Stefan Ioannou: Copper Surplus ‘Relatively Small Compared to Overall Picture’

Resource Investing News had the chance to catch up with mining analyst Stefan Ioannou of Haywood Securities at the recent 2015 PDAC International Convention, Trade Show & Investors Exchange.

Ioannou spoke about his outlook for the copper market, and while he noted that he does see a surplus, he also pointed out that it isn’t too large relative to the actual magnitude of overall global demand for the metal. “The reality is, a strike at a major mine on its own would be enough to take out a significant portion of that surplus,” he said. The analyst also spoke about demand from China, noting that Haywood has seen some positive indications regarding manufacturing activity in the country as of late.

While Haywood formally has a conservative $2.50 forecast for copper in 2015, he stated that there are “strong arguments” for copper to increase going forward, and added that Haywood’s long-term price forecast is $3.25 per pound for copper. “I wouldn’t be surprised to see even a $4 copper price between now and, say, 2020,” he said.

Finally, on the company side of things, Ioannou mentioned Highland Copper Company (TSXV:HI) as one he’s following in the copper space right now. Watch the video below for more of what he had to say.

Interview Transcript

RIN: I’m Teresa Matich with Resource Investing News. Here with me today is Stefan Ioannou, mining analyst at Haywood Securities. Stefan, thank you for joining me.

SI: Thanks for having me.

RIN: So, you said that copper won’t shift into deficit for a few more years. Have supply side events such as problems at Olympic Dam changed that prediction?

SI: I think one thing to keep in mind when you’re looking at supply demand issues is the magnitude of the market. The copper market right now is about 22 million tons a year and the reality is that the surplus that we hear a lot about the news, the actual magnitude of it is somewhere between, say, 3 to 500 hundred thousand tons. So it’s actually not that large a number relative to the actual overall global demand. And so really, the market is in surplus right now. We’ll probably take a few years on paper to get through that but the reality is, a strike at a major mine on its own would be enough to take out a significant portion of that surplus.

So, keep in mind that it is a surplus, but it’s relatively small compared to the overall picture. We could see that a major strike, disruptions at mines, changes in politics could shift that into deficit very quickly.

RIN: Okay. And copper’s been dragged down in the short term by reports of slowing economic growth in China. Is that something that long-term investors should be worried about?

SI: Sure. China’s always been a bit of a moving bubble, and we do look to China as sort of the driver of growth for the global market, and copper, and other commodities in general.

Just a few weeks ago, we saw the PMI numbers, the manufacturing numbers coming out China, and they’re actually good. 50.1 was the flash estimate and anything over 50 is a sign of growth, anything under 50 is a sign of retraction. So we actually are getting positive indications that out of China now that manufacturing is actually increasing in the right direction.

RIN: Speaking of increasing, it’s been said that economic activity picks up in China following the New Year. Is that something you’re seeing?

SI: That’s always a seasonal consideration in China. Every year, the New Year celebrations there are a major consideration. Things do slow down significantly and a lot of inventory buying is usually done right before. But when people come back to market after the holidays, there’s usually a spike back up towards more normal levels for the rest of the year.

RIN: And where do you see the price of copper averaging for 2015?

SI: Formally we’re taking a fairly conservative approach at Haywood right now – our formal price for this year is $2.50.  Again, China is something we need to keep an eye on. That said, looking further ahead I think there’s some very strong arguments that copper will increase over time. Our long-term price is $3.25 a pound, and I wouldn’t be surprised if even a $4 copper price at some point between now and say, 2020.

RIN: Okay. And speaking of the current price environment, you’ve said that you favor good grade when looking at projects. Any companies with exploration or development stage assets that fit that criteria?

SI: I mean, grade is always king, and usually just inherently higher grade deposits are typically a bit smaller. They’re not the giant, billion ton copper porphyries that have low grade that we hear about that in South America, those that can be company makers, and those that are the type of projects that attract majors. The one catch with some of those very large low grade deposits is that they have huge capital costs associated with them, on the order of billions of dollars.

At the other end of the spectrum are high-grade deposits. They’re usually much more manageable for the junior space in the resource sector. So grade is always king. It’s going to keep your cash costs low, all else being the same.

Off the top of my head, one to consider it may be Highland Copper (TSXV:HI) up in the upper peninsula of Michigan right now. They’re in the process of putting, call it three plus projects together. They’re designing a project that’s centered around a centralized processing facility to take a historic mine, a new mine, and a couple of others very high grade deposits, to put them all together and have some synergies there that make a lot of sense. Again, the grade there it’s quite good. It’s not 0.2 percent copper – it’s well over a percent copper, on average.

RIN: Thanks for joining me Stefan.

SI: Thank you.

RIN: I’m Teresa Matich with Resource Investing News.

Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.

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