Deadly Mine Collapse in the DRC to Have Repercussions

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.

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Disclosures from BMO Capital Markets, Glencore, June 27, 2019

IMPORTANT DISCLOSURES

Analyst's Certification
I, Edward Sterck, hereby certify that the views expressed in this report accurately reflect our personal views about the subject securities or issuers. I also certify that no part of our compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.

Analysts who prepared this report are compensated based upon (among other factors) the overall profitability of BMO Capital Markets and their affiliates, which includes the overall profitability of investment banking services. Compensation for research is based on effectiveness in generating new ideas and in communication of ideas to clients, performance of recommendations, accuracy of earnings estimates, and service to clients.

Analysts employed by BMO Nesbitt Burns Inc. and/or BMO Capital Markets Limited are not registered as research analysts with FINRA. These analysts may not be associated persons of BMO Capital Markets Corp. and therefore may not be subject to the FINRA Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Company Specific Disclosures
Disclosure 2: BMO Capital Markets has provided investment banking services with respect to Glencore within the past 12 months. Disclosure 4: BMO Capital Markets or an affiliate has received compensation for investment banking services from Glencore within the past 12 months.
Disclosure 5: BMO Capital Markets or an affiliate received compensation for products or services other than investment banking services within the past 12 months from Glencore.
Disclosure 6A: Glencore is a client (or was a client) of BMO Nesbitt Burns Inc., BMO Capital Markets Corp., BMO Capital Markets Limited or an affiliate within the past 12 months: A) Investment Banking Services
Disclosure 6C: Glencore is a client (or was a client) of BMO Nesbitt Burns Inc., BMO Capital Markets Corp., BMO Capital Markets Limited or an affiliate within the past 12 months: C) Non-Securities Related Services.
Disclosure 9C: BMO Capital Markets makes a market in Glencore in Europe.

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