LONDON (ResourceInvestor.com) -- African Copper [AIM: ACU] continues to progress without incident the development of its Dukwe copper mine in Botswana, yet its share price remains decidedly on the woeful side. Is the market missing a trick? And what clues does the copper market itself hold?
By the end of 2005, African Copper hopes to be substantially closer to production at Dukwe, which would be achieved in two phases from the project's near-surface oxide and deep-level sulphide resources respectively.
Construction of an open pit, heap leach operation drawing on the oxide resource is expected by the company's CEO Dave Jones to be contracted out by Q4 of this year, while detailed engineering studies on the project's oxide phase commenced in April, with completion anticipated roundabout October.
The beginning of October will see a formal application submitted to the government of Botswana for a mining licence, after which Jones anticipates waiting 6-8 weeks for approval. A required capex of approximately $35m is estimated for the development of the Dukwe oxide phase, which will be funded through a combination of debt and equity in a package that is targeted for finalisation by the end of October.
The Dukwe oxide phase will require a 10-12 month construction period, making first production possible during Q1 2007, initially at a rate of 24mlb/yr copper, while the underground, sulphide phase is projected to add around 71mlb/yr to this figure.
Full confirmatory delineation drilling of Dukwe's sulphide resources is now underway, and the completion of a feasibility study on this phase is targeted for the end of the year. The underground sulphide operation would likely add around $25m to total capex.
Operating costs for the underground and open pit operations are broadly similar, with figures of between $0.60/lb and $0.70/lb estimated for both. Underground cost projections are kept relatively low by the fact that the sulphide resources are higher grade than the oxides, and by the fact that an underground scheme would benefit from the surface infrastructure attendant to the open pit operation. The former could reportedly be in production some three years after first output from the open pit.
Aside from Dukwe, African Copper possesses the Matsitama exploration project. This covers 4000sqkm of ground, also in Botswana, supposedly with in excess of 170 geochemical anomalies prospective for copper and zinc. While most of the company's endeavours will have to be focused on Dukwe for the immediate future, Jones feels that Matsitama has enough exploration potential to keep it occupied for 'a number of years'.
So what does all this mean for African Copper's share price, which, without obvious stimulus, has approximately halved in value since the company's flotation in November of last year? Certainly there has been something of a market wide disenchantment with mining stocks of late, but African Copper's shares seem to have been unusually poorly regarded, as their marked decline in price illustrates.
In the words of the company's CEO; 'all the indications at Dukwe so far are of an economic deposit'. Although this obviously cannot yet be regarded as a certainty, as there are several stages still to pass, including the granting of a mining licence, environmental approval, and confirmation of the project's sulphide resources, there is currently no compelling reason to believe that the project will not reach production.
In total, Jones reports that lb6.6m of contracts have been awarded since the beginning of the year, and this is illustrative of the fact that the company is moving ahead in earnest. Preliminary offers of debt finance have also been received from both British and South African banks.
Another point in the company's favour is its location in Botswana, which is consistently rated, by African standards at least, as an attractive destination for investment. Years of mining in the country, particularly for diamonds, have made it a relatively easy place for western companies to do business in terms of governance, infrastructure and services.
Part of the explanation for the decline in price of African Copper's stock may simply be a lack of exciting news flow, which could have disinterested edgy retail investors and those with short attention spans. According to Jones, the company has just had very little of outstanding interest to report since its flotation, having been ploughing ahead with all the basic, relatively mundane pre construction tasks necessary to any mining project.
News flow of greater interest to the market should commence shortly though as the Dukwe project takes more significant steps forward, and this could to some extent reignite African Copper's share price.
Much obviously depends on the market for copper. In the longer term, Chinese, and to a lesser extent pan Asian, industrialisation is likely to maintain a strong demand for the metal given its myriad industrial uses. But the adjustment of existing global macroeconomic imbalances, id est the fate of the dollar and the yuan, could pose a temporary threat to this demand if the US, Chinese, or worse both, economies are inordinately unsettled by the adjustment process.
On this theme, the future, almost inevitable collapse of the dollar is frequently touted as a bull point for copper just as it is for other commodities, the price of which tend to rise as the dollar falls in order to keep their real price constant, all other things being equal. This though ignores that fact that the very reason that prices are rising in dollar terms is that the purchasing power of the dollar is declining, so in the longer term, any perceived gain in commodity prices is illusory. But also in the longer term, a real rise in the prices of industrial commodities, including copper, is likely to occur anyway as demand outpaces supply, overarching in importance what plays out for the dollar and the yuan.
Copper is one of the commodities most highly leveraged to Chinese and pan Asian economic growth, and any doubts about the continuity of this, despite the near certainty of an ultimately upward trend, will have afflicted shares in African Copper more significantly than those of other copper plays, as the former is not yet in production and is thus more vulnerable to a slide in copper prices and shock to confidence precipitated by macroeconomic dislocations.
Uncertainty regarding this factor has been reflected both in the drop off in price of copper metal over the past month or so, and in the near mirror image decline in the share prices of companies highly leveraged to copper, such as First Quantum Minerals, Antofagasta and Xstrata. Despite this, it would be decidedly unorthodox to expect anything but a tight copper market in the medium to long term, and on this basis, African Copper may yet prove itself to be undervalued at its current share price.