By R. Bruce Striegler
On February 1st, Codelco, Chile’s state-owned copper mining company and the world’s largest copper company, announced a billion dollar cost-reduction plan for 2015. Nevertheless, copper’s low prices have not stalled Codelco’s mining expansion plans which call for an investment of about $22 billion by 2018. Patricia Mohr, Scotiabank economist and commodity specialist says, “Copper in recent years has been an extraordinarily profitable metal. This is due to very little new supply brought on-stream internationally, and it was also a period where global demand growth, especially from China, was very good.”
Mohr says the LME (London Metal Exchange) official cash settlement price for copper peaked at an all-time high, on February 14, 2011, at $4.60 pound. ”At that level, the average profit margin over full break-even costs was over 50 per cent. It was exceptionally profitable.” With prices slipping since 2011, last year’s average of $3.11 per pound was down slightly from 2013. “But that is still a reasonably profitable level for most mines around the world, including those in Canada.”
Mohr says the pace of new development is about to change, “New supply is expected to come on stream in 2015-16. From Zambia ( with Vancouver’s First Quantum Minerals Ltd.), from Peru (with Toronto’s Hudbay Minerals Inc.), from the Democratic Republic of Congo, and from Chile, for example, where there are currently three new copper mines ramping up.” One of the new Chilean mines is Las Bambas, now owned by a consortium led by China Minmetals Corp. Las Bambas is scheduled to produce 400,000 tonnes of copper a year beginning in 2015, equivalent to 12.5 per cent of 2013 imports of copper metal by China. The list also includes Peru’s Minera Chinalco project which now has started production, and Freeport McMorRan’s Grasberg mine in Indonesia, the largest gold mine and the third largest copper mine in the world. “This is an older mine that is moving into higher ore grades, very prolific, with substantial production from that mine is expected to come on stream in 2015-16.”
Copper demand will continue to grow worldwide
The composition of global mined copper production has undergone a material shift over the last 30 years. According to statistics from The International Copper Study Group (ICSG), in 1980 global mined copper production was regionally balanced, with North America representing roughly 28 per cent. Much has changed since then as production in North American has stagnated, while Latin America and, to a lesser extent, Asia have increased production significantly.
In 2012, Chile alone represented 33 per cent of global mined copper production, and figures from ICSG show that Latin America accounted for 42 per cent of 2013’s production. North America by contrast, produced 13 per cent. Internationally, at US$150 billion, the global market for copper is the third largest of all metals after iron and aluminum. From ICSG’s 2014 World Copper Factbook, preliminary figures reveal 2013’s copper production worldwide reached 18.1 million tonnes, Chile was the largest producer at nearly 5.8 million tonnes. Smelter production hit 16.8 million tonnes and in 2013, copper refinery production increased to 20.9 million tonnes. ICSG expects continued mine growth of 4.7 per cent in 2014 and 7.3 per cent in 2015.
It’s easy to see why copper demand remains sizeable. An average North American car contains over 50 pounds of copper; an average railroad locomotive uses 11,000 pounds, while electric subway cars, trolleys, and buses contain a weighted average of 2,300 pounds. Combined with farm and industrial equipment as well as airplanes, copper is critical. Developing Asia is transitioning from rural agrarian economies toward urban manufacturing economies that require increasing amounts of copper. China and India are expected to require massive infrastructure investment as urbanization continues, with copper playing an instrumental role. In China, between 2002 and 2012 over 178 million people moved into urban centers. BHP Billiton reports copper usage in China increases by a factor of 2-3 times when comparing urban centers to rural villages. In the U.S., the average single-family home of approximately 2,100 square feet contains 439 pounds of copper, while the average multifamily unit of 1,000 square feet contains 278 pounds of copper.
