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28 June 2023

Shine on crazy copper!

Manufacturing & equipment, Metals and Mining, Power, Telecoms and Communications, Transport
Middle East & Africa, Americas, Asia-Pacific, Europe
Copper isn’t just a critical metal, it is the critical metal for the global green economy. Complete underinvestment in mining points to a drastic shortage of the metal in coming years. Miners, traders and analysts realise this, but the rest of the world needs to wake up!

Mining industry guru, Robert Friedland, founder of Ivanhoe Mines, in an interview this week on Bloomberg TV said that the copper mining industry is failing to increase supply ahead of accelerating demand. "We're heading for a train wreck here,” he remarked.

He also said deposits are getting more expensive and harder to find, funding is limited, and economies have to prepare for the importance of the mining industry to lead the energy transition. And on copper pricing he warned that if things didn’t change, copper prices could rise by ten-fold. He added that the market has yet to realise the significance of copper and how it is essential to decarbonisation efforts.

Ivanhoe is fortunate though, as it has very good partners and has had recent financing success at its Kamoa-Kakula mine in the Democratic Republic of Congo (DRC), which is ramping up to supply 650,000 tonnes by the end of next year.

In a similar vein, speaking at the World Copper conference in Santiago, Chile, in April this year, Trafigura’s CEO, Jeremy Weir, stated that the lack of new copper projects could derail net-zero targets: “There is a massive supply gap we must address over the next decade… it’s going to take enormous effort from the industry, but also from everyone, and in particular policymakers.” 

As we surge forward with the energy transition, electrification, new industries and the overall goal of the global green economy, we all know that one thing is certain – we will need far more metals, critical minerals and specialised materials. 

Attention on many of these new minerals is being focused like never before, and this attention is more than ever focused on the supply chain and the security of that chain. This focus has become even more intense as many industrialised sovereign states look to ensure long-term supplies of a range of minerals and materials in an increasingly intense and often hostile geopolitical theatre. 

The most used metal in the drive to the green economy is copper of course – and there are serious concerns that over the coming 10 years or so, we will not have enough of the commodity – in all its forms - to meet the requirements of our changing industries. Not everybody is in agreement on this, but there is certainly a large swell of thought and evidence that points to potential serious shortfalls for certain sectors of industry globally.

Interestingly, copper is not classified as a critical mineral in everyone’s book. Many countries now have critical mineral strategies and critical mineral lists. For the EU copper is on their critical mineral list, as it is on the UK’s. But it is not on that of the US, nor Australia’s. One might think it’s not on Australia’s as the country is a major producer of copper. However, it is on the list for Canada, and that country is also a significant producer of copper.

Predictions on the supply front vary significantly, but S&P Global estimates that 40 million tons of copper will be consumed a year by 2030 - up from 25 million tons in 2021. And because of the expected jump with EV production beyond 2030, S&P Global says copper demand will rise massively to 50 million tons annually by 2035. Consulting company McKinsey & Co predicts that at the start of the next decade there will be a 6.5 million ton shortfall in the market supply of copper. As far as individual countries go, Chile produces some 27% of the world’s copper. Research firm Fitch Solutions estimates that mined copper production in Chile in 2023 is likely to be about 5.7 million tons, the same volume as in 2020. And, looking at just one local producer, Chilean miner Antofagasta reported a 10% fall in 2022 copper output.

Instability and underinvestment

What is driving much of the concern on potential shortages of copper is the recognised underinvestment in new mines particularly over the past 10 years. While there remains strong activity in mergers and acquisitions in the copper sector, relatively few large-scale new mine financings have taken place in the last few years – and certainly not enough to keep pace of potential demand.

What has also been one of the main drivers of instability in the copper market is the political crisis in Peru after former President Pedro Castillo was ousted in an impeachment trial in December 2022, which led to a series of nationwide protests. Peru accounts for 10% of the world’s copper production.

In addition, the mining investment climate in Chile has changed drastically over the last couple of years. Mining investment is falling behind where it should be in several markets amid tougher regulatory situations and recent discussions about royalties. At the same time, costs of new mines have gone up, including materials, labour and ESG considerations.

In May this year, lawmakers in Chile's lower house of Congress gave final approval to a slightly amended long-awaited mining tax bill that will require miners to pay more taxes and royalties to the government. The bill, expected to become law next year, now requires only the signature of President Gabriel Boric, who has publicly backed it. The vote was hailed by finance minister Mario Marcel, who underscored that the higher government take required of mining companies would address past ‘abuses’. 

