bisha began with gold mining and then with copper. What is its future?
SI: Bisha is a 40 million ton (40 Mt) volcanogenic massive sulfide (VMS) deposit, world-class in size and high grade. For the first few years Nevsun mined 8 grams per ton (8 g/t) gold from an open pit that had basically no strip ratio to it. Now the company is into the second layer of the VMS cake: supergene copper. It is mining grades well north of 5% now in an open pit. As Nevsun moves into the third layer, toward 2016, there will be zinc and copper, hopefully just as the zinc price really starts to pick up.
TMR: What are the prospects for resource growth at Bisha?
SI: Bisha has always been a very prospective land package, but this is the first year Nevsun has spent significant money on regional exploration. VMS deposits typically occur in clusters, and Nevsun has already found a few smaller ones outside Bisha: one called Harena is 10 kilometers south. Assays released September 23 included 0.85% copper, 3.96% zinc, 0.4 g/t gold and 43.6 g/t silver over 41.6 meters. Nevsun has already outlined a 1.2 Mt reserve that remains open for expansion. Ore from the deposit will be trucked to the Bisha plant for processing.
Click HERE if you are interested to read the full interview.
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Stefan Ioannou has spent the last eight years as a mining analyst covering mid-cap base metal companies at Haywood Securities. Prior to joining Haywood, he worked with a number of exploration and mining companies, as well as government agencies as a field geologist in Nevada and throughout the Canadian Shield in both the gold and base metal sectors.
