When the Levee Breaks
The copper producers remain under pressure with spot copper prices below US$2.00/lb. While we have yet to witness substantial supply-side discipline, an extraneous event that could help bring the market closer into supply/demand balance may materialize.
At a minimum, a looming supply shock from the Zambian copper belt (~4% of world production) could swing sentiment and help alleviate the ongoing sustained pressure on equity prices.
The Zambian power supplier ZESCO has come under some scrutiny this year over its ability to continue to supply power to the energy-hungry copper miners in the world’s eighth-largest copper producing country. In this short report, we take a ‘what if’ approach to gauge the impact on the copper sector and specific copper producers.
We continue to recommend Lundin Mining (LUN:TSX) and Nevsun Resources (NSU:TSX) as the stalwarts in the base metals space at these low copper prices. However, if a supply-side driven, specifically Zambia related, upward move in copper prices were to take place, we would recommend investors place short-term focus on more levered (operationally and financially) Non-Zambian producers such as Hudbay Minerals (HBM:TSX), Capstone Mining (CS:TSX), and Teck Resources (TCK.B:TSX).
UPDATE: What, you wanna see that “Ach Captain, ah cannae hooold it much longer she’s gonna blow” diagram on page three? Okay, here you go:
In next week’s installment: Canaccord recommends that you buy soybean futures on a “What if?” basis as a plague of locusts could hit South America and wipe out next year’s harvest.