Though the global copper project buzz is deafening right now, it’s still insufficiently near term to remove the likelihood of a spike in the copper price next year, Credit Suisse analysts warn in a comprehensive report.
The seven analysts – Jeremy Gray, Peter O’Connor, Roger Downey, David Gagliano, Eily Ong, Ephrem Ravi and Farhinaz Amarsy – base their conclusion on the study of 66 copper projects currently under way or planned.
Though these projects collectively add more than eight-million additional tons of copper supply by 2015 – which is nearly half of the current world level – “a significant spike” in 2008 prices still looms, at a level well above $3/lb.
This will be induced by undersupply.
Demand for copper has been growing on average at 3,9% a year for the past ten years, but new 2008 supply will only feed an additional 2,3% into the market.
Longer term, the analysts see the demand-supply position then reversing, and they estimate that global copper demand will need to grow at higher than 4,3% a year to keep the market “tight”.
But that’s only if all 66 new projects come in on schedule, which they doubt will happen.
Their doubt is based on ongoing global labour and equipment shortages, low copper grades from traditional South American sources, political and infrastructural risk from Central African sources and the need for $66-billion to be raised upfront for the funding of the 66 copper projects.
They believe that many of the projects could be delayed and estimate that long-term supply growth could reduce to only 3,6% a year – 0,3% below the average since 1997.
While Chile has, in the past 17 years, provided two-thirds of the world’s growth in mined supply, it is now expected to bring on only a quarter of the 8,2-million tons of incremental copper capacity that the 66 projects provide.
Future Chilean copper production appears to be plateauing, which means that it is unlikely to provide the high level of supply growth that it has been able to do in the past.
While the 15 new Chilean projects have nearly 80-million tons of contained copper – which represents five years of global production and 22% of the contained copper in the 66 projects – the average grade is only 0,6%.
The same issue is faced in Peru, where 13 new projects contain 63-million tons of copper – four years of global production – but also at grades of only 0,6%.
By contrast, Central Africa’s Democratic Republic of Congo (DRC) and Zambia present the opposite picture – of fewer resources and reserves, but far higher grades and less capital intensity.
While new DRC and Zambian projects have less than half of Chilean and Peruvian reserves, their average grades are two to eight times higher and their capital intensity is at a quarter of the South American level.
The average capital intensity of the DRC and Zambian projects is $4 568/t in the next five years, which is 25% lower than in Chile or Peru, but the analysts aver that new Central African supply will present “a difficult proposition”, because of political risk and infrastructural inadequacy.
EQUITY ‘TOO CHEAP’
Neverthless, the DRC is down to provide 10,8% of new supply and Zambia 4,2%.
Irrespective of copper project geography, 37% of the 66 projects will cost more than $7 000/t to build, which requires a long-term copper price of $2,26/lb to achieve an internal rate of return of 15%.
More than a third of new supply over eight years appears to be uneconomic at $1,30/lb to $1,60/lb, the current analyst price consensus, which forces longer-term copper supply down to less than 3,2% a year.
The analysts believe, however, that, in reality, the uneconomic projects will go ahead and that longer-term copper price assumptions will have to be raised as a consequence.
Whatever the future, they point to a disparity between the valuation of mining equity and the cost of building new projects.
“In short, mining equity appears too cheap,” they say.
On the basis of their copper call, they believe that mining equity will be able to weather the current subprime-induced debt storm “well”.
For diversified miners with exposure to iron-ore, they believe that the debt storm will be weathered even better, given the prospects of some healthy iron-ore price increases in 2008, which they “conservatively” forecast will be up 25% year-on-year.
VIRTUE IN VOLUME
The analysts find that volume growth has become the mining industry’s new virtue and that the days of market penalisation of expansion and new-mine building are gone.
Only a few years ago, the market dealt harshly with any copper, steel or iron-ore expansion, they point out.
After China Steel announced its intention to double slab capacity to 20-million tons in 2001, they recall that the price of its stock price fell 31% and the company dished out generous dividends rather than pursue its plan.
Likewise, Rio Tinto was widely criticised for embarking on a $5-billion iron-ore expansion in 2002 and, in 2003, Anglo American management succumbed to market pressures and scaled back Anglo Platinum’s 3,5-million-ounce expansion plan owing to concerns about falling platinum-group metals prices and a stronger rand, a decision it later rued.
