China, Copper, and the Green Energy Transition: How to find opportunities in the Base Metals market

Whilst precious metals have been on a strong upward trajectory so far in 2024, it’s been far more of a mixed basket for base metals. Copper has been a rare bright spot, even after falling back from record highs earlier in the year. Copper’s crucial role in the green energy transition and rising use in AI applications has seen its demand grow and price rise by 9% year-to-date.

The only other base metals to surpass copper’s performance were tin and zinc. The price of tin is benefitting from booming demand for its use in electronics manufacturing and energy storage solutions whilst facing constrained supplies. Tin has appreciated in value by nearly 25% year-to-date. Supply constraints have been the primary driving force behind zinc’s 12% return.

Source: Trading Economics (Commodities Overview)

Leading the laggards is iron ore, down nearly 25% year-to-date, hit hard by weakening demand from its largest consumer, China. Nickel, down nearly 2%, has faced headwinds following a challenging 2023, with oversupply from Indonesia partially offset by an improving demand outlook. Lead prices have been treading water, more or less flat for the year, as the EV transition reduces traditional lead-acid battery usage.

Source: Trading Economics (Commodities Overview)

The demand outlook for base metals hinges heavily on potential stimulus measures from China and the trajectory of US/China relations once Donald Trump returns to office in January next year. If trade tensions escalate, a tariff war could dampen economic activity, leading to weaker industrial demand for base metals, particularly from China.

On the other hand, as interest rates decline across Europe and the US, industrial demand may be poised for a resurgence. Certain metals, particularly copper, are especially well-positioned due to a combination of historic underinvestment in new projects and rising demand from the green transition. Prices hit record highs in 2024, and most analysts expect further price appreciation in the coming years.

Source: Financial Times

In this article, we will take a closer look at some mining heavyweights and mining juniors listed on the UK markets, in order to assess which companies might offer the best exposure to certain base metals.

BHP (LON:BHP)

The world’s largest miner by market capitalisation, BHP, is currently the top-ranking mining stock amongst the majors on the London markets. A Quality Rank rank of 94 stands out in particular, but the company’s share price has been in the doldrums over the past few years, as the price chart shows below.



This uninspiring share price performance is a fair reflection of the wider macro conditions in the base metals markets, which have impacted both the company’s top and bottom lines. Profitability has steadily been retreating since reaching a high of $30.9bn in 2022. Profits for full-year 2024 came in at less than a third of 2022 levels, stooping down to $7.9bn.

Shares even fell further last week after China announced that its $1.4trn fiscal package, intended to tackle the country’s hidden debt, would offer no direct economic stimulus. As the world’s largest consumer of many commodities, including iron ore for its steel industry, China’s lacklustre announcement sent BHP’s shares 4% lower.

Hebe Chen, an analyst at IG, added: "Not only has China's recent stimulus package fallen short of investor expectations, but the weekend's fresh disappointments from the inflation report and FDI data have also reinforced the view that China is still far from stabilising its beleaguered economy”.

Whilst iron ore fundamentals continue to be a relative drag on BHP’s profitability, the company’s sheer scale means it is able to maintain some of the highest and most resilient profit margins in the industry. This becomes apparent when you take a closer look at the company’s quality metrics.

The almost solid green bars tell you all you need to know about how BHP ranks vs its industry peers. The current impressive return on capital employed (ROCE) of 19.9% is surprisingly still below its 5-year average ROCE of 26.7%. BHP is excellent at leveraging its scale and technical prowess to keep a tight lid on costs and unlock further value for shareholders.

For example, the use of AI at its Escondida processing plants has helped it save over 118 gigawatt hours of energy since FY22. Cost and technological advantages give BHP an edge over its peers and put the company in a stronger position to weather cyclical commodity swings.

BHP's management has also been making the right strategic decisions over the past year, including the temporary suspension of its Nickel operations in Western Australia in July 2024 due to global oversupply. By cutting losses and focusing on commodities with stronger fundamentals, the company is positioning itself for a better future.

BHP’s gamble on copper is already beginning to pay off. Last year, the company acquired Oz Minerals in a $6.4 billion acquisition, which significantly expanded its copper portfolio in Southern Australia. As a result, the company produced 1.86 million tonnes of copper in 2024, its highest total in over 15 years.

