This discussion provides an outlook on the current copper bull market. CRU provide a short presentation to set the scene supply and demand fundamentals expected up to 2030, before we engage in broader discussion among the panellists.
Francisco Acuña, Senior Consultant, Base & Battery Metals, CRU
Marcelo Awad, Executive
Director, Wealth Minerals
Francesco Bressi, Investment Manager, Resource Capital Funds
Luis Albano Tondo, CEO, Marimaca Copper Corp.
The bull market, or price rally, for copper in the last year or so came as a result of a combination of a perfect storm. On one hand, in the aftermath of the COVID-19 pandemic, we saw a rapid recovery in Chinese demand. Which came also in hand with the State Reserve Bureau in China importing a lot of copper cathodes, creating an over-demand of copper into the country.
At the same time, most countries came with a monetary fiscal stimulus to improve economies after the pandemic. Also exchange stocks were at multi-year lows, so there was actually a lack of material in the market.
We’ll see if we are to witness a real fundamental shift in the next couple of years that might get us into a new supercycle. And electric vehicles (EVs) and the green economy are key for that to happen.
In terms of U.S. fiscal policy, there’s been a lot of discussion about the American Job Plan and the impact that that could have. So, it’s at US$2.3 trillion infrastructure expenditure over the next five to eight years. This is coming on the back of the America Rescue Plan, which has already put US$1.1 trillion into the American economy. So that’s already a good scenario.
And for copper specifically, EVs, water, and power grid are the main sources. So, we are talking potentially just over a hundred thousand tonnes a year of copper for infrastructure spending as part of this programme.
I mentioned already about the impact of EVs. I want to highlight very quickly how resilient the EV market was during the pandemic. Obviously, there was a huge impact in the automotive industry in terms of total sales of light duty vehicles. However, that didn’t really have an impact on the growth rate of EVs. And on top of that, Chinese banks are being very aggressive about penetration targets by 2025 on top of the pledge to become carbon neutral by 2060. So monetary incentives are in place in China.
Car manufacturers and OEMs have been very active in getting new models available, creating capacity and so on. Overall, consumer trends are changing and people are becoming more interested in EVs, which has an impact in terms of technology development. This is an interesting story for copper because, as you know, a fully electric vehicle requires four times the amount copper that a regular petrol car does.
From 2025 onwards, most of the boost in copper consumption will come from EVs. Keep in mind that EVs will drive the increasing demand of copper in the coming years. In 2020, we estimated 1.4 million tonnes of refined copper were going to EVs, whereas the complete market is around 22 million tonnes.
So, it’s still a small fraction of it. However, by 2030 we’re seeing that it’s going to be more significant and will continue growing. Similarly, in terms of our renewables, particularly wind and solar, there will be an increase as well going from around 0.5 million tonnes to over 1.3 million tonnes in 2030. So, two key markets that not only are going to require more copper, but also incentivize new type of investors as well. Because we’re getting this question more and more about really understanding what the role of copper is in the green transition.
Where’s all that copper going to come from? In 2020, we saw a major downturn, obviously because of the issues that happened with COVID-19, with the operations that had to close, particularly in Peru, which was probably the country most affected in terms of disruption and closures. Some projects were delayed as well. However, for the next two or three years we’ll have an increasing global mine production driven by both recovering of mine production from existing mines that had to change their mine plans after the pandemic, but also big projects coming online such as Spence, QB2 and others.
We are pretty optimistic in terms of supply over the short term. But then, by 2025, we will see that we won’t have much growth to start with. We will have to start thinking about new production, new projects.
I want to quickly highlight what will be going on in South America in the next five years. The trend we see is that most of the projects or the firm production that we see coming from TLA is going to come from brownfield projects, particularly in Chile. So that could mean that there could be some delays. Brazil is a bit more balanced. But in terms of volume, obviously Chile and Peru take most of the pie.