The analysts find that the scenario is now changed and that new executives are universally bullish on the commodity outlook, and the downturn-guided old guard of 1991 to 1993 and 1997 to 1999 have retired.
“Conservatism has been replaced by optimism and the universal stronger-for-longer, ‘brave new world’ era appears to be well entrenched. We are of the same view,” say the analysts.
Muted new supply will continue, they reiterate, and delivery will be difficult, despite positive management talk on the bringing on of new capacity.
Going forward, they see the main industry challenge as being the balancing of lower-grade projects in politically safer and infrastructurally equipped countries, such as Chile and Peru, with the richer projects in politically less safe and infrastructure-constrained Central African countries.
A second issue is that 75% of all future projects are greenfield, leaving only 25% brownfield projects, in contrast to the “golden” 1990s’ era of Chile providing brownfield opportunities.
They point to greenfield projects being typically more expensive and technically more challenging to build than their brownfield counterparts and tending to be subject to greater delays.
Whatever the outcome of the 66 new projects – 24 of which are already under construction or in early production – the reality is that 48% of these have a copper grade of less than 0,6% copper.
They calculate that projects with grades of less than 0,6% have an average capital intensity of $7 286/t, which is 18% more than those above 0,6%.
THE NEW SUPPLIERS
Based on current management targets, Xstrata, Codelco and Anglo American could develop 3,1-million tons of new copper, which represents more than a third of all new planned capacity.
Xstrata has the most aggressive production target of more than 1,4-million tons of new attributable copper from its planned greenfield developments at El Pachan, Las Bambas, Tampakan, Antopaccay and Frieda River. These are in addition to planned brownfield expansions at Lomas Bayas, Antamina and the phase one and two developments at Collahuasi, in joint venture with Anglo American and Mitsui, which will increase capacity to a million tons a year.
If these plans come to fruition, the group will have spent over $10-billion at an average capital cost of $7 099/t, which will imply a long-term copper price of some $1,90/lb.
The analysts do not believe that Anglo American will deliver any of its sizeable 880 000 t of new copper until 2010, at the earliest, from its four projects, Quellaveco, Los Bronces, Michiquillay and Collahuasi, in Chile.
Anglo is down to spend more than $4-billion at an average capital cost of $5 591/t, which could be conservative, given the lower-grade nature of the projects.
“We suspect the group’s published capital costs are likely to increase over time if the history of these lower-grade projects is any guide,” they say.
State-run Chilean producer Codelco expects to build 985 000 t of additional capacity from five projects, including Chuquicamata phases one and two, Andina phases one and two and the greenfield development Gaby, in 2009.
These will be built at a cost of more than $5-billion at $5 259/t and at an implied long- term copper price of $1,59/lb. These projects are cheaper to build because they are largely brownfield expansions of Chuquicamata and Andina.
They observe BHP Billiton to be benefiting from the recently completed Sulphide Leach and Spence projects in Chile, but believe that the company’s longer-term growth profile could be more muted until the expansions at Olympic Dam and Escondida are completed in 2014.
Attributable production from these two projects could be only 300 000 t, which would be up 25% from overall group output in 2007.
This suggests to the analysts that BHP Billiton should consider nearer-term merger-and-acquisition activity to fill the void and name Freeport as the most effective option for any of the major players to gain significant copper capacity both in the near and longer term.
They say that this is especially true for CVRD, which, with output at less than 250 000 t, lacks a real copper presence.
The analysts observe that Rio Tinto has not developed a copper project since it invested in Freeport’s Grasberg project in 1996 and believe another seven years will pass before La Granja begins first production.
SOME PROJECTS
Los Bronces: Anglo American has completed the feasibility study of the Los Bronces mine, which is due for approval now, the $1-billion expansion increasing copper production by 180 000 t a year.
Quellaveco: Anglo American has 80% of the Quellaveco project in Peru, which is expected to produce its first copper by 2012. The copper grade is 0,64%.
Michiquillay: The Anglo Michiquillay deposit is estimated to contain 4,3-million tons of copper at a grade of 0,69%, with commissioning in 2012 at 130 000 t a year.