Source: BHP FY2024 Annual Report

In July 2024, BHP also announced that it had acquired a 50% interest in the Filo del Dol and Josemaria, two early-stage copper projects with Lundin Mining. Located in Argentina and Chile, these projects represent some of the largest copper discoveries made in recent decades.

Its Jansen potash project in Canada, which is expected to commence production in 2026, will also see BHP become one of the key players in the industry by the end of the decade. The additional income stream will help diversify revenues towards more profitable commodities, as the company estimates it will maintain EBITDA margins of between 65-70% due to its low-cost position.

Despite a bleaker outlook for iron ore and nickel, BHP’s focus on expanding copper production and its exciting potash project in Canada offer investors some hope for a return to profitable growth and share price appreciation over the coming years.

BHP’s CEO, Mike Henry, commented the following on the company’s latest quarterly results for Q1 2025:

"BHP had a strong start to the 2025 financial year, with production up across all major commodities for the quarter. Copper production was up 4% due to higher grade and recoveries at Escondida, and WAIO production was up 3% as we unlocked capacity by completing the debottlenecking work at the port…

In Canada, our Jansen Stage 1 potash project is 58% complete after a productive summer period, with first production scheduled in around two years.”

Central Asia Metals (LON:CAML)

Central Asia Metals (CAML) has been a long-time favourite of the StockRanks. We’ve covered the company frequently in the past, and it’s well-known to some of the members of the community here at Stockopedia. A reliable dividend payer with a strong track record of profitable growth, the copper, zinc and lead producer offers good exposure to a range of base metals in relatively stable jurisdictions.

Its prolific Kounrad mine in Kazakhstan has been producing over 10,000 tonnes of copper cathode a year for over a decade now. The copper recovery plant obtains the copper from waste dumps that originated from the Kounrad open-pit copper mine. As such, these are very low-cost operations to run and are highly profitable for the business, especially when copper prices are on the rise. You can see the impact of growing production below while the copper price was simultaneously rising.

CAML’s management team have also proven themselves at the Sasa mine in North Macedonia. This zine and lead mine has been in production since 2017, successfully diversifying the company’s revenues and reducing its single-asset risk. Investments into a new paste backfill plant and associated underground reticulation system, in addition to a dry stack tailings plant, are set to improve the productivity of operations and further extend mine life to at least 2039.

Despite the operational progress and reliable profitability, the market has been less enthused about the company’s prospects. The forward-looking nature of the markets has taken note of the lack of growth in recent years. Production at both Kounrad and Sasa is slowly declining, and there isn’t enough in the pipeline to enliven investors.

The share price has actually gone down by 23% over the past 5 years, at a time when the basket price of its metals was at elevated levels. If it weren’t for the incredibly generous capital returns, there would be far fewer shareholders left on the register.

Source: Central Asia Metals H1 2024 Interim Report

Since its IPO in 2010, the company has returned $360 million to shareholders, or £282 million at the time of writing. This is roughly equivalent to the entire current market capitalisation (£303 million). Given the current $56 million net cash pile on the balance sheet and annualised run-rate of $60 million of free cash flows, the current forward dividend yield of over 10% looks to be well supported as well.

The poor share price performance may have actually created somewhat of an opportunity for the patient value investor. A price-to-earnings ratio of 6.8 is below the historical average of recent years, and a price-to-free cash flow of 7.7 is particularly enticing too. Given the weak momentum, but strong quality characteristics and attractive valuation, Central Asia Metals is now classified as a ‘Contrarian’ pick according to the StockRanks Styles.

It will be interesting to see if management raises the stakes with some more aggressive acquisitions in 2025. This was a concern when I covered the company late last year. It appears that the £3 million investment in Aberdeen Minerals earlier in March this year didn’t do enough to appeal to investors.

Operationally, everything seems to be business as usual according to the company’s latest Q3 2024 update. Gavin Ferrar, Chief Executive Officer, commented:

"Kounrad continued to perform well in Q3 2024, in line with its production performance in the corresponding period of last year, and maintained its excellent safety record. Q3 is seasonally Kounrad's strongest quarter, and the operation remains on track to achieve full-year production firmly within the guidance range given at the start of this year. 

