In late 2018, I told readers that the bull would run in the copper market (see my article here) before most of the crowd started to see this reality. Long term, copper could turn out to be an even bigger winner than gold has been so far this year. Now it seems the copper cat is out of the bag.
Behind the growing strength in copper lies dwindling supplies in a market with exploding demand. Let’s take a closer look.
It’s true that copper prices did the COVID-19 dive between January and March, from a high of $US 2.80/lb to lows in the $US 2.00 range. But since then, the price has rallied to reach near record high prices above $US 3.00/ lb—a gain of more than 50 percent since the COVID-19 lows hit in March.
The strength in copper is now much more widely expected to remain high and higher going forward, as demand from Chinese infrastructure rises and the global transition to electrified economies spreads.
Just check this news out... On October 22, the Wall Street Journal headlined the fact that copper prices have risen to their highest levels in nearly 2½ years, highlighting the strength of China’s economic recovery along with investors’ anticipation that the transition to electric cars will stoke demand for the industrial metal.
Clearly, copper is back in favor. During the Bank of Montreal's LME Week seminar October 20, managing director of commodities research Colin Hamilton said copper was the "darling" of the market once again, as the world aims to build back in a sustainable manner after COVID-19.
Citi’s Max Layton notes that Citi’s bullish case of $8,000 per tonne looks increasingly probable. That means copper, as strong as it is today, could have a long way to go yet. Let’s take a closer look, and spec out some top copper investment prospects.
The deficit in the copper market is set to deepen over the next several years as supply of the widely used metal struggles to keep up with strong demand from the power and construction sectors, compounded by the proliferation of electric vehicles (EVs).
“Refined output is expected to increase by 4.3 percent year on year to 24.7 million tonnes in 2021 after decreasing by 2.1 percent to 23.6 Mt in 2020, primarily as a result of disruptions caused by the coronavirus pandemic,” S&P Global Market Intelligence commodity analyst Thomas Rutland said.
There’s just not enough copper supply to keep up with demand.
While Fitch Solutions expects the copper market deficit to ease from an estimated 416,000 tonnes in 2019 to 299,000 tonnes in 2020, it sees that deficit widening again from 2022, according to a mid-September report. The analytics provider forecast a shortfall of 489,000 tonnes in 2024, rising to 510,000 tonnes in 2027.
That supply shortage can be expected to underpin considerably higher copper prices going forward, which are projected to reach the $3.30 to 4.00/lb range in 2024. Short-term spikes may well exceed baseline prices.
The reality is that decarbonization of the global economy will remain a driving trend for a long time to come.
Look at China—now committed to carbon neutrality by 2060, and further committed to raising EV penetration to 25 percent. The economic giant has pledged to more than double grid spending to support the renewables and EV build out, and aims to accelerate wind power capacity growth from 20-30GW per annum over the next 5 years to 50GW per annum for new additions. (For context, the UK raised its 10-year target for wind by 10GW).
Everywhere you look, decarbonization is gaining momentum. Copper is absolutely essential to that massive, global effort.
Let’s have a look at some of the broader factors pushing up global demand for copper.
Beyond China, spending on infrastructure has to increase in developing countries where urbanization will continue, and in developed countries where renewal and upgrading is badly needed.
The reality is that infrastructure spending remains mired well below required levels in both developing and developed countries. Emerging markets will continue their march towards the creation of wealthier societies and infrastructure is a critical enabler of this. The urbanization trend doesn't show signs of slowing, and again this requires substantial infrastructure spending.
Developed markets, on the other hand, are waking up to the fact that their infrastructure badly needs repair. Much of it is certain to be planned with priority given to resilience, sustainability, and decarbonization.
An important fact: a greener economy means even greater demand for copper. Renewable energy assets require three to fifteen times as much copper as conventional power generation per unit of installed capacity.
Copper-intensive industries are already growing rapidly. Wind capacity is set to almost triple over the next decade, and that's expected to create a million tonnes per year of incremental copper demand in 2029. That’s coming from wind power alone. A similar global build out of solar power will also require further increases in copper production.
Extensive analysis shows that in order to meet international decarbonization targets, copper production must grow between three and six percent each year to 2030.
Finally, mass market EV adoption has begun for real. Case in point, California has announced plans to end sales of new internal combustion powered vehicles in 2035. Having seen the success of Tesla (from zero to the world’s most valuable auto-maker in less than a decade), established car manufacturers are rushing to get battery-powered EVs to market. By model year 2022, there will be more than 100, already announced, widely available.
