Motley Fool Australia

Top broker warns our copper miners don’t measure up despite the bullish copper outlook

Resources shares

Copper bulls believe the price of the red metal will jump higher in 2020 but this doesn’t mean shares in ASX copper miners are set to rally.

If anything, Goldman Sachs downgraded the Sandfire Resources NL (ASX: SFR) share price to “sell” from “neutral” despite the broker’s positive forecast for the commodity this year.

This probably explains why the Sandfire share price fell 0.7% in after lunch trade to $5.94 when other miners are rallying with the broader market.

Sandfire downgraded to “sell”

The S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index jumped 0.7% at the time of writing and it’s the miners that are outperforming. The BHP Group Ltd (ASX: BHP) share price advanced over 1% to $39.94 while the South32 Ltd (ASX: S32) share price added 2.5% to $2.86.

Goldman Sachs cut its recommendation on Sandfire as it sees a 12.5% downside to its share price. The broker thinks the stock is expensive as the miner trades at 1.4 times net asset value (NAV).

That’s a bit rich as 37% of Sandfire’s assets are lower returning development projects.

Poor quality projects

What’s more, the miner’s flagship Degrussa mine has a short mine life of just 2.5 years and Sandfire’s other so-called growth projects are low returning, based on Goldman’s estimates.

But Sandfire isn’t the only copper miner to avoid. The broker also has a “sell” rating on another prominent copper play – OZ Minerals Limited (ASX: OZL).

Is OZ Minerals a “sell” too?

This hasn’t hurt OZ Minerals though, at least not today. The OZ Minerals share price gained 1.1% to $10.91 in afternoon trade even as Goldman listed three reasons to dump the stock.

The first is commissioning risk at the miner’s Carrapateena project in 2020. It also noted that OZ Minerals’ valuation looks stretched at 1.1 times NAV and 7 times forecast 2020 earnings before interest tax, depreciation and amortisation (EBITDA).

Finally, there’s hardly any free cash coming from the miner for the next three years with Goldman estimating a free cashflow yield of -6% to +4% over the period.

Time to be bullish on copper

Goldman’s negative view of both Sandfire and OZ Minerals stand in contrast to its copper price prediction.

Its commodity analysts believe the copper price will fetch US$3 a pound on average this calendar year. That implies a more than 5% upside for the metal from its current spot price and its bullish take on the commodity stems from expectations of a copper deficit in 2020.

The silver-lining is that a firmer copper price will likely boost sentiment towards other metals. Copper is affectionately nicknamed “Dr Copper” as it tends to lead prices for other industrial metals.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited and OZ Minerals Limited. Connect with him on Twitter @brenlau.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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