Everlution Newsletter

Copper Could be like Gold (Part 1)

Commodities Research Unit (CRU) predicts that without new capital investment, global copper mined production will drop from the current 20 million tonnes to below 12Mt by 2034, leading to a supply shortfall of more than 15Mt. Over 200 copper mines are expected to run out of ore before 2035, with not enough new mines in the pipeline to take their place. In this issue (Part 1) we look at problems with supply. In the next issue we look at forecast demand issues.

Some of the largest copper mines are seeing their reserves dwindle; they are having to dramatically slow production due to major capital-intensive projects to move operations from open pit to underground.

Grasberg in Indonesia, the world’s second-largest copper mine, is emblematic of the problems copper miners are facing. The mine began as a large open pit but after decades of extracting the easy-to-reach ore is gone and future production is expected to come from a deep cave deposit known as the Deep Mill Level Zone. Copper concentrate exports have plunged dramatically as operations shift from open pit to underground.

Major South American copper miners have also been forced to cut production. State-owned Codelco has said it will scale back an ambitious $40-billion plan to upgrade its mines over the next decade, after reporting a drop in earnings, a prolonged strike at its Chuquicamata mine, and lower metals prices. The world’s largest copper company also said it will reduce spending through 2028 by 20%, or $8 billion.

Chuquicamata is expected to see a 40% fall in production in 2021. A $5 billion expansion, moving from open pit to underground, will take five years to reach full output of 300,000 tonnes per annum – this is not new production. Shipments from BHP’s Escondida mine took a hit in 2019 due to operations moving from open pit to underground. The largest copper mine on the planet is expected to take until 2022 to re-gain full production, again not new production.

These cuts are significant to the global copper market because Chile is the world’s biggest copper-producing nation — supplying 30% of the world’s red metal. Adding insult to injury, for producers, copper grades have declined about 25% in Chile over the last decade, bringing less ore to market.

Country-wide protests over transit prices and perceived inequality have disrupted mining supply chains. The social unrest, along with a newly invigorated resource nationalism, has spooked would-be foreign investors in a country that only a few years ago was touted as an economic tiger.

Chile also has problems with water. The country’s underground reservoirs need to be recharged by rainfall and snowmelt from the Andes, but a study found more water was leaving the salars (salt flats) than returning, prompting water restrictions affecting both lithium and copper mines in the extremely arid Salar de Atacama, in northern Chile. In 2019 Chile’s water authority said it would double the number of areas off-limits to mining, from 30 to at least 70.

Escondida will stop drawing fresh water from the salt flat. Instead, the huge mine will bring desalinated water from the coast, where in 2018 BHP spent $3.4 billion on a desalination plant. Two pipelines transport water a steep 3,200m above sea level. Antofagasta’s Zaldivar mine is nearing its mine life in 2029 and may be forced to close earlier if its water permits to draw water from the salar are not renewed.

A 2019 report by Moody’s Investors Service said that some of the worst droughts in half a century have led to tougher environmental regulations that are hiking miners’ costs and risks. Among the countries with mines exposed to decreasing water availability are Peru, Chile, Australia, South Africa and Mongolia.

On top of all this, there is the ongoing threat of strikes at South American copper mines which every year strip out some percentage of output. In a recent article, Bloomberg reports how a confluence of factors, including copper prices at a seven-year high, productivity gains (Chile is producing at similar levels to last year with fewer workers) and weak local currencies, are swelling industry margins, emboldening unions to down tools and ask for more pay/benefits. Look for labour disruptions next year, when 31 contracts are due to expire in Chile, including at BHP’s Escondida, last hit by a 44-day strike in 2017.

What about new copper mines? Surely mineral exploration companies are identifying new ore bodies, cueing up the next generation of copper producers? Well, they are trying. Problem is, they are having to go further afield and dig deeper to find copper at the grades needed to economically produce copper products for end-users. This usually means riskier jurisdictions that are often ruled by shaky governments with an itchy trigger finger on the resource nationalism button. Combine that with production problems and you have the makings of a supply shortage.

