on copper

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    Are copper prices too low?
    ! Copper price estimates understate recovery potential
    BHP Billiton's decision to reactivate idle capacity has focused our attention on the
    copper market. Our current estimate of an average peak price of US¢88/lb in 2004
    envisages little price recovery in local currency terms, and appears conservative if
    a strong re-stocking cycle should occur.
    ! Re-stocking cycle could be a re-run of 1994
    Re-stocking by mature economies, and not industrial production growth alone,
    should drive copper prices in the current cycle. Lower growth and de-stocking by
    China is likely to coincide, but the impact should be muted by recovery in the US,
    Europe and Japan.
    ! The supply side is unlikely to short-circuit a price recover
    We estimate that 815Kt of annual production should be added to supply in 2004,
    with 67% from expansions. We believe that a scenario involving a re-stocking
    should see supply growth absorbed by the market and stocks drawn down by
    500Kt. We believe such an outcome could drive the copper price above
    US$1.00/lb by early 2005E.
    ! The equity market undervalues a re-stocking cycle
    In our view, copper equities fully value our current scenario of a price peak at
    US¢88/lb in 2004E. However, EV/EBITDA multiples could expand from 8.6x in
    2003E to 12.0x in 2004E, if our re-stocking scenario is adopted by the market.
    WMR is the most leveraged Aussie miner with a 10% copper price move
    impacting EPS by 13%.
    3 October 2003

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