Business Description:
3.8 billion lbs of Copper, 1.3 billion lbs of Gold and 82 million lbs of Molybdenum produced in 2021
Expected unit cash cost of $1.35 per lbs of Copper in 2022
Catalysts:
Copper inventories are at a 47-year low
Demand for Copper still rising with EV and Renewables in the West and China; and electrification and construction in the developing world
Economic recovery
Supply gap happening
Shifting business in cheaper markets such as Indonesia
FY20 Cash cost per lbs in Indonesia $0.43 vs $1.81 in North America
34% of sales from Indonesia in FY21, expected to be 36% in FY22
Restarted to pay dividends, intends to return more cash to shareholders in the future
Greatly improved balance sheet with net debt of $1.4 billion vs $6.1 billion a year ago
Risks:
Shift from North America to Indonesia and Peru poses more political risks
Copper prices are very volatile
Will be taking more debt in the future for Indonesian smelter project
Financial Analysis:
1,020 mm lbs of Copper sold in 4Q21 (vs 866 mm lbs for 3Q20) at $4.41 (vs $3.47 in 4Q20) with cost of $1.96 (vs $1.78 in 4Q20)
Valuation:
My personal Biases:
Very Bullish on Copper
Already one of my best investments of 2020 with 300% gains on some trades and 81% on average
8.9% of my portfolio
Assumptions:
Intrinsic value calculated with expected average copper price of $4.30 per lbs, expected gold price of $1750 per oz and expected Molybdenum price of $15 per lbs in the next 5 years
Production cost of Copper $2 per lbs
Operating cash flow 40% of revenues
Expected production data and Capex from Company
Discount Rate of 13% with terminal growth rate of 0% (lower than last time with improved balance sheet)
Sensitivity data for 2022-2023 given by company
5 year horizon (we could see higher/lower Copper prices in less time than that)
No change in shares outstanding
P/FCF ratio ranged from 4-20 in the last 10 years
Ignore all dividends and buy backs
Conclusion
Premium on current intrinsic value if we assume Copper prices to be on average of $4.30 in the next 5 years
But still a good bet on Copper with 15% annual returns if Copper prices remain at $4.50
Possible 350% upside in 5 years or less if Copper prices cross $5.50
Big downside if Copper prices drop considerably
Expected annual returns of 16%