Under the new law, the top tax rate will reach up to nearly 47% for companies that produce over 80,000 tonnes of fine copper a year, considered high by the industry. It also establishes a 1% ad valorem tax on copper sales from companies that sell more than 50,000 tonnes of fine copper, as well as an additional 8% to 26% tax depending on a miner's operating margin. The mining industry reacted with outrage to the initial bill announcement, which it claimed would undermine investment decisions for mines that will be needed to fill the global copper shortage.

In another shock for Chile’s mining sector, earlier this month Andre Sougarret, CEO of Chile's state-owned mining giant Codelco, announced he was stepping down after only a year in the role, citing "complexities" in running the world's largest copper producer as well as personal reasons. Codelco is facing challenges on various fronts, with copper production at a 25-year low and the government charging the firm with leading talks with private lithium companies to shift to a state-led public-private model. "In these months we have faced complexities in the most diverse areas, managing this state-owned mining company in the current time and circumstances," Sougarret said.

Speaking at World Copper earlier this year, Trafigura’s Weir commented that miners also need the right fiscal environment to proceed with much-needed projects: “Governments and policymakers really need to understand that unless we have enough copper, we’re not going to meet climate-change objectives, and could totally derail the whole energy transition. That’s a real problem.” 

He also pointed to the general perception of the mining sector, and said that governments could help on the education front: “The industry, to some degree, is not well-liked, not well-appreciated, not well-understood. While the industry does a good job of addressing issues in the local environments it operates in, including the indigenous communities, social and environmental issues, I still think that broader society doesn’t know the importance of mining.” Adding: “We’re going to have to make a choice, if you want to decarbonise, you’re going to need metals, and to do that, we’re going to have to develop resources."

How has this impacted market pricing?

Uncertainty in production and the availability of physical product has heavily impacted global copper prices so far this year. For instance, miner and trading company Glencore said its copper production fell 12% in 2022, impacted by issues at its Katanga open-pit mine in the DRC, disruptions at copper mines due to extreme weather, labour issues or lower grades. Glencore said it produced 1.06 million tonnes of copper last year, and kept its 2023 outlook unchanged at around 1.04 million tonnes.

So, surely less available product would boost prices? This is not a simple matter – as it also boils down to physical demand. Copper averaged $8,243 per metric ton in May 2023, which was 6.4% lower than in April and 12.3% lower than in May 2022. The high for this year was $9,436 per ton in mid-January. Looking at this month, copper hit $8,670 on 22 June, and dropped back to $8,391 per ton LME copper cash settlement as I write this. This year so far, the price has very much been jerky to say the least.

Trafigura’s co-head of metals and minerals Kostas Bintas told a conference in Lausanne in March 2023 that very tight stocks meant the copper price could hit a record high within the next 12 months, even above $12,000 a ton. Goldman Sachs has forecast that copper could hit $10,500 a ton in the near-term, before reaching $15,000 by 2025. The previous record was $10,845 a tonne in March 2022.

What could drastically hold the copper price back though is the rate of growth of the Chinese economy, and overall demand for copper from the country. Factories in China opened up extensively last year, but overall industrial output is now growing at a much slower pace than originally expected. And the Chinese construction sector is not currently performing as strongly as it did over the past 20 years or so. These factors are heavily influencing the price of copper of late. The real surge in growth and demand for copper within China will come as it ramps up the renewables energy equipment and EV manufacturing sectors. This will not be immediate – but it will happen.

But it is not just in energy transition that growth will be seen with more intensity. At the World Copper conference in Chile, Trafigura’s metals and minerals analyst Graeme Train stated: “Data storage requirements are doubling every three years, which requires a huge build out of data centres and related infrastructure. This is creating huge demand for copper and a new sector we haven’t had until now.”

He added: “We are also seeing re-tooling of manufacturing and industrial bases, which are becoming increasingly automated. There are a lot of drivers for this: reshoring and nearshoring, tight labour markets and demographics. But the net result is a need for more copper. And then there are big sectors like the auto industry, which has to refit its factories so they can produce electric vehicles and batteries. Again, this requires more copper. Combined the volume of growth of these non-energy translation sectors is expected to be at least as large as the growth in demand from electric vehicles.”

Recent copper mine financing developments

USA - Kennecott

In June, Rio Tinto announced it would invest $920 million at its Kennecott operation in Utah, US, to strengthen its copper supply. Of the total approved investment, the company will allocate $498 million to develop an underground mine and infrastructure in an area known as the North Rim Skarn (NRS). Rio Tinto expects the NRS to deliver around 250,000 tonnes of additional copper over the next 10 years besides open-cut operations. It is scheduled to start production in 2024.