New mines and increased production; producers anticipating improved prices
Canada is the third largest copper producer in the world, after Chile and the U.S. Ontario and B.C. are the two largest copper-producing provinces. Mine output in Ontario is processed locally, while most of the copper mined in B.C. is shipped as copper concentrate to Asia for smelting and refining. In 2013, Canadian production of copper, according to Natural Resources Canada reached 613,500 tonnes.
China consumes almost half the world’s annual copper output and to some economists, recent inflation data from China renews their fears of a worsening economic outlook for the world’s top copper consumer. A worse than expected 3.3 per cent drop in factory gate prices in December was interpreted as further evidence of inactivity in the country’s real economy. While consumer prices showed a small uptick, producer prices in China have now fallen for 34 months in a row.
In B.C., Imperial Metals has completed its 30,000 tonne per day copper/gold Red Chris project, with the mine now in final commissioning stages. Red Chris will be Imperial’s third operating B.C. mine. Imperial Metal’s Mount Polley, an open pit copper/gold mine in central B.C. suffered a tailings pond rupture in August 2014, pouring 10 million cubic metres of water and 4.5 million cubic meters of finely ground rock containing potentially toxic metals into local streams and lakes. Since that time, the mill has been on care-and-maintenance and it is unknown at this time when production may resume.
In recent years, Teck spent $475 million to modernize and extend the life of a 40-year-old mill at its Highland Valley copper mine, about 75 kilometres southwest of Kamloops, B.C. Teck also reported sales volumes of coal and copper were also lower in 2014 than in 2013 and gross profits fell 2014 to $2.9 billion compared with $3.7 billion in 2013, a 22 per cent decline. At Taseko’s Gibraltar Mine in B.C.’s Cariboo, a third phase of modernization and upgrades was completed in 2013. Taseko’s Gibraltar is now the second largest copper mine in Canada and currently employs approximately 700 people.
In December 2014, Environment Canada approved development of Seabridge Gold’s KSM project in British Columbia, the world’s largest undeveloped gold-copper project by reserves. Seabridge Gold plans a combined open-pit and underground gold, copper, silver and molybdenum mine located approximately 65 kilometres northwest of Stewart, BC and roughly 35 km northeast of the Alaska border. The deposit boasts 38.2 million ounces of gold, 9.9 billion pounds of copper, 191 million ounces of silver and 213 million pounds of molybdenum provable and probable reserves. The mine is expected to process 130,000 tonnes per day of ore over an anticipated mine life of 52 years.
Some mining companies have recently cut projected output for 2015 by 300,000 tonnes (Rio Tinto at Kennecott, BHP Billiton at Escondida and Glencore at Alumbrera), helping to trim an expected surplus this year to a modest 250,000 tonnes. One miner bucking the trend of production cut-backs is Vancouver-based Capstone Mining Inc. Consulting firm pwc reports in its 2014 price survey of gold, copper and silver miners that Capstone is planning to significantly increase production over the next several years. Driven in part by its 2013 purchase of the Pinto Valley open pit copper mine in Arizona and its 70 per cent stake in a major copper-iron project in Santo Domingo, Chile, pwc’s report quotes Capstones founder and CEO saying the company is happy to be doing the exact opposite of what everyone else is doing. He explains that while Capstone’s Santo Domingo project is going into production, others will be just ramping up construction on their projects.
Patricia Mohr, Scotiabank economist and commodity specialist concludes, “I think because of this new mine supply, copper is going to gently edge down in the next several years. For 2015, I’m using an average of $2.90 per pound, in 2016 slipping to $2.85 pound, and then from 2017, I have copper snapping back. We’ll get through this period of mine expansion around the world, the market will tighten again and prices will move up, probably quite substantially and it will return to being a lucrative metal.” Mohr suggests that the demand will still come from China, in spite of appearances of slowing growth. “In 2014, the demand for refined copper was up about eight per cent in volume terms. It has to do with the build-out of high speed rail, which is still on-going, the build-out of subway systems across the country, the electricity grid, household appliances and automobiles.”