***** Copper Article, page-2

Hi zooma, a couple of paragraths from that report below...
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The Spread Sheet Effect - sowing the seeds for higher copper prices tomorrow

For major international mining conglomerates, controlling spending is now in vogue. Xstrata (now a merged entity with Glencore) during a 2011 presentation, using Wood Mackenzie data, concluded both Greenfield and Brownfield copper projects had experienced an average capital cost intensity of U$3.49 per pound worth of annual production from 1985 to 2011, adjusted for inflation. Further, their expectations increased to U$6.79 per pound through 2012 to 2015 for Greenfield copper projects under construction. Therefore, it’s not surprising to see large mining companies focused on cost. For example, Freeport-McMoRan Copper & Gold (NYSE: FCX) targeted reductions of U$1.9 billion in spending for 2013 and 2014, as well as potentially deferring other spending commitments. Within the mining sector, the time required to develop Brownfield projects through to production is expected to take roughly 8 years, and Greenfield projects twice as long. Though mined production of copper is set to increase over the next few years, increasing demand and reduced capital investment for exploration and development of new deposits will likely lead to material supply shortfalls around 2020.

Copper Exploration – finding silver linings

In the current global copper environment, where supplies, excluding secondary production (“scrap”), and first order consumption are largely being driven by single countries, there is upside for investors in well-managed exploration companies who are willing to be patient. Copper demand out of China should continue to be robust as Chinese economic growth is expected to remain healthy, albeit slower. The urbanisation of China is a long-run phenomenon that will take years, if not decades, to complete. Further, India is a significant wildcard for future demand as bureaucracy and inadequate infrastructure has seemingly hindered economic development up to this point. India’s population could surpass China’s as early as 2025, and is relatively poor when compared to even other BRIC nations; indicating tremendous potential if the Country’s newly elected government is able to make positive changes.

Copper demand is a function of four major segments:

• Real economic growth

• Transportation systems – according to the Copper Development Association the average vehicle in the US contains over 50 pounds of copper, and even more for electric cars. The average railroad locomotive uses 11,000 pounds of copper, while electric subway cars, trolleys, and busses contain a weighted average of 2,300 pounds. When these numbers are combined with farm and industrial equipment, as well as airplanes, the critical nature of copper in the development of modern industrial societies is plain.
• Industry – much of developing Asia is transitioning from rural agrarian based economies toward urban manufacturing based economies that require increasing amounts of commodities including copper (Chart 11). As China’s economy continues to emerge, there are other Asian nations looking to “emerge”. The ASEAN-5 (Indonesia, Malaysia, Philippines, Thailand, and Vietnam) have had recent geopolitical struggles, yet many have made substantial progress since the late 1990’s. In particular, Indonesia and Vietnam appear to offer strong industrial growth potential.

Long Term Outlook – exploration to benefit from mining sectors Capex cannibalisation

Copper supplies are likely to exceed demand in 2014 and 2015; we further expect this situation to persist for 2016 and 2017. This is less than an ideal environment for promoting rising copper prices. However, the economics of copper mining have changed dramatically over the last 11 years. Operating costs for the sector have risen substantially while head grades have, and are expected to continue to, decline.Additionally, copper inventories are also near historic lows preventing prices from moving back to pre-2004 lows. Over the 10 year forecast period, copper price are likely to rise as capital costs and regulatory risks for large scale mining development projects have become significant hurdles deterring investment into future production.
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Long Term Outlook – exploration to benefit from mining sectors Capex cannibalisation

Copper supplies are likely to exceed demand in 2014 and 2015; we further expect this situation to persist for 2016 and 2017. This is less than an ideal environment for promoting rising copper prices. However, the economics of copper mining have changed dramatically over the last 11 years. Operating costs for the sector have risen substantially while head grades have, and are expected to continue to, decline.Additionally, copper inventories are also near historic lows preventing prices from moving back to pre-2004 lows. Over the 10 year forecast period, copper price are likely to rise as capital costs and regulatory risks for large scale mining development projects have become significant hurdles deterring investment into future production.