And last but not least, the other topic for discussion is environmental, social, and governance (ESG). For copper this is important because EVs, renewables, and the green transition are key drivers for copper. So, if we think that the copper industry would like to reduce carbon by 50% by 2030, this means that there will be one ton of CO2 per ton of copper.
So, with all this in mind, there could be a supply gap that will become sizeable by 2030 as we saw beforehand. We’ll need more projects to come at a firm level. We’ll need more brownfield and green projects. And overall the world will need more copper. So, depending how we achieve that, you will obviously see an impact on prices.
Marcelo, given your experience with Antofagasta, do you think that we should see a shift on the strategy that the majors are taking?
Well, I have seen the majors on the wait-and-see mode in the last 12 months and taking all possible measures to keep the costs down while the prices continue increasing. I have also noticed that they are updating a number of expansion studies that they put in a box the last four to five years. And as the fundamentals get stronger, I believe the major midsize user will start launching mainly around field projects, such as expansion or switching from oxide layer to sulphide plans, which require important investment. I would like to add that in Chile, most of the projects, as Francisco noted, are brownfield splitting from oxide into the sulphide layer.
Most of the new exploration targets portfolios in the world have chosen a production target of less than 250,000 tonnes per year. This is the right time for majors to get aggressive on developing new projects to meet the expected forecast demand from EVs. And one important topic that we’ll have to consider is decarbonization. This is high on the agenda of most companies across the world. The decarbonization roadmap we have called for is the manual for decarbonization and for EV metals. That’s why I’m very positive on the next three to five years about copper demand and copper price.
I believe that this is the right time because the copper demand outlook continues to remain strong on the firm expectation of a global economic recovery
Perfect. Thanks, Marcelo. And just very quickly, what’s your take on M&A activity from copper majors? Maybe there will be some consolidation in the space or maybe majors are going to be more aggressive in looking to acquire smaller companies.
I think we’ll see a number of M&As coming up. I would say not major with another major, but perhaps majors acquiring or bringing in talented middle-size companies that could fit today’s synergies and culture.
I want to move now to Luis because I’m navigating through a downturn, as we saw in the last maybe five years. It is particularly harsh for junior explorers. So my question to you, Luis, is how did explorers survive the previous copper cycle downturn? And now that we are changing into a new copper cycle, what do you see as the key challenges?
Luis Albano Tondo:
Yeah, thanks Francisco. Let me tell you about the discovery of Marimaca, which I think will set the scene for further discussions in the panel. So Marimaca, which is different from the previous or the current geological modelling status quo in Chile, is an IOCG deposit. It’s not a porphyry deposit, it is an oxide deposit. We were able to find it because it’s actually very close to two big centres – Mejillones and Antofagasta.
So, we can say that Marimaca is actually on the beaten path. And still nobody had recognized that fact until we arrived there. There was no drilling done and so on. So, I think one of the challenges that we took for ourselves was to challenge the status quo of the geological setup. And what we realized was that although being an IOCG hosted in intrusive rock, most of the IFCGs are actually hosted by volcanic rocks. We’re able to discover and to think about the project differently. The intrusive rock was extremely fractured, which allowed for the mineralization to impregnate the rock and then create the deposit.
Lots of other companies and geologists have been through the place and couldn’t find it. That tells me that although Chile is the top location for finding new deposits, still, if you challenge the current geological model setup, you can actually find new greenfield projects.
In terms of challenges for junior companies, when you are not in a supercycle, explorers will always struggle for capital for doing their work. In terms of our company, we’re very fortunate to have the early participation of a private equity fund from London which gave give all the support we needed during the last downturn to continue with exploration.
Another question is what role do you see private equity playing in mining and exploration? If it’s going to remain a key focus, do you think the private equity world is going to continue being a relevant part of the financing scene?
Well, to answer your first question, we will continue supporting projects. Now, private equity, it’s interesting. We started private equity for the mining space. We’ve only been dedicated to the mining industry. And purpose was to focus on earlier phases of investment, and also to take advantage of certain, specific opportunities. We tend to fund across the stages of development, but also across commodities – not just copper.
