Copper is Not a Third Place Metal
Trying to make copper sexy and alluring is difficult. I think people would agree that it is physically interesting both in its natural color as well as green when oxidized, but it is not stunning. It is a tough sell as an alluring metal. So, we are forced to look at the awesome facts, data and demand. We must look at it from its complete necessity not only in infrastructure, but in the green technology boom, electronics, and the current arbitrage potential between the commodity price and the producers’ stock price. Copper is needed, is in demand and the copper crunch is coming. We need to produce more output either from existing mines or newly discovered ones. The highly conductive and malleable metal is an integral part of the electric vehicle market, mobile phones, laptops and all electronics. We can safely agree this will not diminish any time soon as technology leaps forward. Let us consider some of the markets and how we can make a staple, base metal; a foundation metal into the metal of the future that it is. We are not going to focus on beauty and rich history but only on demand, technology and data. We do that by talking about electronics, the green revolution, autonomous vehicles and the parabolic curve of technology.
Today, the commodity copper is at a three-month high at $3.25/lb but that is not reflected in any junior mining companies in Canada. Globally, producers have been running into some issues in third world countries which has hindered some performance but there is huge potential in copper. Before we get into that opportunity let us consider demand. The demand, the ability to supply from countries like Chile and Peru is becoming more difficult. BHP Billiton has spent about $8 billion at the Escondida copper mine in Chile which is responsible for 5% of the world production to date. They are in the third round of talks to payout cash bonuses of $34,000 to workers. To put that into perspective the average monthly income is $896/month. This is one indicator of the issues surfacing in these regions. That and contract negotiation after minerals have been found, or tax ‘adjustments’. Chilean miner Antofagasta Plc’s Chief Executive Officer Ivan Arriagada said there have been few new discoveries of high-quality deposits that would offer the same potential as the Escondida, the world’s largest mine, in Chile. So, we can compare that he suggested that if annual global demand growth was only 2 percent, we would need seven new Escondidas by 2030 to keep pace with customer requirements!
Aluminum Corp of China (Chinalco) started work on a $1.3 billion expansion of its Toromocho copper mine in central Peru. The investment will increase the mine’s copper output by 45 percent by 2020, with the value of production exceeding $2 billion annually but not all copper is in South America. Currently, 50% of all copper is going to China. There are plenty of potential companies in North America from greenfield project generators to ‘mine reclamations’ and potential discoveries in safer, reliable jurisdictions are creating hope for this demand problem. In Canada, BC and Ontario are the hot spots, with BC sending most of its copper to China for smelting. In the US, it is states like Arizona, Utah, Nevada, Michigan and California.
The demands of the OBOR (One Belt One Road Initiative) will be massive and it does not does not include internal growth in China, nor the necessary improvements required in the US. The US requires road, bridge and building improvements and the US still imports copper despite its own mining efforts. Now this is not a glamorous story by it is a necessary one. This is a true demand certainty. Often practical and necessary are not exciting but where is the copper going to come from? It comes from exploration. It comes from retail investors spurring activity in project generators, exploration and bringing mines to production. It is time for people to take portions of their portfolio and focus it in the resources sector. We need more metal! It is not a question of maybe. Perhaps you are not convinced, and I must get a little flashy. Let’s shift gears and consider how copper is a metal of the future.
Eco-Friendly, Green tech and Renewable
Copper not only plays a key role in technology being an incredible conductor, but it is also recyclable and what better what to bring that idea home then to look at homes. Copper shingles and applications on housing are fire resistant and are able to endure harsh weather and heavy snow. They outlast other shingles and can endure for up to 100 years. The copper itself is also recyclable.
There is a strong demand for eco friendly homes, and places like California are requiring new homes to have solar panels. The use of solar panels requires a great deal of copper as well as cobalt, lithium, nickel and potentially more powerful vanadium. The metals durability and efficiency make it the metal for electronic, batteries, wiring, transformers and energy storage devices that support and connect solar photovoltaic (PV) panels and wind turbines as well as the components that power them.
The Copper Development Association informs us that a well-designed solar PV system uses approximately 9,000 pounds of copper per megawatt of peak capacity. Depending on the design, a system can contain anywhere from 4 to 15 million pounds of copper. When we speak of the power grid copper provides superior conductivity, durability and reliability play a critical role in increasing the energy efficiency and resiliency of energy systems, including infrastructure and installations.
