Copper was the second most valuable mined metal last year (with the total value of the metal extracted being narrowly ahead of gold but well behind iron ore) and is arguably the most important commodity in the new era of clean energy and electric vehicles. Indeed, at the end of July, the cash price of copper looked like breaking above US$6,000/t before the latest bout of concern over international markets saw the red metal fall below US$5,800/t.
From talking to investors who attend the Mines and Money events, it is clear that there is a sharply greater interest in copper. Investors are particularly bullish on copper's long-term fundamentals. On the demand side this is boosted especially by the growth in electric vehicles (EVs) and batteries. On the supply side there is a continuing decline in ore grades, coupled with under-investment in exploration for new deposits. On top of this, the delivery from many existing copper mines is at risk because they are operating in politically sensitive jurisdictions.
Taking these factors into account, many long-term investors have recognised the increasing opportunities in the copper market. The industry has responded, with operators of primary copper mines increasing their capital expenditure by 17% last year to US$24.3 billion. Copper exploration budgets also increased last year — up 22% year-over-year to US$2.1 billion according to S&P Global Market Intelligence (SPGMI).
Because of this heightened investor interest, Mining Beacon hosted a webinar on August 14 to address the important factors that investors should consider when making an investment in copper. The issues were discussed by four panellists: the CEO of North Shore Capital, Jeremy Atkinson; the senior copper analyst at SPGMI, Keval Dhokia; the Principal of Hallgarten & Co., Christopher Ecclestone; and the President and CEO of Foran Mining Corp., Patrick Soares.
You can hear a recording of the panel discussion through the Mining Beacon website by clicking on the link below.
Keval emphasised that it was important to separate any analysis between refined metal and concentrate as different factors apply. SPGMI now expects the refined-metal market to be in surplus at the end of this year, compared with earlier expectations of a slight deficit. This is largely because Chinese exports are copper intensive, and they are being impacted by the ongoing trade dispute with the US.
In contrast, the concentrate market is widely accepted to be in deficit, and Keval noted that the lower treatment and refining charges mean that profit margins for mining companies have not fallen as much as they would have done otherwise as metal prices decline.
Looking ahead, Keval discussed the smelter expansions coming online in China that will feed an expected increase in demand for the metal. He also noted that SPGMI expects the conc market to remain volatile next year.
Patrick said the extractive sector is positive about metal prices, with the industry being "real believers in the long-term price of copper". Prices will be underpinned, Patrick noted, by higher operating costs as deposits become deeper and lower grade. Also, as per the industry adage, Patrick noted that the best thing for low metals prices is low metals prices — in that mined supply has historically shrunk if the metal price falls below a point where 10% of mined production is making an operating loss.
Although Christopher agreed that copper's long-term demand seemed assured, he argued that, in the short- to medium-term, markets had "got ahead of themselves", and a "wake-up moment" was coming! The take up of EVs also seems exaggerated, according to Hallgarten, as the "West has not come to the party". Hallgarten is also pessimistic at the GDP-growth levels claimed by Beijing.
Jeremy noted the high capital intensity of copper mines, compared, for example, with gold mines. He referred to an AME estimate that new copper mines opening between 2015 and 2023 have a median value of US$7.26 in initial capital expenditure per annual pound of metal capacity. This average capex currently equates to 2.6 years of revenue, which is twice that for new gold mines.
The reason for this high capital intensity, Jeremy noted, was the huge scale of most copper mines. Although this reduces unit operating costs, it increases the up-front costs, and so the risk to investors. This capital cost, and the requirement for long-life operations (to recoup the outlay) favours the major companies. Panellists were agreed that the smaller copper-mining companies needed to focus on high-grade deposits, and that in 20 years many copper mines will be smaller, higher-grade, operations.
In a poll, the majority of delegates believed that the copper price would remain within US$300/t (5%) of US$6,000/t. Keval agreed, saying that SPGMI is factoring in US$5,800/t for the remainder of this year, resulting in a cash-metal average of about US$6,000/t (US$2.72/lb) for 2019. Christopher said Hallgarten had reduced its original year-end estimate of over US$3/lb to below US$2.80/lb, but still believes the metal will reach US$3.20/lb by the end of 2020 because of market tightness.
The panellists discussed geopolitical factors, and the importance of factoring in political risk when making investment decisions. Christopher commenting that "some jurisdictions have made themselves unattractive". Patrick noted that Foran Mining is operating in a very attractive jurisdiction (Saskatchewan), and agreed with others that Peru will be a key destination in future. In addition to location, Patrick said investors are looking at the size and grade of the deposit, and also the skills and availability of the local workforce.
Looking ahead, Jeremy commented that he didn't expect huge improvements through technology but rather optimisation of existing procedures, especially with regard to water and waste management. Transformational changes, particularly in processing, might come further into the future, for example the leaching of ore (eventually utilising insitu techniques), and in improved transportation.
Christopher added that, at the moment, technology is adding to capital costs, rather than reducing it. Indeed, Hallgarten is instead looking for change in the boardroom, with "more intelligence" from directors in making investment decisions.