In fact, new supply is concentrated in just five mines – Chile’s Escondida, Spence and Quebrada Blanca, Cobre Panama and the Kamoa-Kakula project in the DRC. And while these mines are expected to account for 80% of base-case output increases until 2022-23, their profitability depends on the copper price staying above $5,000 a tonne, according to analysts at Bank of America Merrill Lynch.

The current copper pipeline is the lowest it’s been in a century, and not improving. In 2018 Colin Hamilton, the director of commodities research at BMO Capital Markets, said that after the delivery of first copper from Cobre Panama (285-310,000t per year), BMO doesn’t see the next batch of +200,000-tonnes projects until 2022-23 — “when the likes of Kamoa (501,000t per year), Oyu Tolgoi Phase 2, and QB2 (316,000t per year) are likely to offer meaningful supply growth.”

Eco-tip for the day – Composting

Thinking of starting your own composting. You will be helping the environment if you do. Every tonne of food, paper and garden waste that ends up in landfill results in approximately 2.1 tonnes of carbon dioxide equivalent emissions. If you can redirect that material to composting, you are not only eliminating most of those emissions, you are giving your garden the ability to accelerate growth rates (through improved soil quality) and hence increasing sequestration of carbon dioxide from the atmosphere. Further, you are eliminating the carbon emissions in the supply chain of the food you produce by growing it in your own backyard.

Apart from the advantages of growing more of your own food, composting is ultimately going to bring financial advantages too.

Using the information on composting found at: https://happydiyhome.com/diy-compost-bin/, we are going to present a series of articles on all-about composting over the next couple of issues of Everlution Newsletter. Look for Part 1 in the next issue.

Share watch – Oz Minerals Limited (ASX: OZL)

Oz Minerals has all of its sites operational at the time of writing. It produces mainly copper with gold as an additional product.

It has increased the production rate at its Carrapateena copper-gold mine in South Australia. The mine has achieved a production rate of 4.25 million tonnes per annum (Mtpa) consistently during November, despite a short South Australia-wide lockdown during this period due to the Covid-19 pandemic. The company said that it achieved a planned ramp up ahead of its original schedule.

The Carrapateena copper-gold project is located on the eastern margin of the Gawler Craton in South Australia, about 160km from the Port Augusta. OZ Minerals managing director and CEO Andrew Cole said: “While the mill achieved nameplate capacity in March 2020, the mine production ramp-up has continued throughout the year and has been completed some six months earlier than originally anticipated. This significant milestone is a credit to all concerned.

“The cave continues to perform well, caving through the Upper Whyalla zone on 27 November with the cave now approximately 260m from surface. Importantly, this cave growth milestone further de-risks the establishment of the cave.” Carrapateena is one of the biggest undeveloped copper projects in Australia and has the potential to produce 65,000t of copper and 67,000oz of gold a year over the mine’s 20-year life.

Above is Oz Minerals’ share price graph for the last year.

Financial indicators

The VIX fear gauge down by 0.34 of a point since last Tuesday EST to 21.30. Another 1.30 points down and it will be in SAFE territory for the first time since the first quarter of the calendar year.

The Dow Jones Industrial Average up since last Tuesday EST by 23.62 points or 0.14% to     30,069.79, the STOXX 600 up 1.49 points or 0.52% to 392.84 and the Shanghai Composite index up 10.18 points or 0.32% to 3,410.12.

Gold on 1,870.80. US 10-year Treasury Bonds on 0.926 and oil on 45.41. Cryptos Bitcoin down 30 points since last Tuesday or 0.15% to 19,136.

ASX 200 up 37.20 points or 0.56% since last Tuesday to 6,687.70. The Aussie dollar on 74.12US cents.

Eco Market Spot Prices

LGC $38.00

STC $37.95

ESC $27.00

VEEC $37.00

ACCU $16.60

Sources: RenewEconomy, demandmanager,  Reuters, SMH, Market Watch, Crikey