Copper is required for battery production, for the inverter/converter, and for internal charging equipment. Moreover, external charging facilities also require copper, as does the grid needed to deliver this robust need for power.
For a number of years, copper miners have been arguably restrained in copper mining capital expenditures. The expansion of existing mines accounts for the majority of new copper production scheduled to come online by 2024, after which new projects will be required to bridge the growing gap expected by analysts.
Moreover, exploration budgets are at a fraction of levels seen a decade ago, and expenditures have been withdrawn from largely grass roots exploration.
In terms of exploration budgets, copper was the worst-performing commodity in 2020, according to Market Intelligence mining analyst Kevin Murphy. “While exploration for all commodities was impacted by COVID due to lockdowns and other restrictions, the steep copper price drop in March saw a lot of caution enter the exploration sector,” Murphy said.
The combination of low capex and reduced exploration expenditures equates to limited new production capacity coming online anytime soon. That’s especially bad news in light of the reality that high-quality, low-cost copper mines are hard to find, and often take many years to bring into production.
Add to that the fact that production efficiency at existing mines falls over time. For example, output from the world’s largest copper mine, BHP Group's Escondida in northern Chile, is expected to tumble by between 13 percent and 21 percent in fiscal 2021 as grades decline.
So with copper prices firmly established in a long-term uptrend, with forecasts in the $4.00/lb range or higher, how does the savvy investor profit? Here are a few ideas...
The Kamoa-Kakula Copper Project—a joint venture between Ivanhoe Mines (39.6 percent), Zijin Mining Group (39.6 percent), Crystal River Global Limited (0.8 percent) and the Government of the Democratic Republic of Congo (20%) has been independently ranked as the world's largest, undeveloped, high-grade copper discovery by international mining consultant Wood Mackenzie.
It is a very large, near-surface, flat-lying, stratiform copper deposit with adjacent prospective exploration areas within the Central African Copperbelt, approximately 25 kilometers west of the town of Kolwezi and about 270 kilometers west of the provincial capital of Lubumbashi.
A pre-feasibility study for the Kakula copper mine was completed in February 2019. The preliminary economic assessment focused on expanding the production at Kakula-Kamoa project was also announced in February 2019.
With an estimated production rate of 18Mtpa, the project is expected to become the world’s second biggest copper mine. It is estimated to produce more than 700,000t of copper a year.
Glencore is one of the world’s largest globally diversified natural resource companies, and the world’s largest marketer of copper. Moreover, the company produces additional battery metals.
The company produces and markets copper, cobalt, nickel, zinc, lead, chrome ore, ferrochrome, vanadium, alumina, aluminum, tin, and iron ore.
It also engages in the oil exploration/production, distribution, storage, and bunkering activities; and offers coal, crude oil and oil products, refined products, and natural gas. Glencore markets and distributes physical commodities sourced from third party producers and its production to industrial consumers in the battery, automotive, steel, energy, and oil industries.
Glencore also provides financing, logistics, and other services to producers and consumers of commodities. It operates in the Americas, Europe, Asia, Africa, Oceania, and internationally.
Imperial Metals is a Canadian metals and mining company engaging in the acquisition, exploration, development, mining, and production of base and precious metals in North America. The majority of its holdings and operations are in British Columbia, Canada.
In 2019, the company’s Red Chris mine produced 71.9 million pounds of copper, 36,471 ounces of gold, and 133,879 ounces of silver. Imperial’s portion of Red Chris production was 50.3 million pounds of copper, 25,177 ounces of gold, and 90,577 ounces of silver.
Exploration continues at the property with programs designed to obtain geological, geotechnical and metallurgical data to support future studies for underground block cave mining, and on searching for additional zones of higher grade mineralization within the Red Chris porphyry corridor.
Turquoise Hill is an international mining company focused on the operation and development of the Oyu Tolgoi copper-gold mine in southern Mongolia.
Oyu Tolgoi is one of the world’s largest new copper-gold mines and is located in the South Gobi region of Mongolia, approximately 550 km south of the capital, Ulaanbaatar, and 80 km north of the Mongolia-China border.
Oyu Tolgoi has the potential to operate for approximately 100 years from five known mineralized deposits. The first of those (the Oyu deposit) was put into production as an open-pit operation in 2013.
