Investment Matters

Copper Ready

This week we attended Macquarie Bank’s base metals summit.

The ‘future of copper’ featured and has been the topic du jour – with a surge in price over the past two years bringing the commodity into focus.

We see an exposure to copper as an important part of a diversified portfolio.

Clients achieve an exposure to copper primarily through three holdings: Sandfire, Aurelia Metals and Newcrest.

Describing both Aurelia and Newcrest as copper producers may be a surprise to some, as they are typically thought of as ‘gold’ exposures.

However, gold is often dug up in a form where it is complexed with other metals, including copper.

While rarely highlighted in presentations by either company (with copper thought of as a ‘credit’ or a kind of ‘negative cost’), copper will become increasingly important to Aurelia and Newcrest in the coming years.

This was in focus this week.

Newcrest released three important pre-feasibility studies that helped give more colour to its growth profile in the coming years. This included a materially growing exposure to copper.

Furthermore, Aurelia released drilling results which have firmed up the company’s future copper prospects, which we see remain undervalued.

We detail these announcements below.

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Firming up the future

Newcrest has long been a core holding in client portfolios; a diversified (multiple producing assets), low-cost producer of gold with long-life assets.

However, many have been quick to discount the company’s long-term growth assets (circa FY25-FY50), overly concerned that production from its current assets is declining.

This week, the company provided more certainty to investors, by releasing three pre-feasibility studies pertaining to some of these growth investments.

These studies further delineated these growth options and gave a better indication of the costs of these projects and their expected returns.

Shares in the company ended the week 5% higher.

Newcrest’s growth projects include:

  • Red Chris - a recently acquired, very long life (30+ years), and low-cost mine in Canada
  • Havieron - a mine located near current producing asset Telfer in Western Australia
  • An extension of its flagship Lihir Mine located in Papua New Guinea.
  • An extension of its other flagship mine, Cadia (previously announced in August).

The three studies released this week indicate these projects will add $3.2 bn in value over the coming years (assumptions: Gold @ US$1,500/oz, Cu @ US$3.30/lb, AUD: USD @ 0.75).

The combined production from these assets should see a ‘smoothed’ production profile over the coming decade.

These projects are expected to be funded from Newcrest’s cash flows, and a clean balance sheet that has large undrawn debt facilities.

Smoothing out concerns: Newcrest’s updated production profile

Source: Newcrest

Importantly this should also see Newcrest’s costs return to much lower levels.

This is illustrated in the chart below, which plots Newcrest’s all-in sustaining costs (an estimate of the majority costs involved in mining a tonne of ore).

Moving down the cost curve

Source: Newcrest

A key part of this will be copper production, which is expected to rise over the coming decade – with the underground mining of Red Chris from FY-27 being a key driver of copper production.

For reference, the amount of copper expected to be produced per annum over the next decade (120-160 kt) is approximately half of that produced at BHP’s Olympic Dam, the world’s fourth-largest copper deposit.

Copper: an increasingly important part of Newcrest’s production

Source: Newcrest

Overall, the releases this week highlighted that Newcrest continues to be a long-life, low-cost producer, who provides significant exposure to copper over the coming decade.

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Building on a solid foundation

This week, Aurelia released drilling exploration results at its four key deposits: the newly acquired Dargues, Kairos (Peak Deeps), Federation and Great Cobar.

Overall, the result highlighted strong intersections across the portfolio, which support an expansion and increase in confidence of its resource base.

This is important, as Aurelia already has a large amount of infrastructure built or planned in the Cobar region. Therefore, extending existing deposits delivers strong profits.

Shares in the company ended the week 8% higher.

Highlights of the announcement included:

Deposit

Exploration result

Federation

  • High-grade gold, zinc and lead intercepts in both the central and southwestern portions of the deposit.
  • A very high-grade gold intercept at the southwest edge of the deposit (23m @ 5.8% Pb+Zn, 9.7g/t incl 5m @ 15% Pb+Zn, 41.7 g/t Au) which warrants further exploration.

Great Cobar

 

  • Further step out drilling highlighting high-grade copper intercepts at depth
  • As a reminder, Great Cobar was a significant copper mine in the area between 1870-1919 but has been minimally explored at depth.

Kairos (Peak Deeps)

 

  • Very high-grade copper mineralisation along strike to the north of Kairos
  • Intersections include 43.0m at 2.4% Cu and 0.1g/t Au, 10m at 3.4% Cu and 0.2g/t Au, 7m at 5.9% Cu and 0.1g/t Au, and 4.5m at 3.8% Cu and 1.5g/t Au.

Dargues

 

  • Deep infill and extension drilling highlighting high gold grades at depth (16.0m at 7.3g/t, 13.0m at 8.6g/t and 9.7m at 4.2g/t).
  • As a reminder, Aurelia acquired the asset with a view that’s its life could be extended with further drilling at depth

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

We note that there were significant copper intercepts at Great Cobar and Kairos (Peak Deeps).

The company has recently made a point of highlighting that it is ‘copper ready’. We suspect that the company’s exposure to copper and base metals will play a larger role over coming years, particularly with further copper discoveries at the Great Cobar at depth – an asset we see as undervalued.

While the market’s focus is often on quarterly gold production, the company has a significant amount of optionality in these base metals – particularly copper.

We see the company as materially undervalued given this optionality, with this week’s results validating this potential.

US CPI: was the ‘sigh of relief’ this week a little premature?

Once again, the ‘transient’ or ‘not so transient’ inflation debate was in focus this week, with the US Bureau of Labour Statistics releasing Consumer Price Index (CPI) estimates for September.

This led to the market breathing what is likely a premature sigh of relief.

Why?

While the headline rate was still by all accounts high (0.4% for September or 5.4% year on year) this was largely driven by food and energy prices.

The view is that these items are typically ‘volatile’ (influenced by the weather, currency and OPEC amongst other things).

Excluding these items, the ‘core’ CPI number (all items less food and energy) were more muted rising by 0.2% in September or 4% over the last 12 months.

In particular, the focus was on the items that have largely driven the rise in CPI we have seen over the last year – used cars, lodging and travel which moderated significantly.

Crisis averted?

As economist Gerard Minack points out – this ‘first wave’ of inflation was largely driven by an increase in the demand for goods in the face of a disruption in supply.

It is not surprising to see this ‘wave’ settle as supply chains are slowly unblocked.

However, as economies re-open demand is shifting to shelter (rent or housing costs) and services – as opposed to goods.

As Minack points out, historically these sectors, which are very large components of CPI are where inflation tends to persist. That is, they are unlikely to be fixed simply by an easing of supply constraints.

151021Minack

As the chart shows below – asking rents have skyrocketed in the US recently, which have been a good leading indicator of rents:

Asking rents suggest housing costs are likely to rise in the US

Source: Minack Advisors

Similarly, the tightness of the labour market in the US and abroad is likely to put pressure on prices in the services sector – which is driven by labour costs (noting that there remains some slack when viewed on an employment to population ratio basis).

We are already seeing signs of this tightness, for instance, a rising quit rate in the US (people are more likely to voluntarily quit their jobs when demand for workers is plentiful). 

The quit rate in the US is at multi-decade highs

Source: Bloomberg

Labour costs and their impact on the price of services is important – central banks have shifted to prioritising employment outcomes over guarding against inflation.

Therefore, unlike cycles in the past, the absence of premature tightening of monetary policy to cool the labour market is baked into the cake.

The upside risk to inflation, therefore, remains as high as ever and something we remain vigilant of.