Natural Resources
4 April 2021
Comment
Houston, we have a problem.
Last week members of the copper world gathered in Santiago for CRU’s 2022 World Copper Conference. For consumers of copper, and ultimately that’s pretty much everyone, the headlines don’t look good.
According to CRU the annual copper supply deficit will be 6 million tonnes per annum for the next decade. Put simply we need around eight more Escondidas to fill the gap, and we need them to come to full production capacity in the immediate future. According to CRU, an investment of over$100bn is required if the world is going to meet demand requirements.
S&P Global Intelligence recently identified just 22 copper projects scheduled to be in production before 2026. They will contribute 1.5Mt pa of copper at capacity.
Despite the additional planned capacity potentially coming onstream in the next four years, consensus forecast numbers point to a structural deficit in copper supply of approximately five million tonnes by 2030. An additional 20% of current global production coming from greenfield projects implies more than 75 new mines coming into production in the next eight years. That looks like a tall order.
Copper prices are already at decade highs but in Santiago analysts from Goldman Sachs (NYSE:GS) suggested prices need to go much higher to stimulate a significant supply response. An indication perhaps of the quality of the current copper project pipeline.
Nevertheless, with copper prices at ~200% above the 90th percentile of the copper cash cost curve, clearly the industry is looking healthy and in a good position to ponder growth options.
Unfortunately it isn’t quite that simple. Freeport McMoran’s CEO and Chairman Richard Adkerson captured it well with his reported response to those views on current pricing and growth options … “it is far beyond a price issue”.
The point he was highlighting is that although current prices mean copper companies are making heaps of cash they simply cannot significantly accelerate their current project pipelines given the lack of historic exploration spend, development timelines, ESG considerations and ultimately the quality and quantum of the pipeline that exists. He concluded that “the market is going to need it faster than companies like ours can produce it”. Coming from the head of one of the largest copper producers globally, this is a pretty stark warning.
Most large copper companies’ growth options over the last decade have been focussed on expansion of existing mines rather than M&A. Given the impending supply crunch and the current cash generation in the industry, casting the inorganic growth net wider surely can’t be far away.
The paucity of the copper project pipeline is something we have been highlighting for some time through our series of publications on Copper M&A and analysis of the existing project pipeline. In our December update we found that there are 65 development and exploration projects with resources of more than 2.0Mt contained copper, enough to sustain ~ 100kt pa copper production.
Based on our assessment and ranking of a number of project factors, including the potential size, economics, exploration progress, permitting risks, location and geopolitical risk, resource quality, the existing shareholder structure, we believe that only 23 of these have the potential to involve third party M&A activity.
Change on the way?
Recent months have seen an uptick in activity with Lundin Mining’s US$485m acquisition of the Josemaria project, BHP investing C$100m in Filo Mining’s exciting South American exploration project and Barrick having just reached agreement with the Pakistan government on a restart of work at Reko Diq - despite Balochistan not exactly being the most salubrious of addresses.
One explorer’s response.
One of the five projects we concluded had a ‘High’ possibility of a third-party involvement is the Santo Tomas project in Mexico owned by TSXV listed Oroco Resources*.
Hot on the heels of the completion of a C$18.1m capital raise last month this week the company have announced the appointment of Richard Lock as the company’s new CEO. Mr Lock has led the construction and development of several large mining projects around the world, including at Rio Tinto’s Resolution and Keystone copper projects in the USA.
Executive Chairman Craig Dalziel said the appointment “completes the assembly of a highly skilled cohesive team of industry professionals that is fully capable of delivering this world class mining opportunity to the project acquisition market-place”.
Hopes are high that the now fully funded current drilling campaign will turn the historic resource of 2.6mt contained copper into multiples of that. In a world with a looming copper supply deficit and relatively few ‘independent’ copper projects of size and scaleability, continued work to confirm and expand the resource will almost certainly increase Santo Tomás’s attraction for any suitor.
Global Copper M&A US$bn (Source: S&P Global, RFC Ambrian)
Copper M&A activity has been pretty limited over the last decade but has begun to accelerate over recent years. We’ve got some way to go to develop the copper resource pipeline required to meet climate change related demand but there are signs that the market is belatedly deciding to shift gear – could we be on the cusp of a significant copper M&A wave?
Charlie Cryer
Head RFC Ambrian London
+44 (0)20 3440 6834
charlie.cryer@rfcambrian.com
*RFC Ambrian acts as Financial Adviser to this company and holds an interest.
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