Sasa also performed well in Q3 2024, with the tonnage processed recovering from the levels of H1 2024 towards the level recorded in Q3 last year... We look forward to maintaining this progress in Q4, which we expect to result in full-year production towards the lower end of the guidance range.

Meanwhile, the Capital Projects programme at Sasa is nearing completion, which includes moving to the use of paste backfill in mining and adopting dry-stack tailings.”

Ferrexpo (LON:FXPO)

There were a few notable winners from Trump’s election victory on the 6th of November. In the US, the likes of Tesla, Coinbase, and the large banks have charged ahead. In the UK, companies with exposure to Ukraine were some of the biggest gainers.

One that has stood out is iron ore pellet producer, Ferrexpo. The share price is up a staggering 67% over the last month and jumped 24% on the 6th of November, as investor hopes of a Donald Trump victory came to fruition. With the war in Ukraine turning into a long, drawn-out war of attrition, investors have been hopeful that Trump's promise of ending the war in Ukraine will help Ferrexpo get back to better times.

The company’s mines are located in Ukraine and produce high-grade forms of iron ore. This iron ore helps to improve the productivity of the steelmaking process while simultaneously lowering carbon emissions, hence it commands premium pricing and higher margins.

Prior to the break out of the war, Ferrexpo was one of the most productive cash cows listed on the London markets. In 2021, the company recorded free cash flows per share of 124 cents, or just under 100p per share, well above the current share price of 78p.

It is for this reason and the associated historic dividend payments that investors are willing to take on such high risks. The free cash flow generation permitted the company to pay out a whopping 52.4 cents in dividends to its shareholders that same year, the equivalent of just over half of the company’s current share price.

Source: Ferrexpo H1 2024 Interim Report

Fortunately for Ferrexpo’s investors, it seems that the company is now turning a corner in terms of production. 2 pellet line equivalents are now back in production. H1 2024 production rates have recovered to half of what they were prior to the commencement of the war in H2 2021.

The management team is doing all it can to mitigate the impacts of the war whilst supporting Ukraine’s efforts. The graphic below highlights the difficulties of carrying out business activities during wartime.

Source: Ferrexpo H1 2024 Interim Report

Of course, it’s not just the war that has impacted Ferrexpo’s operations. Iron ore prices have come off somewhat since their highs in July 2021. It would therefore be wrong to assume that profitability would surge straight back to these levels if the war were to end. However, given Ferrexpo’s premium pricing for its high-grade (65% Fe) iron ore pellets, a full resumption of production would likely see profits return to the $100 million level and subsequently justify a much higher valuation as a result.

The company’s latest quarterly report for Q3 2024 confirmed some of the challenges it continues to face as a result of the war. Nikolay Kladiev, Group Chief Financial Officer, added:

“The combined effects of much lower iron ore prices and higher input costs, put significant pressure on our margins during the third quarter. High electricity tariffs, which I highlighted at our interims, continue to increase and add to our C1 costs compared to the start of the year. We also continued to see elevated freight rates and additional war risk insurance premiums. In response, we have sought to contain costs where possible and to manage our cash position, which at the end of the third quarter remained around US$100 million.”

Source: Ferrexpo H1 2024 Interim Report

Ferrexpo definitely remains the highest risk/reward play out of the companies discussed. The company maintains a nice cash cushion of over $100 million, but much depends on Donald Trump’s ability to mediate between Ukraine and Russia. Early suggestions of an 800-mile buffer zone, patrolled by UK and European troops, seem wide off the mark. Neither side will want to compromise on territory, and a lot could change over the next few months. Trump will be facing an incredibly challenging task when he takes to the Oval Office on 20th January 2025.

A peaceful resolution and Ferrexpo holders will likely be holding several bags if they hold on for long enough. Failure to do so, on the other hand, could see share prices retreat to the 50p level, where they spent the better part of this year.

Jubilee Metals (LON:JLP)

Now, I would normally have included this in the upcoming Chrome and Platinum Group Metals (PGM) article that I’ll be writing next week, given the fact that the overwhelming majority of Jubilee’s existing production and revenues come from its Chrome and PGM operations in South Africa. In FY 2024, Chrome made up 73% of the company’s revenues, with PGMs at 18%.