In a release from the 2017, Solar Energy Industries Association’s 2017 Solar Market Insight Report 30 percent of all new electric generating capacity brought online in the U.S. came from solar power. Solar power has high use of copper not only in the panels but in the battery storage side. The Copper Development Association’s (CDA) Director of Sustainable Energy, Zolaikha Strong stated: “As more businesses, governments and nations transition and expand their use of renewable energy technologies, the demand for copper will be significant as it remains a fundamental component for the operation of renewables, including solar and wind power.”
Strong’s presentation, “Energy Efficiency & Resiliency: The Recipe for Protecting Our Nation’s Electrical Grid,” focused on how increased energy efficiency is vital to securing power supply and crating new economic growth.
One reason for excitement is in battery electric vehicles (BEVs), which require three to four times as much copper as traditional fossil fuel-powered vehicles. To determine the estimates Glencore commissioned CRU to measure electric cars and batteries. CRU is a London-based research company which considered grid infrastructure, storage, charging and vehicles – based on relatively modest penetration of EVs in the total global vehicle market out to 2030. According to the study as early as 2020, when EVs would still make up only 2% of new vehicle sales, related metal demand already becomes significant, requiring an additional 390,000 tonnes of copper, 85,000 tonnes of nickel and 24,000 tonnes of cobalt. This would mean an increased output of 25% from Glencore’s current mines!
Based on an EV market share of less than 32% in 2030, forecast metal requirements are roughly 4.1m tonnes of additional copper (18% of total world 2017 supply).
China is already the world’s largest and most profitable market for BEVs, and Beijing is now reportedly working on plans to curb and eventually ban the sale of fossil fuel-powered vehicles, according to the Financial Times. This would place the Asian giant in league with several other powerful countries similarly crafting bans on internal combustion engines within the next 25 years, including Germany, France, Norway, the United Kingdom and India.
Where is the opportunity
So how do I take advantage? Do I buy a producer or an explorer? Should I buy the commodity or the company? There are just two questions that reflect your risk tolerance and your potential gain. For the experienced investor buying on the futures market in a commodity is a great strategy but it is aggressive, needs active management and because of its natural leverage ability is not suitable for most investors. The natural selection might be buying the index. There are several metals and mining ETFs notably the S&P/TSX Global Base Metals and Mining index. The Index is the basis of four ETFs that trade on the TMX. They are the Claymore Global Mining ETF, the Claymore Global Mining ETF Advisor Class, the Horizons BetaPro Global Base Metals Bull + ETF and the Horizons BetaPro Global Base Metals Bear + ETF. An ETF is a fine idea in theory, but it is unlikely that more passive investing is what you need. Most people want growth and we need to take risk. That leaves stocks. This is the wise approach for retail investors, but do we look at producers or project generators? Currently there is opportunity in both but given all the data, the length of the downturn in the mining cycle and the amount of drilling going on targeted research on junior miners is the best option for maximum growth.
In Canada there are some big operations like Copper Mountain Mining operates the Copper Mountain mine in BC. It holds a 75-percent stake in the mine, with the remainder owned by Mitsubishi (TSE:8058). Imperial Metals runs the 30,000-tonne-per-day Red Chris copper mine in BC. The company also restarted operations at its Mount Polley copper-gold mine in BC. KGHM is one of the largest copper-mining companies in the world and currently developing the Ajax project, an open-pit copper-gold mine in BC. Taseko Mines (TSX:TKO) holds the BC-based Gibraltar mine, the second largest open-pit copper-molybdenum mine in Canada. Teck Resources majority owns and operates the Highland Valley copper mine in BC.
The final consideration would be to consider some of the project generators that take risks collecting data, research and putting boots to the ground in order to find and develop projects. These companies typically work to hand-off projects in the form of buyouts or takeovers when they find resources. These are crucial in the chain of keeping technology in our hands, and meeting carbon quotas and creating a greener future. But that is for next time. For now, I hope you found some sparkle in this copper lustre.
Securities Disclosure: I, Andrew O’Donnell, hold no direct investment interest in any company mentioned in this article. I was not paid for this article.