Collahuasi expansion: Anglo and Xstrata are expected to raise production to 650 000 t by 2010 at a cost of $660-million.
Mutoshi: Toronto- and Australian-listed Anvil Mining owns the Mutoshi copper project in the DRC. Gecamines estimates that the Mutoshi mining licence area contains 248 000 t of copper metal at a grade of 2,25%. The company intends to start production by 2010 with an annual capacity of 20 000 t of copper metal.
Kinsevere: Anvil Mining has a 95% interest in the Kinsevere copper project in the DRC, which is estimated to contain 20-million tons at 4,3% copper. The company commissioned phase one in June 2007 at a cost of $35-million. This could produce 25 000 t/y of copper. The company has approved $238-million for phase two, which would increase the annual production capacity to 60 000 t/y.
Olympic Dam expansion: The current oper- ations at Olympic Dam, Australia’s largest underground mine, involve producing 200 000 t of copper and 4 500 t of uranium oxide a year. BHP Billiton is conducting prefeasibility studies to expand its wholly owned Olympic Dam operations in Australia. Olympic Dam contains 4, 4-million tons of ore at 1,1% copper.
Luita: The Luita copper project in the DRC is currently producing 1 500 t of copper every month. The ramp-up of the project is progressing, but owner Camec is currently in dispute with the DRC government over its licence C19 and 50% stake in Mukondo Mountain.
Lumwana: Equinox Minerals, which owns the Lumwana copper project, in Zambia, says that the deposit contains 2,7-million tons of copper metal at 0,73% copper grades. The project is currently under construction and management intends to start commercial production from mid-2008. The company estimates that the average annual production for the first six years from the deposit would be 160 000 t of copper metal. Mine life is 37 years.
Kolwezi: The Kolwezi tailings project, owned by First Quantum, is located in the Katanga mining area of the DRC. The construction of the annual 30 000-t copper project is under way and the company estimates the capital cost at $300-million. The tailings are estimated to host 1,7-million tons of copper metal with an average copper grade of 1,49%. The first production from the project is expected by the end of 2008.
Tenke Fungurume: The Tenke Fungurume copper/cobalt project, in Katanga, DRC, is owned by Freeport (57,75%), Lundin Mining (24,75%) and Gecamines (17,5%). The partners plan to commission the project by early 2009 with an initial capacity of 100 000 t of copper metal and 8 000 t/y of cobalt.
Ruashi: Owned by Metorex, Ruashi is located in Katanga, DRC, and is currently producing 10 000 t/y of copper and 1 000 t/y of cobalt from phase one of the project. Metorex plans to increase the copper and cobalt production to 35 000 t/y and 3 500 t/y respectively under phase two, which is scheduled to come on stream in 2010.
Mwambashi: Mwambashi, in Zambia, is a joint venture between Teal (70%) and Korea Zinc Company (30%). The deposit contains 209 000 t of contained copper at an average grade of 2,43% and is scheduled to produce its first copper by the end of 2008. The small-scale project will have an annual capacity of 15 000 t of copper metal.
Kamoto: The Kamoto copper project in the DRC is wholly owned by Katanga Mining. According to the company, the deposit is estimated to contain 5,7-million tons of copper metal at an average grade of 3,5%. The company intends to produce 145 000 t of copper from this $424- million project. The production is scheduled to start from the second half of 2007.
Pebble: Northern Dynasty Minerals and Anglo American jointly own the Pebble copper/gold/molybdenum project in Alaska, US. The massive deposit is estimated to contain 27,78-million tons of copper, 82-million ounces of gold and 1,68-million tons of molybdenum. The project could have an annual capacity of 250 000 t of copper from 2014, at the earliest.
KOV: Nikanor’s KOV project in the DRC is one of the richest in the world with 8,8-million tons of contained copper at an average copper grade of 5,09%. The project is likely to begin production in late 2009, but the ramp-up to its original design capacity of 250 000 t is not likely until 2012. Konkola Deep: The Konkola deep-mining project, owned 51% by Vedanta Resources, aims to increase the copper ore production capacity of Konkola mine from two-million tons to six- million tons, at a cost of $400-million. Completion by 2010 would enhance the life of the Konkola mine to 2035.
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