Deadly Mine Collapse From Suspected Illegal Mining To Have Serious Repercussions On Market?

If the mine collapse was related to illegal mining, then it could impact production…

by Clive Maund of Streetwise Reports

The potential effects of the event on the copper market and the project’s major joint venture partner are outlined in a BMO Capital Markets report.

In a June 27 research note, BMO Capital Markets analyst Ed Sterck wrote that the fatal mine collapse from suspected illegal mining at the KOV open pit at the Kamoto Copper concession in the Democratic Republic of the Congo will impact Glencore International Plc (GLEN:LSE) and the copper market. News reports indicated at least 36 people died in the accident.

Kamoto is a partner with Glencore in the Katanga joint venture, Glencore holding a majority 64.75% interest. Katanga accounts for about 14% of Glencore’s net present value. The joint venture is projected to produce 269,000 tons of copper and about 24,000 tons cobalt in 2019. Although uncertain, the KOV mine is thought to supply about two-thirds of the ore processed at Katanga.

Sterck purported that if the mine collapse was related to illegal mining then it could impact production there but only short term after an investigative period. However, “preventative action will likely be needed, and it could impact Glencore’s social license to operate.”

More certain, the analyst pointed out, is the effect the event will have on the copper market, already suffering this year. “We see the market as very sensitive to further supply disruptions such as this.”

Due to rainfall in South America’s Atacama Desert, cuts in Zambia and the ongoing strike at Chuquicamata in Chile, the annualized rate of copper disruptions in the first six months of 2019 is already higher than it was last year, at 5% versus 3%. Further, spot treatment and refining charges being at multiyear lows and Chinese cathode inventories drawing quickly indicate copper market tightness.

Sterck concluded that “with managed money net short positions still representing 15% of total open interest on the COMEX, there is potential for relatively aggressive short covering in the financial market, which could see an outsized price reaction. This should boost other copper mining equities.”

BMO has an Outperform rating and a £3.20 per share target price on Glencore, whose stock is currently trading at around £2.73 per share.

Disclosure: For Important Disclosures on the stocks discussed in this report, please click here.