Recording date: 28th August 2024
The Battery Show (Copper Bottomed, Episode 17)
The copper market has seen significant volatility in recent months, with prices ranging from $3.92 to $5.25 per pound before settling around $4.25. This fluctuation was driven by Chinese housing market weakness and fund positioning, rather than fundamental demand. While Chinese demand remains soft, ex-China demand, particularly from the US, has been strong. Most analysts maintain a bullish long-term outlook on copper due to supply constraints and growing demand from electrification and decarbonization trends.
A major development in the sector was the $3 billion joint venture between Lundin Mining and BHP to acquire Filo Mining, highlighting the premium value placed on high-quality copper assets. This deal could have positive implications for Argentina's mining sector.
Several reports, including from Wood Mackenzie and S&P Global, emphasize the looming copper supply deficit. Wood Mackenzie projects a 75% increase in copper demand by 2050, reaching 56 million tonnes annually. However, new major copper discoveries have become increasingly rare, with the average timeline from discovery to production now stretching to 18 years for mines in general, and potentially 25-30 years for large copper projects.
Major producers like Freeport-McMoRan and BHP are struggling to show significant production growth. Both companies are heavily investing in leaching technologies to extract more copper from existing operations, but the effectiveness and cost-efficiency of these new methods remain uncertain. BHP, for instance, is projecting only modest production growth over the next decade despite substantial investments.
In the junior mining space, two companies stood out. Arizona Sonoran Copper Company released a Preliminary Economic Assessment (PEA) for its Cactus Open Pit Project, showing promising economics with a 24% IRR. However, the presenter noted potential underestimations in operating costs and capital expenditures that investors should scrutinize. American Eagle Gold, despite a recent share price decline, continues to report encouraging drill results from its NAK project, demonstrating a large copper-gold system with good grades near the surface and excellent infrastructure.
The overall narrative for copper remains bullish, driven by increasing demand from population growth, urbanization, rising living standards, and the energy transition. However, supply growth is constrained by the scarcity of new discoveries, long lead times for project development, and the challenges of extracting copper from lower-grade or more complex deposits. For investors, this suggests potential opportunities in both major producers investing in efficiency improvements and junior explorers with promising projects, particularly those with high-grade, near-surface mineralization and good infrastructure. The sector may require patience, as the market sometimes expects linear improvement in exploration results, but the long-term fundamentals appear strong for well-positioned copper assets.
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