Future Copper DemandThe bottom line is whether the copper industry has been investing in sufficient capacity to meet future demand. At $2.15 spot prices the answer is no - and in the meantime existing top tier/bottom cost producers are grinding through reserves without expending capex on new discoveries, which are few.
China's growth rate has slowed but it is now based on a much larger economy than it has ever had before, so in absolute terms world demand remains at all time high levels. At the same time former investment and production capacity is in excess of demand, so we have a temporary glut and a gutted spot price.
It is a long term cyclical industry with long lead times to take viable deposits into production, or to expand production capacity at existing operations. Eg. OT - by 2006 the scope of the discovery was clear, and it will likely be 2020 before block caving production begins.
Unless electricity and the wound-copper magnetic electric engine is rendered obsolete by new technology, it is probable the world needs more copper to support existing industrial capacity if there is a serious move to cleaner energy solutions and away from internal combustion oil/gas power. China and the United States have not only supported the rest of the world in the Paris Agreement, but joined each other on September 3 depositing their ratifications of the Agreement. That is a very big deal because they will both exert tremendous pressure on non-compliant states to meet lower emission standards. No doubt both nations see energy solution changeover as a new potential source of economic stimulation. Existing technologies such as electric vehicles, electric train and mass transit, solar, or wind turbines are potentially massive copper demands. And world population and urban migration continues as technology gains continue in the developing world. More people with more consumption than ever before, even in a sluggish growth cycle with frightening levels of debt and misallocated investments.
So looking at today's markets and relatively small production overcapacity does not indicate what new consumption patterns may develop in the future. And in my own view, equity valuations are based too heavily on past performance and existing conditions, and company representatives and industry analysts are reluctant to make predictions on future changes in consumption patterns.
I've been betting on copper and the fact it is so cheaply priced and copper miners are so poorly valued today is an even greater inducement to lengthen the bet - especially with developing projects with growth capacity, open-ended reserves, or in other words, optionality to future production increases. OT is going to be hugely valuable. Not at today's valuations, but perhaps not as far into the future as some pessimists believe. When the copper market revives I believe huge fortunes will be made and the companies that have invested today are going to be financially very successful as they will have a near monopoly on production capacity for several years if a supply deficit develops.
For TRQ it may be that the longer the delays in putting the public float into play, the more leverage shareholders will have in valuation to a revived copper market. As in, just sitting tight and being right may beat negative rate Deutche bonds by a long shot. Are there other, quicker or hotter money opportunities out there for your investment capital? Sure. Diversify. But OT should, Mongolian tendencies to shoot themselves politically in the foot notwithstanding, eventually reward.
Time will tell. Patience required.
cg