We believe private equity is a good source of funding because it’s a long-term source of funding. So similar to the case of Marimaca, we take a long-term view. And by taking a long-term view, that means that we are available when, for example, the capital markets are not. I suspect this is part of the nature of the mining industry and I don’t see it changing in the foreseeable future.
Marcelo, do you see a potential risk to existing mining operations in reaching their respective production targets in the future?
Yes. Existing operations are getting deeper, but the hardware and the grade are getting lower. This is coupled with new regulations and community requirements. That’s why some mines are facing lower production. There are solutions to come back at full production. But sometimes the investment is not economically viable. The trend is to wait for a high copper cycle to implement a higher investment that can overcome these challenges and, in the meantime, to manage a marginal output increase to improve the overall economics of projects.
I believe that this is the right time because the copper demand outlook continues to remain strong on the firm expectation of a global economic recovery.
That takes me now to Luis. We said already that Chile is mostly a brownfield story. As one of the few greenfield projects, and taking into consideration all these potential supply constraints, do you see a competitive advantage in moving forward and taking a project into production to fill that gap?
Luis Albano Tondo:
The main drivers for a company, any company to approve any project, either greenfield or brownfield, remains the capital risk appetite. In other words, the risk associated with any potential overruns and also the execution risk – the technical, the permitting, time and so on and so forth. In the case of Marimaca, I think one of the best competitive advantages that we have is its location. We are close to Mejillones, which has the infrastructure necessary for developing the project. I’m talking about people, we are close to Mejillones, Antofagasta, and to water. In our case we are going to be using seawater for the heap leach operation. In terms of power, we are very close to the heart of Chile’s national grid in another part of the country. And, of course, the logistics are close to the port of Mejillones, which is surrounded by highways.
Francesco, we mentioned beforehand that copper is getting a lot of attention because of the impact of electrification and so on. And we see the supply gap that will exacerbate the need for new projects. In this sense, do you foresee an increase in activity in terms of funds flowing to get more exposure to copper? What will be the competitive environment for financing projects in the next year?
One point that is worth mentioning is copper has had strong fundamentals for the past seven, 10 years. It’s been a preferred metal. Those fundamentals remain, but this wasn’t reflected in the past few years because of the copper price. Now the copper price has spiked, we’re all awake and saying, “Wow this is it, it’s finally arrived.” And that of course has brought attention from all the sources of financing. So yes, we have seen more flows into the copper space. We still haven’t seen many projects being funded by alternative sources of capital. So not by the majors. But we do expect to see that happening.
And it hasn’t necessarily been because the industry was not in favour of copper. It’s just because it’s not so easy to find a good copper project. Private equity, because of the nature of private equity being disciplined capital, doesn’t like overruns. Once you have these big porphyry copper projects, it’s very hard for a private equity fund to get them into production.
Now moving on to ESG. Overall, how do you see ESG impacting project profitability?
Luis Albano Tondo:
At Marimaca, as we develop the project, we are very aware of ESG. We know that for, instance, when you have more chlorine into the process, you can have more recovery. And the most important fact for us is that that the source of the seawater we use is already permitted because we have a number of providers in the area that have already got the permit for extracting water. We are not going to be creating an additional impact of permitting more seawater for the project. That’s very important.
And of course, being an oxide deposit and being able to extract the copper by heap bleaching. In terms of water consumption, this is going to be almost five times less water in terms of tonnes. The third point is the footprint of the project. If you are doing heap leaching, you’re not having to build a tailings dam. So, the footprint of the project is going to be reduced and that has a significant reduction in the environmental impact that you will have. And the list goes on. We are in the Atacama Desert, a region that is known for being one of the best places for renewable energies such as solar and wind power.
And in fact, nowadays, when you start talking to the generators in Chile, are offering you a portion of the renewable energy that you’d like to have. And we are targeting to have as much as we can. If we can have a hundred percent renewable, that’s what we want to do. We can say that Marimaca is going to be really a green copper operation, literally, because we also have our copper oxides in green minerals. We are well positioned.