Why Copper

STRUCTURAL INDUSTRY TRENDS: COMPELLING FOR COPPER

Record consumption (with positive growth forecasts) and depletion of reserves (with limited new supply)

  • Large & structurally attractive market with limited substitution options
    • Copper ranks 3rd in global metal consumption: ~US$140 billion pa demand
    • Large consumption base, 23.6Mtpa, relative to fragmented supply, largest mine 1.2Mtpa top 10 only 5.4Mtpa
  • Robust demand and above trend expectations for future growth
    • Record Chinese imports during Spring’18 - more than at the height of the Supercycle
    • Continued Urbanization: eg 2.2Mt of new consumption (alone) from China’s “Belt & Road Initiative” before 2030
    • Accelerating Electrification: eg Bernstein estimates 2x copper supplies for electric cars (alone) by 2035
  • Previous commodity cycle’s new supply has peaked
    • & notably limited post Cobre Panama commissioning (with 0.4% Cu grade)
  • Estimated 4% pa average decline in existing capacity
    • Eg Codelco (largest global producer 1.8Mtpa): spending US$39b just to keep production flat

...mine project pipeline at lowest level in 7 years (with lack of investment & long lead time on new supply)

  • “The global copper industry needs a new Escondida mine (the worlds largest copper mine) every 15 months over the next 10 years in order to meet global demand ... - JS (CEO Rio Tinto)
  • Low hanging exploration fruit has been picked
    • New jurisdictions, lower grades &/or deeper orebodies
  • Strong consolidation over the last decade - “The Cupboard is Nearly Bare”

Nearer term uncertainties

  • Impact of “Trade Wars”, Chinese growth, balance of mine supply v smelter capacity/outrage, lowest supply shock (2018) in over a decade (2% v 5.6% average), real inventory levels (steady declines since Mar’18), DRC election, Grasberg underground transition

Freeport CEO foresees 'really, really high copper prices’ (January 24th, 2019)

  • the market likely will see "really, really high copper prices... How are you going to replace the top 10 mines in 10 years? It’s not going to come from what’s on the schedule now.”
  • expects "a strong desire for companies to expand their copper business," over the longer term, but opportunities for investment will be limited by geology, politics and the nature of available ore bodies.

  • Exploration will not be enough to meet future copper demand.

  • It would be an "uphill battle" to see an acquisition that would make sense for FCX right now, adding that companies get into trouble when try to force M&A into a strategy.

  • “if we look at the copper equivalent capacity of our company, 4.5 billion pounds of annual production . . ., the cost to develop Greenfield capacity is $8-10/lb, that indicates that to replace what we already have now could be in the order of $35-$45 billion”.
    • CEO Richard Adkerson (Source: Bloomberg First Word)

BHP – “Neither source of metal is likely to come cheaply” (February 19th, 2019 – economic & commodity outlook update)

  • We estimate that grade decline could remove -2Mtpa of mine supply by 2030, with resource depletion potentially removing an additional -1½ & -2¼Mtpa.
  • Our view is that the price setting marginal tonne in ten years will come from either a lower grade brownfield expansion in a low risk jurisdiction, or a higher grade greenfield in a high risk jurisdiction. Neither source of metal is likely to come cheaply.

WORLD CLASS DISCOVERIES ARE EXTREMELY RARE

  • Fitch forecasts that global copper demand will increase from 23.6Mt in 2018 to 29.8Mt by 2027, at 2.6% CAGR
  • Top 10 copper mines only produced 5.4Mt in 2018 (largest mine 1.2Mt)

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Without projects supply gap will exceed 15Mt by 2035

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Many key operations set to exhaust their current reserves
Peak historic/forecast annual copper production (‘000t) vs Expected LOM (year)

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Almost all the uncommitted projects are needed by 2035
Forecast committed copper mine production and potential from uncommitted projects*

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* Committed production after disruption; Uncommitted before any adjustments


COPPER OUTLOOK - FAVORABLE DEMAND

  • Continued Urbanization
  • Accelerating Electrification & Environmental drivers
    • Growth in Renewable Power & Storage
    • Increasing Electric Vehicle adoption (3-4x copper usage to traditional combustion engines ex charging points/infrastructure)
  • Implications of how “upcoming electrification will change the copper world”, from Gianni Kovacevic, Chairman of CopperBank (Mar’19): http://www.commodity-tv.net/?v=298899

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  • Copper demand for the last 25 years has grown at an average rate of 3.3% pa
  • Based on below trend 1.8% pa average growth, the world over the next 25 years will consume more copper than what has been consumed in all history

COPPER OUTLOOK - FUNDAMENTAL SUPPLY STORY

  • Reducing exploration success rate & expenditure
  • Limited development pipeline
  • Declining grades
  • Deeper mines
  • Higher costs and capital intensity
  • ~US$100billion spent over last 15 years
  • Average discoveries at ~0.5% Cu or less
  • These discoveries require ~US$4.5/lb Cu to be economic (new peak copper pricing)

PALISADE RADIO: GIANNI KOVACEVIC: THE COPPER BULL MARKET IS ONLY JUST STARTING (JAN’19)

The average grade of copper ore mined has declined by 1.8% per year over the past 12 years to 0.59% in 2017

The fall is due to declining grades at some of the largest, long-life mines and the development of new low-grade mines. The declining grade trend will continue because of the same two factors. BHP’s 1.1Mtpa Escondida is lifting ore throughput to maintain copper output as grade declines. First Quantum’s 320ktpa Cobre Panama starts up in 2018 mining ore with only 0.4% copper. (Source)

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LOW HANGING FRUIT PICKED

“A declining resource base and aging assets will require miners to access new resources in key new geographies to meet future demand” – Glencore, BAML presentation May’17

Tier 1 copper assets are increasingly located outside of the OECD & are at depth or lower grade – location for some of the next generation of mines

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Adapted from Glencore, BAML presentation May’17 - new copper geographies listed are highlighted in gold, with the largest consumer of copper, China, highlighted in black


CONSOLIDATION: THE CUPBOARD IS NEARLY BARE

Unlike the recent uptick in consolidation in the gold sector, M&A has been active in the copper sector over the last decade leaving “the cupboard nearly bare1

-  325 copper M&A deals involving global assets (ex- China) that have taken place since 2008

-  Combined value of US$88.8b

1 RFC Ambrian report - Nov18

  • 92 operating mines (US$45.3b);
  • 31 construction projects (US$10.6b);
  • 89 feasibility stage projects (US$23.6b);
  • 57 resources definition projects (US$5.5b);
  • 47 exploration projects (US$1.8b - ex deals <US$10m)

     2019 (to January 24th)

  • China Moly US$1.14b to buy another 24% of Tenke mine (DRC)
  • Sandfire US$80m offer for MOD Res. (explor. in Botswana)

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