Updated 2024 outlook for copper stocks following a pullback

Copper stocks have been under pressure in recent months, driven by a 16% pullback in prices from their record highs in May.

Despite this correction, RBC Capital Markets analysts believe that copper could be finding a floor near current levels, around $4.00 per pound.

Analysts point out that while global economic concerns, particularly in China, have weighed on prices, supply constraints remain tight. Any improvement in demand, especially from China, could potentially drive prices higher again.

The copper market has seen mixed signals, RBC notes.

On the one hand, positive indicators include the China import premium rising to $60 per ton from a negative $14 in mid-June, and a 15% decrease in Shanghai copper inventories over the last month.

On the other hand, London Metal Exchange (LME) inventories have surged by 40% in the same period, reflecting ongoing economic uncertainty.

“A broader global slowdown remains a downside risk that historically would suggest copper falls to marginal cost ($2.75–3.00/lb); however, if indeed we have a softer landing and rate cuts provide support, we could be close to a bottom at around $4.00/lb,” analysts said.

For copper equities, the outlook remains cautiously optimistic. Year-to-date, copper stocks have outperformed the metal itself, with equities up 22% compared to copper’s 5% gain. Despite recent setbacks in operational performance, the equities are trading at “reasonable” valuations.

RBC analysts point out that the second half of 2024 is expected to be crucial for copper producers, with many companies relying on a stronger operational performance to meet annual guidance.

According to the latest industry update, approximately 45% of the annual production target has been achieved so far, with a significant ramp-up expected in the coming months. However, costs are tracking about 4% above the midpoint of guidance.

“Q2 results were helped by stronger metal prices, with copper up 15% and gold up 13% vs. Q1, which offset weaker operations, leading to ~67% of covered copper producers beating EBITDA estimates,” analysts highlighted.

Several copper producers faced challenges during the quarter, but remain optimistic about a stronger performance in the second half of 2024.

Producers like Capstone, Teck (TECK), Ivanhoe, Hudbay (HBM), and Lundin are focused on ramping up key projects and improving operations, RBC says.

Costs have generally remained under control in the first half, with expectations of further improvements at Teck due to higher QB2 volumes and at Capstone with the successful ramp-up of its Mantoverde Development Project.

Freeport (FCX) and First Quantum are also well-positioned to meet their full-year guidance if operations remain steady in the coming months, according to RBC.