Macquarie's favourite ASX-listed copper play (and its not Sandfire or BHP)

Macquarie says there's a lot to like about the little-known Capstone Copper (ASX: CSC) – a dual-listed $7.3 billion market cap copper producer that made its ASX debut on 8 April 2024.

The Toronto Exchange listed producer has approximately 7.5% of its 753.5 million shares listed on the local sharemarket. Its listing and potential index inclusion increases the number of ASX quality copper pure plays to two, according to Macquarie.

"Following crystallisation of the long-awaited bullish copper outlook, ASX investors now have an alternate pure play copper exposure," the analysts said in a note on Tuesday.

"Capstone is now our preferred pure-play copper exposure on the ASX and stacks up well versus Sandfire Resources due to its stronger organic growth, cheaper relative value, higher revenue exposure to copper and slightly less leveraged balance sheet."

The report initiated coverage of the stock with an Outperform rating and $12.60 target price.

Capstone Copper at a glance

Capstone operates a diversified portfolio of projects across the US, Chile and Mexico. These include (plus midpoint FY24 production guidance and group production weighting):

• Pinto Valley Project, US (100% owned) – 61,000 tonnes or 29.8%

• Cozamin Project, Mexico (100% owned) – 23,000 tonnes 11.2%

• Mantoverde, Chile (70% owned) – 68,000 tonnes or 33.1%

• Mantos Blancos (100% owned) – 53,000 tonnes or 25.8%

• Santo Domingo (100% owned) – Fully-permitted, expected to deliver first copper in 2028

• Consolidated: 205,000 tonnes

Macquarie's investment thesis

"BHP's bid for Anglo American indicates the attractiveness of buy versus build, with M&A potentially continuing to play out in the sector underpinning valuation support for unencumbered pure-play copper names such as Capstone," the report said.

"We believe Capstone provides an undervalued alternative to gain high-quality copper exposure on the ASX, with potential future index inclusion."

The buy thesis covered four main topics:

1. Greenfield growth: The Mantoverde and Santo Domingo project will add approximately 190,000 tonnes per annum of production by 2030.

2. Brownfield opportunities: Optimisation and development of Mantoverde and Mantos Blancos projects can add up to 100,000 tonnes per annum

3. Portfolio optimisation: There is scope for a potential divestment of Cozamin, which represents approximately 11% of 2024 production, reducing to only 6% by 2029, likely becoming too small for Capstone's portfolio. The analysts expect a 30% sell-down of Santo Domingo to help with costs associated with its development.

4. Pathway to ASX 200 inclusion: Capstone currently has 56.3 million CDIs on issue and averaged $6.2 million in trading volumes in the first two months of trading, providing investors with strong liquidity. The analysts see a "pathway for entry into the ASX 300 for the September 2024 rebalance, and potentially one day into the ASX 200."

Key Charts

"There are growth levers at most of Capstone's existing mines, in addition to latent capacity."

Source: Macquarie

There appears to be a linear correlation between copper production and EV/EBITDA. In short, the larger the copper production, the higher the multiple.

Source: Macquarie

Capstone vs. Sandfire

BHP's (ASX: BHP) acquisition of Oz Minerals left the large-cap pure-play copper space quite sparse, with only Sandfire Resources (ASX: SFR) remaining as a notable option.

"Sandfire has an enviable position of being the only copper pure-play company on the ASX 200, and it has had a good run, up 18% year to date," the report said.

But how does the up and coming Capstone compare to Sandfire?

• Production: On a market cap to copper production basis, Capstone is trading at 24.8x and Sandfire at 26.9x, based on 2024 and FY24 estimates, respectively, as the companies report on different timelines.

• Costs: Sandfire's forecast average FY24e C1 costs are US$2.16/lb, which compares to Capstone's forecast average CY24e C1 costs of US$2.43/lb. Capstone has both the lowest cost (Cozamin) and highest cost (Mantoverde) mine of the group of the two.

• Ratios: Capstone trades at more attractive ratios than Sandfire. This includes EV/EBITDA (4.1x vs. 4.6x), free cash flow yield (16% vs. 14%) and Price/NPV (0.8x vs. 0.9x).

• Revenue and exposure: In 2024-to-date, Capstone has approximately 95% of its revenue exposure to copper, with minimal exposure to silver, gold and zinc. In FY24-to-date, Sandfire has approximately 75% of its revenue exposure to copper and the remaining attributed to zinc, silver and lead.

• Balance sheet: It's fairly common for copper miners to have leveraged balance sheets. Macquarie says Sandfire's balance sheet is slightly more leveraged, with gearing at 30% as of 1Q24 vs. Capstone's 28%.

Copper outlook

The Macquarie Economics and Commodities Strategy team recently upgraded their copper forecasts by 7-9% in 2024-25 to US$4.39/lb and US$4.34/lb respectively.

"The team has revised copper supply with other updates - our committed mine supply forecast is little changed for 2024, but revised lower for 2025-28, primarily due to the potential restart of Cobre Panama being moved back to late 2025," the report said.

Capstone is most sensitive to changes in copper prices. For every 5% increase/decrease in copper price assumptions, Macquarie sees a $1.86 per share increase/decrease in Capstone's valuation.