The company plans to assign $300 million to rebuild the smelter, including a furnace while a $120 million investment will be made to upgrade the refinery tank house structure at the Kennecott mine and update its molybdenum flotation circuit with a fully automated system.

Peru - Antapaccay

In May this year, Glencore announced plans to invest at least $1.5 billion on an expansion project at its Antapaccay copper mine in Peru, up from $590 million announced previously, in a bid to unlock the stalled plan key to maintaining copper output. The project had been delayed by social unrest in the province where the mine is located. 

In recent years, production had stalled as the quality of ore grades declined. The Coroccohuayco project aims to extend the mine's lifespan by decades – to 2045 or 2050. Production at Antapaccay, one of Peru's largest copper mines, has fallen steadily from 221,000 tonnes in 2016 to around 150,000 tonnes now, making the expansion project important.

Canada - Marathon

In May, Generation Mining executed a mandate to arrange a senior secured project finance facility of up to $400 million to fund the construction and development of its Marathon Palladium-Copper project, on the north shore of Lake Superior in Ontario. A syndicate including Export Development Canada, together with ING Capital and Societe Generale, will act as the mandated lead arrangers. The formal mandate includes a non-binding indicative term sheet for a senior debt facility of up to $400 million.

The execution of the mandate is a key milestone in the project financing process for the development of the Marathon project. Closing of the facility, targeted for the third quarter of 2023, remains subject to completion of final due diligence in form and substance satisfactory to the MLAs, final credit approvals and execution of definitive facility documentation.

In March this year, Gen Mining also signed an offtake term sheet with Glencore for copper concentrate, containing copper, palladium, platinum, gold, and silver, to be produced at Gen Mining’s Marathon Palladium-Copper project. Glencore will purchase an average of 50% of the total copper concentrate to be produced. Gen Mining has also finalised an offtake term sheet with a European integrated copper group which will purchase the balance of the concentrate produced by the Marathon project, 

Chile - Los Brancos

In April this year, Chile's ministry of environment finally approved an environmental permit for a $3 billion extension of Anglo American's Los Bronces project. The authorisation to go ahead had been delayed since mid-2022 when the permit had been rejected. Environmentalists and social groups had criticised the project, located in the Andes Mountains, near the Chilean capital, for its long-term impact on a nearby glacier, as well as on the area's water supply. 

The asset, one of Anglo American’s two largest copper operations, has been mined for over 150 years and is running out of high-grade ore. The Los Bronces Integrated Project would allow the company to tap higher grade ores from a new underground section of the mine, extending its life through 2036. The project uses the mine’s existing processing facilities, optimises water efficiency, and requires no additional fresh water or tailings storage facilities, Anglo has said.

Los Bronces has the capacity to produce over 300,000 tonnes of copper each year. The underground deposit is estimated to have a 1.7% copper grade, three times the mine’s open pit grade. In that sense, it would be a rare example of an expansion project that will process lower tonnage without requiring further milling and processing capacity. The project is part of Anglo American Sur, owned by Anglo American (50.1%), the Codelco-Mitsui consortium (29.5%) and Mitsubishi (20.4%).

Chile - Quebrada Blanca

In late March this year JBIC, the Japanese export credit agency (ECA), signed two additional loan agreements with Sumitomo Metal Mining and Sumitomo Corporation for the development of the Quebrada Blanca copper mine in Chile.

One loan is for $625 million, which comprises of a $250 million term loan from a Japanese bank syndicate, and a $375 million direct loan from JBIC. The other loan is for $125 million through JBIC and MUFG combined.

The project is being carried out by Compania Minera Teck Quebrada Blanca, a Chilean corporation owned by Sumitomo Metal Mining, Sumitomo Corporation, Teck Resources Limited, and Chilean corporation Empresa Nacional de Mineria.

Back in February 2020 a $2.5 billion financing was closed for Quebrada Blanca 2, which involved financing from four ECAs – Euler Hermes, JBIC, Kexim and Canada’s EDC. Commercial banks involved included KfW IPEX Bank, Bank of Montreal, BNP Paribas, ING Bank, Mizuho, MUFG and SMBC. The borrower was Minera Teck Quebrada Blanca. Full details can be found within TXF’s TagMyDeals.

Also see our sister brand, Proximo's article: Chile's changing pit politics

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