Oz Minerals shares: best investment for the 2030 copper shortage?

OZ Minerals (ASX: OZ) shares have risen by 209% over the past five years to $AU26.30, resulting in an AU$8.8 billion market cap.

And despite remaining essentially flat over the past year, there could be both immediate and long-term catalysts for the ASX 200 stock.

Oz Minerals shares: takeover offer

Oz Minerals shares remain halted on the ASX, after the copper and gold mining company requested a trading halt to consider a new takeover offer. Oz noted they will stay paused until either Friday or until an announcement about a ‘change of control’ transaction.

This is the second offer in recent history. In August, mining titan BHP offered $8.4 billion for a complete buyout, which was rapidly rejected. At $25 per share, this represented a 32.1% premium to Oz’s share price at the time.

The company had countered that the offer was ‘highly opportunistic’ because it had been made at a low share price point when copper prices had slipped from previous peaks. CEO Andrew Cole argued that Oz has ‘a unique set of copper and nickel assets, all with strong long-term growth potential in quality locations,’ which would likely benefit from the rising demand for transition metals.

With the share price having recovered, this argument clearly held some merit. But with this objection resolved, it remains unknown whether BHP, or another suitor, is involved in this new bid.

What is known is that Oz owns two copper and gold mines in South Australia, and both are located adjacent to BHP’s Olympic Dam mining hub. Selling off its coal mines, BHP is in a transition phase itself. And while BHP CEO has told investors he thought the original bid ‘fair and compelling,’ he also consoled that while Oz Minerals would be ‘nice to have,’ it was not essential to BHP’s growth.

Of course, rhetoric forms part of any negotiation, and a renewed deal at a higher price per share could still make strategic sense. It’s also possible that BHP could be considering a strategic partnership offer, given its extensive operations in the area.

It’s worth noting that Rio Tinto recently spent AU$4.9 billion to take full control of Turquoise Hill Resources, to increase its holding over the Oyu Tolgoi copper and gold mine in Mongolia. Transition metal consolidation is gathering pace.

Oz Minerals: copper prices

In recent Q3 results, Oz Minerals saw copper production increase to 30,012 tonnes, up from 27,423 tonnes in the prior quarter. And gold production rose from 51,184oz to 56,334oz. The company is growing, and fast.

Cole enthused that the quarter saw ‘steady improvement in our operational performance and a major growth milestone has been achieved with a positive investment decision for the West Musgrave project.’

The proposed AU$1.7 billion project is expected to have a mine life of 24 years, and produce an average of 35,000 tonnes of nickel and 41,000 tonnes of copper per annum through the first five years of operations, reducing throughout the mine’s life. Overall, its post-tax net present value is estimated at between AU$1.5 billion and AU$2.2 billion, though this return could be far higher if the copper price escalates back to its record high.

This feels inevitable in the long term. The International Energy Agency now expects copper demand to treble by 2040 as net-zero goals accelerate. And Trafigura has already warned that the global supply of copper remains dangerously low.

Cohead of metals and minerals trading Kostas Bintas has warned current inventories can only cover 4.9 days of global consumption, and this is likely to drop down to 2.9 days by the end of 2022. The trader further notes that demand for long-term renewable energy solutions will more than compensate for any short-term Chinese slowdown.

However, the problem is that while copper prices could soar in the long term, they could also drop in the near term. Rising inflation has driven up production costs by circa 30%, and a global recession appears imminent.

And the cyclical nature of commodities mean that mining companies cautious of falling demand aren’t prepared to invest in new mines that could be unprofitable when they first start producing.
Jefferies analysts now argue that ‘the incentive to use cash flows for capital returns rather than for investment in new mines (as) a key factor leading to a shortage of the raw materials.’

But Oz Minerals is investing for the long term. While this could mean a depressive effect on its share price in 2023, the years beyond look bright. According to S&P Global, the world could see a deficit of 10 million tons of copper by 2035. Meanwhile, Goldman Sachs analysis shows that copper miners need to jointly invest US$150 billion over the next decade to fill the shortage gap.

In 2021, the shortage gap came to just 2% of production, which was enough to push up the copper price by 25%. All else being equal, 2035’s shortage gap could be tenfold higher.

The implications for Oz Minerals shares are stark.

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