Since debuting in late 2016, shares of Ero Copper Corp (TSX: ERO) have tripled, from roughly $5 to more than $15. Now with a market capitalization of $1.4 billion, the company has a similar size to mining peers like Iamgold Corp and Osisko Mining Inc.
Over the next few years, there’s a real chance Ero Copper can triple yet again. Here’s why.
Copper is going on steroids
As I wrote in February, copper could “go on steroids over the next decade.” Analysts at Citigroup agree. A recent report from the bank forecasted prices of US$8,000 per ton in 2022, rising to $9,000 per ton by 2028.
“We look beyond the potential trade war to longer-term copper market fundamentals and we find that current prices of $6,200 a tonne are nowhere near high enough to enable the market to clear,” the report continued. “Copper is set to outperform most other commodities under our coverage over the coming decade on a lack of mine supply growth.”
The thesis is simple: rising demand and shrinking supply should create a long-term market deficit, leading to rising prices for years to come. Looks at the data, it’s hard to argue otherwise.
On the supply side, the current pipeline of new mining projects won’t be enough to satisfy even the most conservative estimates for demand growth. While under-the-radar mega projects like Trilogy Metals Inc hold the long-term potential to upend current conditions, it’s still likely that supply will remained constrained over the next five to 10 years.
Demand, meanwhile, is expected to grow at around 3% per year through 2030. I would argue these estimates are overly conservative. In fact, copper demand could grow by up to 5% annually. Over a decade or more, the compounded difference would be huge.
The rapid growth in renewable energy is the biggest reason why current estimates are too low. Copper is a highly efficient conductor, so it’s used in nearly every form of renewable energy, from solar and wind to hydropower and geothermal. According to some estimates, renewable energy infrastructure requires 12 times to copper intensity compared to traditional energy projects. The average wind farm can contain up to 15 million tons.
In short, if renewables win, then so will copper. Long-term it’s a great bet that this future will be realized.
Analysts at McKinsey now believe that renewable energy will account for more than half of all power generation as early as 2035. By 2050, renewables sources could comprise up to 75% of all global energy production. All of that infrastructure will need massive amounts of copper to be made possible.
Why Ero Copper should be your pick
Ero Copper operates mines in northeastern Brazil, within the states of Bahia and Pará. One of the company’s biggest projects to date, Boa Esperanҫa should enter production in 2022. While this remains years off, investors need not worry, as the copper story should last for decades.
The company is building capacity quickly. In 2018 alone, it discovered three major new mining sites. It also experienced a 100% increase in mineral reserves and resources at its Vale do Curaçá Property.
Notably, management owns 18% of the company’s shares. By buying Ero Copper, you can take advantage of the copper story alongside a management team that’s incentivized for the long-haul. Judging by the rapid increases in reserves over recent years, Ero Copper is well-positioned to take advantage of impending market supply deficits.