A second deposit, Hugo North, is under development as an underground operation and is scheduled to begin sustainable production in 2021. The other three deposits, Hugo North (Lift Two), Hugo South and Heruga, are not yet scheduled for development.
With the current development schedule, Turquoise Hill expects that Oyu Tolgoi will be the world’s third-largest copper producer at peak metal production in 2025.
Turquoise Hill expects average production from 2025 to 2030 to be more than 550,000 tonnes of copper and over 450,000 ounces of gold per year, all from the Oyu open pit and the Hugo North underground operation.
Capstone Mining is a base-metals producer with two producing copper mines: Pinto Valley in the US and Cozamin in Mexico. Capstone also owns 70 percent of Santo Domingo, a large scale, fully-permitted, copper-iron-gold project in Region III, Chile, as well as a portfolio of exploration properties.
Pinto Valley, Capstone’s flagship copper mine, is currently the only operating mine located in the historic Globe-Miami mining district of Arizona, one of the oldest and most productive mining districts in the United States. Since its first recorded production in 1975, Pinto Valley has produced more than four billion pounds of copper.
Capstone is positioning Pinto Valley to be optimized in time for higher copper prices. The optimization focuses on a series of low-capital, quick payback projects to de-bottleneck operational performance, with the goal of 10 percent higher production with 10 percent lower costs in 2021.
Cozamin is a copper-silver underground mine with a surface milling facility, located 3.6 km north-northwest of Zacatecas City in the mineral-rich state of Zacatecas, Mexico.
An expansion study is evaluating the mine’s long-term growth potential of Measured and Indicated Resources (inclusive of Reserves) of over 1.36 billion tonnes at 0.30 percent copper, as well as evaluating scenarios for potential expansions to 100,000+ tonnes per day.
It has generated free cash flow at all points of the copper cycle and has delivered over $450 million in cumulative free cash flow (up to December 31, 2019). In 2020, a capital investment of $5 million to de-bottleneck the underground operation by building a one-way ramp will unlock 50 percent more metal output to over 50 million pounds copper and 1.5 million ounces of silver per year by early 2021.
For those who choose to participate in junior resource investments, as I often have over the years, a close look at Freeport Resources might prove exciting. Freeport is adding the Star Mountains property in Papua New Guinea to its portfolio. Star Mountains is a potentially large copper and gold porphyry project.
In 2018, H&S Consultants Pty. Ltd. completed a maiden Mineral Resource Estimate for the property. Using a 0.3 percent copper cut-off grade, the deposit is estimated to contain 210 million tonnes of Inferred Resource grading 0.4 percent copper and 0.4 g/t gold, for 2.9 million ounces of contained gold and 0.84 million tonnes (1.9 billion pounds) of contained copper. Using current prices for gold and copper, this is equivalent to approximately 5.7 million ounces of gold or 3.8 billion pounds of copper.
While Freeport is at early stages of corporate development, the Star Mountains property has seen $US50 million in exploration over the past several years. This junior company itself is backed by smart money, and when it comes to juniors, smart money backing is a big deal.
Over the years, my approach to investment has always been to ride fundamental, secular change. Computers, the internet, 5G, and now decarbonization are all powerful, long-term trends that set the odds of investment success in your favor.
Demand for copper to meet the needs of green infrastructure spending in coming years is hard to overstate. By all accounts we are facing a structural shortage of an essential component of economic growth now and in coming decades.
Copper mines take a long time to go from initial discovery to production, so even with higher prices and greater incentive to bring new mines online, it’s going to take years before supply really catches up, which ultimately begs the question: How high can copper prices rise?
As post-COVID recovery accelerates and countries “build back better,” investors who get into copper today can expect to beat the averages—provided their selection is reasonably sound. Remember, the trend is your friend.
As always, it’s important to do your due diligence before making an investment, or consult with your investment advisor to ensure that any investment you make fits within your risk tolerance and investment goals. That having been said, exposure to copper may be one of the best choices investors can make in this market.
Blake Desaulniers, Contributor
for Investors News Service
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DISCLOSURE: Freeport Resources is a Blake Desaulniers portfolio holding.
DISCLAIMER: Investing in any securities is highly speculative. Please be sure to always do your own due diligence before making any investment decisions. Read our full disclaimer here.
 Max Layton, Citi
 Bernstein, September 2020