However, the most exciting part of the company’s portfolio is definitely the ramp-up of its copper operations in Zambia. Just last week, Jubilee’s management confirmed that it’s on track to produce 1,800 tonnes of copper in H1 2025 and approximately 4,200 tonnes in H2 from its Roan operations. By the first half of 2026, copper recoveries are projected to increase substantially once on-site leaching is introduced at Roan. This could raise annual copper output to as much as 13,000 tonnes a year.

Source: Jubilee Metals FY 2024 Annual Report

The ongoing expansion at the company’s Sable refinery is expected to result in the capacity to produce up to 16,000 tonnes of copper a year. Jubilee is therefore confident that there is a medium-term pathway to expand its processing capabilities to reach over 25,000 tonnes per annum. This would see copper become the company’s primary revenue stream and transform its earnings potential if copper prices were to remain above $9,000 per tonne.

The lack of progress on the Copper front in Zambia seems to have been holding the company back in recent years, especially given the weak pricing environment for PGMs. A series of setbacks meant that the long-awaited copper production growth didn’t happen on time, and the share price suffered for it. Since reaching a high of just over 20p in 2021, the shares have lost nearly three-quarters of their value.

The recent Q1 update confirms that Jubilee has tackled several legacy issues, particularly in Zambia. To counter drought-induced power disruptions at the Roan Concentrator and Sable Refinery, the company secured a private power agreement in September 2024, ensuring stable power across facilities.

Additionally, it commissioned a front-end module at Roan in August 2024 to maintain high-grade concentrate production despite feed variability. Ramping up the Munkoyo and Project G open-pit operations has further supported Jubilee's expanded processing capacity, keeping it on track with copper production targets despite early challenges.

Jubilee appears to have turned a corner, with brokers projecting that rising copper production, alongside its Chrome and PGM output, could return the company to profit levels last seen in 2021, when its share price was four times higher than today.

It’s taken longer than anticipated for the company to get its copper operations up and running, but now that guidance has been confirmed, the share price has been on a tear, up nearly 20% over the past week alone. While it may take time for management to fully regain market trust, momentum is clearly building.

Source: Jubilee Metals FY 2024 Annual Report

Plenty of operational risks remain, and the PGM pricing environment remains difficult, but optimism around the business is clearly greowing. Leon Coetzer, Jubilee CEO, commented the following on the company’s Q1 2025 results:

"I am pleased to report significant progress in the first quarter of FY2025, where we have successfully achieved key milestones in advancing our copper strategy, while our chrome and PGM operations continue to perform strongly.

Despite facing several hurdles along the way, including the country-wide power crisis, we have navigated these challenges and emerged stronger.

Looking ahead to the remaining three quarters of FY2025, I am confident that we will continue with executing on our copper growth strategy, while maintaining the momentum of our successful South African operations."

Conclusion

While precious metals have enjoyed strong demand as safe-haven assets amidst geopolitical and economic uncertainty, the performance of base metals has underscored the impact of varying demand and supply factors across different markets.

Green energy demands, tech developments, and infrastructure needs in developing economies have buoyed metals like copper, tin, and zinc. However, investors would be wise to keep an eye on emerging trends and macroeconomic data to stay on top of the demand and supply drivers behind each metal.

China’s role remains pivotal, especially in the iron ore and copper markets, where it accounts for a substantial portion of global demand. Any potential economic setback in China, which is already contending with debt issues, deflationary pressures, and weak domestic demand, could ripple through commodity markets. The threat of US tariffs on Chinese exports would further exacerbate this scenario.

Meanwhile, the global green transition introduces both opportunities and constraints. Copper and zinc, integral to clean energy infrastructure, are forecast to appreciate in value amid limited new supply investment. Though mining firms are gradually ramping up copper projects, lead times to production are long, suggesting potential structural supply deficits that could sustain high prices.

Source: Financial Times

Geopolitical dynamics further complicate this picture. Base metals reliant on industrial output could be especially vulnerable to global trade disruptions, such as potential tariff escalations between the US and China, which could dampen demand and disrupt supply chains. Conversely, improved relations could support a more robust trade environment, which might stabilise demand for industrial metals.

As we look ahead, commodities central to infrastructure development and green technology, such as copper and zinc, appear well-positioned for further growth, despite broader headwinds in base metals markets.

It will be interesting to see which base metals and base metal miners come out on top in 2025!