Citigroup highlights ‘pockets of opportunity’ in quality copper and gold mine developers

While the momentum phase of the mining/metals “Supercycle” is in abeyance, Citigroup asserts that “pockets of opportunity” exist for investors in M&A in “quality mine developers”, metallurgical coal and mid-tier steel.

Author: Dorothy Kosich
Posted: Friday , 29 Aug 2008

RENO, NV -

Although they note that mining and metals have suffered "amid dour re-calibration of global macro forecasts, and a dollar-driven exodus," Citigroup metals analysts suggest that, "by year-end portents of doom will likely shift to pro-cyclical assessments, ‘If this is as bad as it gets, that's pretty good."

Nevertheless, analysts John Hill, Graham Wark and Liam Fitzpatrick warned that mining and metals "will likely remain rangebound, awaiting either macro or supply/demand catalysts."

Citigroup asserted that "there are pockets of opportunity" which include late-stage plays such as Nucor in steel "where scrap spreads indicate upside to EPS," Peabody in "coal based on exports & looming PRB inflection;" Freeport, which is benefitting from severe copper supply constraints; structural changes in aluminum; and " M&A in metallurgical coal, mid-tier steel, and quality mine developers."

In an analysis published Wednesday, Citigroup analysts said they are updating the company's proprietary database of more than 80 copper, gold and silver projects.

In their research Citigroup noted delays on major committed cooper projects are averaging 6-12 months. "As recent additions were unable to offset depletion and 2007-08 demand growth, we do not expect new projects to materially alter the severely constrained copper supply picture. This gives minimum 2 years of visibility to supply adds, with material downside from underperformance of operating mines due to labor strikes, productivity issues, pit wall failures etc."

Meanwhile, Citigroup's research revealed that delays on major uncommitted projects, such as Oyu Tolgoi and Galore Creek, are from one year to indefinite postponement.

"At face value, there appears to be ready availability of copper geology projects delivered as advertised. However, we expect that a combination of frictional barriers (limited supplies/manpower) and explicit factors (political, infrastructural, and other site specific factors) will result in further multi-year delays among uncommitted projects," according to the analysts.

While financing risks remain a concern, nevertheless, Citigroup noted that "active M&A in the past few years has seen the better projects move to the hands of capable developers. Strong cashflows of acquiring companies will help these companies secure financing despite tight credit market conditions."

GOLD

In their analysis, Citigroup found that mine supply is less relevant to gold prices.

Meanwhile, the analysts noted that "there are many smaller miners (<400,000 oz/year) planned near term and relatively few larger scale projects."

"M&A among gold developers has been less fervid than in Copper," they said. "This is likely related to political factors (tougher locations) as well as commodity outperformance that provided copper mines excess cashflows, plus better ROI (return on investment) on projects."

"Gold mines tend to show high cash margins but poor ROI due to short mine lives," Citigroup advised. "As such, the wave of M&A for gold developers has been less impressive with more current availability of single asset gold developers. Key examples that could be considered targets include Osisko and Detour Gold in Canada, Minefinders and MAG Silver in Mexico, Guyana Goldfields in Guyana, Crystallex and Gold Reserve in Venezuela, and Greystar Resources in Colombia, among others."

Meanwhile, Citigroup noted that "financing risks are a bigger concern for gold developers as the senior gold companies are less flush with cash than copper competitors. This will likely result in more juniors attempting to go to construction with others banding together."

The analysts also found that the higher capital cost trend is less clear in gold "where there is a greater variance in mine life (more short lived operations)."

"Recent updates suggest upfront capital costs per annual ounce of $1,000 to $2,000/oz per life-of-mine ounce or about $125-$150/oz (excludes sustaining capital). New feasibilities are likely to step higher," Citigroup concluded.