Copper experts call for new exploration push
The copper market is in desperate need for more greenfield discoveries, said experts at a gathering of the world’s most important industry get-together in Chile.
More than 200 copper mines will run out of profitable ore by 2035, leaving a huge supply gap of about 15 million metric tons of copper, or about three-quarters of current supply, according to CRU, the London-based mining consultancy that organizes an annual conference every April in Santiago.
The supply gap requires that every single copper mining project with an approved feasibility study be developed, and over 90% of “potential” projects see the light of day, according to CRU. Several of the world’s biggest mines, like Chuquicamata in Chile and Bingham Canyon in Utah, are a century old and needs billions of dollars in investment to extend their useful lives.
“The challenge is in finding Tier I assets,” said Hamish Sampson, a CRU analyst. “The industry has entered a new age of optimism and growth.”
The good news is that major mining companies have massive exploration budgets in the billions of dollars to back junior exploration targets that show potential. As major mining companies have reduced exploration budgets in the down-cycle to acquiesce to investor demands for cost reductions, that in turn means they are now more willing to back juniors with a promising project.
One investor, Resource Capital Funds (RCF), said it plans to invest in earlier stage prospects to capture the higher growth that exploration companies enjoy when first unearthing a discovery.
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“We believe that we are entering a new cycle,” said Martin Valdes, a partner and managing director of RCF. “The highest returns are in the resource definition.”
Getting access to finance is one of the principal challenges facing copper exploration companies, said Joe Mazumdar, a former geologist analyst of Exploration Insights. Juniors have shied away from copper deposits because they are often harder to drill than gold, he said.
In general, exploration teams at both major mining companies and juniors are too focused on producing quick results using computer-driven data and are losing the art of geoscience to find deposits, said Angelo Peri, exploration manager at Sumitomo Metal Mining in Chile. The cyclicality of mining disbands exploration teams during bad times, meaning its harder to make progress in the good times, he said.
The prospect of shortages means the copper industry could lose current applications to substitution, said Fred McMahon of the Fraser Institute. In the eventuality that substitution risks depressing prices, risk premia is high for projects in more challenging jurisdictions, McMahon said.
CRU’s main copper analyst, Vanessa Davidson, backed this thought up. The cost of capital for developing a new project is high, with discount rates in the 15% range for a major discovery. This has led to majors teaming up on projects, such as BHP Billiton and Rio Tinto’s joint venture to develop the massive Resolution Copper project in Arizona.
Some of the winners in the new era of copper supply depletion might not be exploration teams, but innovators that figure out new ways of getting copper out of the ground, said Jose Pesce, vice president of resource development for massive Chilean state mining producer Codelco. By means of example, Pesce said mining companies should reevaluate drilling areas that are considered as riskier geological formations such as orebodies in unstable areas of mountains.
The CRU conference each April is one of two main events for the copper industry together with the London Metals Exchange (LME) Week in October in London. Both events happen to coincide with the twice yearly negotiations that are held between mining companies and Asia-based smelters and refineries to establish treatment and refining charges, known as TC/RCs.
We will keep you posted on another report from this year’s event in Santiago, on the prospect for automotive batteries boosting demand for copper and lithium.
Matt Craze has covered commodity markets for more than 20 years, working as a researcher at CRU International, and for over 10 years as a ... <Read more about Matt Craze>