2020 was supposed to be copper's year to shine. Now everything is uncertain

FinancialPost - Earlier this month, Toronto-based Hudbay Minerals Inc. injected US$115 million in cash to its balance sheet, shoring up the company’s finances just as a veil of uncertainty settles over the copper market.

The cash came from an agreement by Hudbay to pre-sell 80,000 ounces of gold from its Manitoba operations at an average of US$1,682 per ounce over the course of 2022 and 2023.

As chief executive Peter Kukielski told shareholders, “it looks like gold is flying.”

By pre-selling gold, which has risen 15 per cent since January to US$1,737 as of Friday, Hudbay was able to preserve its access to a revolving line of credit, as clouds build over its copper business — which along with other base metals accounted for 80 per cent of its revenue in 2019.

Unlike gold, copper price largely remains a function of supply and demand, both of which have grown more opaque as mines shut down and global economic growth projections are tossed aside amid the coronavirus pandemic. It marks a plot twist for copper, which was supposed to shine in 2020 amid a widely projected supply deficit.

Instead, as economic activity shut down, a surplus has built up and now analysts are struggling to peg where the price will end up this year amid uncertain demand.

“With the environment we’re in, forecast is a nightmare,” said Colin Hamilton, a commodities analyst at BMO Capital Markets. “What you know is you’re going to be wrong.”

The pandemic has affected both supply and demand.

For example, Hudbay recently announced Pampacancha, its long planned expansion of its flagship Constancia mine in Peru, expected to open in late 2020, would be delayed by at least four months. The company cannot consult with local communities around the mine as the pandemic persists, according to Kukielski.

It also closed the Constancia mine in March, and is only now beginning to ramp up production again, with exact output uncertain as it devises plans to ensure it has adequate labour and supplies to operate.

The closure, meanwhile, affects its revenue, which in turn changes its access to capital, as Hudbay’s interim chief financial officer Eugene Lei explained on a May 15 call reporting first quarter results.

Hudbay’s stock was trading at $3.47 on the Toronto Stock Exchange on Friday, down nearly 36 per cent this year.

In the first quarter, copper prices were projected to trend upward from around US$2.75 per pound to US$3, instead they are currently projected to trend down to US$2, he said.

Having the extra US$115 million cash from the gold sale gives the company some comfort that even as its copper revenues flag, it won’t breach its loan covenants and has access to a revolving line of credit that currently stands at around US$446 million, Lei said.

“We feel confident with the pre-pay announcement and the resulting effect on the revolver that we can actually operate down to a US$1.90 (per pound) environment,” he said during the call.

Across the world, other copper companies are experiencing similar situations, with mines shut down, workforces limited and access to capital impaired as a result.

This week, the price of copper fell to US$2.46 per pound this week, and the S&P/TSX Global Base Metals Index is down 26 per cent since January, according to Haywood Securities.

But the story around copper, and base metals, is complicated, and not completely negative.

China, the world’s largest consumer of copper, is expected to announce economic stimulus measures at the National People’s Congress that kicked off on Friday. The measures should boost demand for copper which is sensitive to changes in economic activity.

“Fiscal support would provide local governments with the ability to fund infrastructure projects … and favourable loans to construction,” Haywood analysts wrote in a note on Friday.

As Canada, the U.S., Europe and other governments announce similar fiscal stimulus projects, to fund everything from electric vehicle charging stations to roads and bridges, copper prices are expected to rise.

On Thursday, analysts at UBS AG wrote that commodity prices have stabilized and may have even bottomed out as the second quarter begins. Still, they expect prices to be volatile in the second half of the year and copper could be under “downward pressure” until the fall.

Hamilton, the BMO analyst, said copper traditionally outperforms during a recovery because of government’s fiscal stimulus.

Already, demand for copper from Chinese buyers is picking up and prices appear to have passed the bottom. However, a fresh headwind may emerge in the form of rising tensions between Beijing and Washington.

“I would definitely say Chinese demand has recovered a lot faster than I would have expected two months ago,” said Hamilton, adding, “Does this mean the recovery has come earlier? Or is this just a head fake and we’re going to head lower? That’s the unknown dynamic at the moment.”