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Copper Poised for
a Rally In 2020

The RBC Mining & Materials Equity Team believes copper is poised for a rally back to $3.00/lb in 2020 as economic conditions improve (modestly) and expect limited supply growth before 2021. The trade war remains the wild card; however, analysts believe both sides are motivated to complete at least a phase one deal which would be a positive catalyst for base metals prices (to the extent it's not already priced in). Global PMIs have shown modest signs of improvement from a low base and RBC believes fiscal stimulus efforts can continue to drive a gradual improvement in 2020.

The RBC view is not premised on robust global growth, rather a gradual improvement and specifically an improvement in key copper demand drivers. On the supply side, analysts forecast modest supply growth but key risks are building, including limited acid availability in certain regions, the ongoing protests in Chile and geopolitical issues in other key producing areas. Here is the RBC Base Metals Outlook:

Key copper demand drivers showing signs of improvement

Expecting stronger copper demand following a weak 2019: We expect stronger copper demand growth of 1.8% vs. 0.5% in 2019 due to a modest improvement in the global economy and more specifically Chinese electrical grid spending (~40% of Chinese copper demand) is rising to reach the government's targets, and property completions (more copper intensive) which have lagged property starts have crept up from a low base.

Zinc smelters slowly catching up: Chinese zinc production has gradually increased which has weighed on the price, despite inventories remaining at historically low levels. We expect this to continue and forecast prices fading towards our long term price of $1.00/lb; however, there have been smelter shutdowns outside of China and it could take time to rebuild inventories which keeps our estimates above marginal cost support which we see at $0.80-0.90/lb.

Nickel fades as inventories stabilize: Following the announcement of the Indonesian ore export ban and significant draw downs in inventories nickel reached $8.45/lb in September; however, it has fallen 26% to $6.26/lb as inventories have stabilized and the Indonesian ban may not tighten the market until 2021. We believe nickel prices are likely to remain supported and forecast a return to $7.00/lb in 2020 after the current seasonally weak period.

Iron ore expected to remain strong in H1/2020: The Chinese property market remains relatively healthy after stimulus from 2016-2018 and supply has yet to normalize which points to elevated iron ore prices in H1/2020 before potentially fading later next year. We expect met coal to rise on healthier steel margins, recent supply reductions in China and Mozambique, and potential re-stocking under 2020 import quotas in China. We forecast $150/t in 2020 which is near cost support in a roughly balanced market.

Recommended Equities

In North America, Lundin Mining remains a preferred copper name due to improving FCF and production growth in 2020 along with First Quantum Minerals where a continued successful ramp at Cobre Panama can drive a re-rating. Teck Resources remains undervalued compared to global diversified peers and more stability in met coal and an improvement in copper prices could drive better share price performance in 2020. Ivanhoe Mines continues to create value at the Kakula deposit and more news around the high grade Kamoa North discovery could provide catalysts in 2020.

North America

Lundin Mining (LUNMF) (Outperform, C$9.00 target price) remains a preferred copper name as we forecast increasing production and FCF in 2020 as capital investment rolls off. The company recently announced they intend to increase the quarterly dividend to $0.04 from $0.03 as they anticipate rising FCF in 2020.

The ramp up has been impressive at First Quantum’s (FQVLF) (Outperform, C$18.00 target) Cobre Panama mine, in particular the cash costs are below expectations and we believe continued success can drive a further re-rating.

Teck (TECK) (Outperform, C$31.00 target) remains undervalued and finding stability in the underlying commodity price and continuing to execute on their business plan can help to close this gap. We see some risk around Teck’s Q4 release in February as we anticipate an increase in capital expenditures at QB2 and we currently model $5.5B (including cost inflation) vs. the prior estimate of $4.7B + $300-470M of capital inflation.

Ivanhoe (IVPAF) (Outperform, C$7.00 target) can continue to outperform in 2020 with several catalysts on the horizon, notably more details on the high grade Kamoa North discovery.

Freeport-McMoRan (FCX) (Sector Perform, $14.00 target) remains a good way to get leverage to a rising copper price and while FCX is muted in 2020 as Grasberg transitions to underground mining, we believe the market could start to price in the 2021 production growth some time next year.

Hudbay Minerals (HBM) (Sector Perform, C$6.00 target) is trading at an attractive valuation and could start to demonstrate additional value in Peru; however, this could take time.

Turquoise Hill (TRQ) (Sector Perform, $1.50 target) has a pivotal year to resolve the outstanding political, financing, and engineering issues.

European Miners

We continue to prefer Anglo American, which we rate Top Pick, PT 2,650p (prev 2,450p) and BHP Group which we rate Outperform, PT 2,000p (prev 1,900p). We have upgraded Glencore to Outperform PT 290p from PT 310p today on improved risk/reward. We also tactically upgrade our recommendation for Rio Tinto to Sector Perform PT 3,900p (prev 3,700p) and have an improved target price for Vale PT $14.00 (prev $12.00). Antofagasta remains Sector Perform rated with PT 900p (prev 940p). We continue to like Central Asia Metals Outperform, PT 285p (prev 300p) and rate KAZ Minerals at Sector Perform, PT 600p.

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