Copper. BHP Daniel Malchuk, President Operations, Minerals Americas
LME Week Bloomberg Forum, London, 1 November 2017.
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Thank you to Bloomberg for the opportunity to share our views on copper, it’s a pleasure to be here at LME week in London.
As a Dual Listed Company, London is one of our homes and a very important base for our European investors.
I personally have a strong affiliation with copper – my beginnings with BHP were in copper in the United States and since then I’ve gained over two decades of experience across different commodities around the world.
Even now (in my capacity as President Operations, Minerals Americas) I am responsible for many non-copper assets, I’ll have to admit that copper still has a special place in my heart!
Let me start by stating that Copper fits our strategy
For many years, we have been clear about our positive outlook for copper, and have worked extremely hard to make sure our assets are well placed to deliver copper to the world.
At BHP we think in decades and generations. Our ability to plan, work and invest for the long term is our advantage.
We choose commodities that will deliver returns through the cycle.
As you know, the theme of this forum is “East meets West” which is very appropriate for my discussion today, given that Asia is expected to remain the powerhouse of growth to fuel commodities demand such as copper for decades to come.
So, today I will focus on two things:
- Why we like copper and the outlook for supply and demand; and secondly
- How we will create value with our quality assets, through exploration and the application of technology.
So let me start, or rather remind you, of the market fundamentals.
Our historic positive outlook on copper – and I believe many of you will agree with me – is underpinned by strong demand drivers because of its relevance to each step of the development cycle, combined with characteristic ore quality depletion from the supply standpoint.
The world needs resources to grow – it needs them to help build new cities and provide cleaner – and ideally renewable – energy that can power whole communities.
I am telling you nothing new so far, these conditions have been well understood for a while. However, in the last few years we have seen the strong emergence of two drivers that have potential to lift this game even higher.
These are electric vehicles and renewable energy… and fortunately Copper is ideally placed to benefit from the expected upsurge in demand from both.
The rise of renewables is a positive story. Thanks to strong policy support and major technical improvements, wind and solar power generation have increased nearly 50-fold since 2000!
Solar’s share of global power generation has more than doubled in just three years – yet still accounts for a small slice of the total energy mix.
Even so, this presents a great opportunity.
Solar requires about five kilograms of copper per kilowatt – that’s more than double the copper intensity than alternative forms of generation.
And with the use of solar expected to rise around the globe, this is an enormous amount of copper to source!
Now turning from the power grid to the highways…
A hybrid car uses 40 kilograms of copper – that’s twice the amount of copper a regular petrol car uses.
A pure battery-powered electric vehicle uses even more copper – about 80 kilograms or four times that of a petrol car!
And if you think you are seeing more and more hybrid and electric vehicles on the roads, you’d be right.
To capture this insight, I’d now like to share a short animation from our Prospects blog.
So as you have seen, the global electric vehicle fleet is expected to increase from one million vehicles today to about 140 million by 2035!
We believe electric vehicles could require even more copper as they evolve – up to 105 kilograms per car.
That would see copper demand for electric vehicle fleets grow to an estimated 12 million tonnes, or more than half of the current global market for refined copper.
Sure, demand for other metals will also increase as a result of this trend, such as lithium, cobalt, nickel etc. However it is the relative magnitude which makes copper our key area of focus.
Based on total refined copper output, the value of the copper market could increase by over 50 per cent by 2035 – an opportunity worth seizing!
Now you see why copper is firmly on our radar.
But, as good as this market looks there are some hurdles we need to clear first that would set us up for the future.
Supply constraints – meeting the challenges of the copper industry
The challenges such as supply constraints we face are significant. These range from declining grades, deeper deposits, harder ore, labour productivity and water scarcity, to higher expectations from host governments and communities.
Grade decline alone has huge ramifications. Industry grades are expected to decline by 17 per cent according to Wood Mackenzie data over the next decade. Ageing mines require more effort and cost to deliver the same production.
Securing reliable power and water supply to support operations requires a proactive approach.
The overreliance on groundwater sources is a major issue for the industry, particularly in Chile. There will be a growing need for desalinated water to process the higher volumes of lowergrade ore.
And BHP is not standing still.
We are applying advanced manufacturing practices such as automation, remote operations and a keen focus on improving our planning and execution of maintenance.
We have the luxury of having a phenomenal resource endowment, a portfolio of high quality, and long-life copper assets, such as Escondida, Spence, Olympic Dam, Antamina and the option at Resolution.
We have worked hard over the past decade to invest at the right time and our existing copper portfolio is now well positioned to benefit from what we believe is a brilliant future.
Exploration – bringing the future forward
In spite of our attractive resource base, we want more copper resources in our portfolio. And we believe the most valuable pathway to achieving this is through exploration, the drill-bit!
Exploration has the highest potential to deliver future returns and that is why it is a key part of our copper strategy… but we also recognise that given our high standards it is not an easy task.
Copper exploration these days is as a trade-off between depth and maturity.
The mature, well established and explored regions such as Chile are clearly less likely to host a big discovery close to the surface, with new deposits more likely to be at depth… and therefore more difficult to identify!
On the flipside, as we venture into less mature regions, such as Ecuador, where exploration activity levels have historically been lower, the potential for new discoveries closer to the surface is greater.
BHP is positioning as a global exploration leader. This is not about having the largest budget. It is about allocating the funds wisely through a highly focused and technical approach.
We have both the advantages of geoscience expertise and industry diversification. So what does this mean?
Our Copper Exploration team is leveraging our in-house petroleum exploration expertise with a specialised approach to exploration and deposit modelling.
What we call the ‘Mineral System’ allows us to identify without pre-conceived biases the best geological environments capable of hosting Tier 1 copper deposits.
Knowledge-sharing between our teams at BHP is important, but another valuable part of our exploration strategy is our academic ties.
Our partnerships with the likes of Bristol University, and the Universities of Wollongong and Western Australia, has helped us tackle the geoscience issues our explorers face. We are developing tools that measure the fertility of terrains.
We have leveraged data analytics and developed complex algorithms to be applied using Machine Learning techniques. BHP holds over 100 years of exploration data which provides a competitive advantage for building these algorithms, which have the potential to identify areas capable of developing Tier 1 deposits – This is an exciting prospect!
Our exploration techniques give us an early mover advantage, and inform us whether to continue or exit. This ensures we are sustaining a high-quality portfolio.
Our current exploration strategy targets porphyry, skarn and sedimentary hosted copper deposits globally, with a focus in the Americas, and IOCG mineralisation in South Australia. These settings host the most important Copper deposits ever found.
At the end of financial year 2017, our copper exploration portfolio comprised 79 projects covering 1.8 million hectares.
We have made, and continue to be open to, exploration alliances with junior explorers – their expertise and flexibility allow us to advance projects along the exploration pipeline. We are open to new ideas and opportunities, feel free to bring these to us!
We are aware that greenfield exploration is challenging and high-quality mineral deposits are increasingly scarce and difficult to find.
To be successful in Exploration, it requires perseverance and a stable and sustained investment through the commodity price cycle.
The rewards though – if we get it right – will be great.
Conclusion – Think big, think copper
Now to wrap everything up ….
We believe there is a great future ahead of us, full of opportunities as BHP becomes more active in adopting new technologies over the whole value chain. From exploration to marketing!
We can only grasp that future if we think big. And it is copper that will lead the way!
Copper has had great fundamentals for some time, and great potential due to the rapid rise in renewables and electric vehicles.
We are well placed to support increased copper supply into the global market, given our resource endowment.
Our existing copper assets are world-class. We have a smart exploration program and a sustainable approach that will see us be a key player in this market at a global level for years to come.