What was once considered low-grade is now the new norm for copper production.
This holds true even if the world only plans on replacing depleting mines to maintain annual production. Never mind trying to grow production.
Copper Crunch Alert #1: Production Costs are Rising
The declining grades of existing copper producers are going to drive production costs up higher and higher.
You can pull up this chart on Bloomberg to show the true cash costs of production for the same group of producers.
The chart below only shows the mine site cash costs for copper mines. The all-in sustaining costs are anywhere between 50-200% higher. Very few copper producers can make money at current prices. | |
Copper Crunch Alert #2: Fewer Big Discoveries
Copper has been an integral part of human progress for the last 10,000 years.
Over $50 billion dollars has been invested in the exploration, development, and production of copper in the last decade.
Yet in that span of time, only 4 major discoveries have been made.
Markets LOVE a discovery.
In total, $50 billion dollars found 225 billion pounds of copper. At current production rates, this works out to just over 5 years of global supply.
While many small exploration companies may claim to have made big discoveries, there haven’t been any significant 1 billion pound plus copper discoveries in the last 5 years. | | More copper was found in 1991 alone than all of the copper found in the last 10 years.
So what’s happening?
- Are the geologists getting worse?
- Is there no more copper to be found?
- Is the copper industry spending less looking for new copper deposits?
The answer to all of the above is NO.
The industry is spending billions of dollars annually looking for copper.
The chart below shows how much money is spent every year on copper exploration. | | | The next chart overlaps annual copper discoveries with annual copper exploration expenditures. | | It’s clear from the chart above that the industry has not slacked on spending money looking for copper.
The problem is that they’re finding less.
To make matters worse, poor infrastructure and governmental red tape are making it harder for existing projects to expand production to keep up with demand.
A large open-pit copper mine needs roads and infrastructure to allow the transport of trucks, materials, and workers.
There’s also a huge amount of electricity needed to operate a mine.
Electricity can be roughly 15-25% of the cost of a pound of copper produced. Electricity powers almost everything in a copper mine – equipment, grinding mills, crushers, shovels, trucks, and lights.
In the past few years, we’ve seen a mining downturn. Many of the regions with advanced and promising copper deposits haven’t increased their infrastructure to properly handle the new demand.
As a general rule, 65 megawatts (MW) of power is needed per 100 million pounds for an open-pit copper mine. This is enough electricity to power 65,000 homes.
Most of the large copper projects in Africa that are expected to come online in the near-term don’t have any spare capacity available on government electrical grids.
The solution would be to use their own grid, either by using diesel generators or building their own powerplant. Both are very costly endeavors and aren’t profitable with copper under $4.
You Have to Target Copper Companies in the BEST Regions
In some countries, governments have used electricity as leverage to strong-arm mining companies into a bigger cut of the profits.
In 2017, First Quantum Metals was told by the Zambian government that the power to their site “could” be reduced unless they paid a new electricity tariff…
The end result for companies operating in risky areas is a higher cost of production. They’ll have to either build their own power generation or pay extra to be on the government’s grid.
In Indonesia, Freeport-McMoRan (one of the world’s largest miners) got their equity stake in their Grasberg mine in Papua, cut back from 91% to 49% by the government. And that was AFTER they’d already invested $12 billion into the mine.
Now the government is asking Freeport for another $10 billion to be invested over the next few years – or else they’ll risk losing their remaining 49% interest.
The Mongolian government is doing the same to Rio Tinto in real-time over the world-class Oyu Tolgoi copper deposit.
When governments seize assets or have leverage over corporations, it drives up costs.
Having a copper asset in a safe and mining friendly jurisdiction significantly limits these political risks.
Surging Growth in the Copper Market
The global economy always has periods of recession after periods of growth.
But like Rick Rule always says, bear markets are the authors of bull markets.
Nobody will deny that overall, in the long run, the human population is growing.
All countries are moving towards green electrification. Copper is absolutely critical for wireless technologies and the electrical revolution that’s now taking place.
Copper Consumption Will Head to Record Territory
Historically, global copper production has increased at an average rate of ~3.4% per year. However, don’t expect that trend to hold in the coming years, for the reasons outlined earlier.
With long term growth in consumption lead by the Electric Vehicle movement, we can see a major gap between copper production and demand open up following the projected recovery from the pandemic. | | Could we see a time when copper gets treated as a precious metal?
It’s clear there isn’t enough copper in the world that can be mined economically at under $3 per pound to supply the global demand over the next decade.
The big copper producers will do everything in their power to make sure they’re able to meet growing global copper demand.
But history shows that the big copper producers like Rio Tinto and BHP only want tier 1, world-class copper mines.
So, what’s a tier 1, world-class copper mine?
1 Billion Tonnes at 1%?
In the olden days, a “monster” deposit that the majors would fight over would have 1 billion tonnes of 1% copper.
1 billion tonnes of 1% copper is 22 billion pounds of copper.
22 billion pounds sounds like a lot of copper.
But that amount is less than a single year of current copper consumption.
In the last 15 years, global copper grades have fallen from an average of 1% to just under 0.4%.
That’s a 60% drop.
The world’s largest copper producers are now openly stating that 1 billion tonnes at 0.5% copper is now the monster deposit of the electrical revolution copper era.
After all, only four 1 billion tonne 1% copper deposits were found in the last ten years.
1 billion tonnes at 0.5% copper is just over 11 billion pounds of copper. That’s still a staggering amount of copper.
But it's the profits to be made by finding the next monster copper deposit that are truly staggering.
Copper’s a big business. The copper market is 50% bigger than the gold market.
Billionaires have been made from ordinary people with extraordinary ideas about copper discoveries.
In tomorrow’s essay, I will share some of the world’s greatest wealth creators who made their fortunes from the copper markets.
You’ll be shocked at some of these dynasties, who are well known today, whose wealth first came from copper.
Learning all of this was one of the most exciting educational journeys of my life and I’m thrilled to be able to share it with you.
Tomorrow, I’ll tell you about the richest man in recent history… who you’ve probably NEVER heard about before.
And how mind-boggling fortunes are made with this one particular metal. I was shocked myself when I first dug into it.
Stay tuned, | |  Jay Martin CEO, Cambridge House | |