Prepare to Profit from the Coming Copper Crunch

Yesterday, we discussed electric vehicles and how they’ll be the driving force behind a global copper boom.

By 2040, electric vehicle copper consumption is set to triple and overall demand will increase by 50%.

Here’s the current predicament for copper supply: right now, there are 728 operating copper mines in production in 65 countries. This sounds like a lot…

However, 10 mines account for 27% the world’s production. That’s right, 44 billion pounds of copper comes from 10 mines.

These copper ‘super mines’ have been operating for decades now. The bulk of the riches have been tapped, and they’re past their prime.

Since these super mines have been producing for years, the ore is now deeper in the pit.

That means higher costs per pound of copper.

Currently, 50% of the world’s copper comes from 30 mines. In other words, 4% of the mines produce half of the worlds copper.

Just over half of total mine production comes from mining-friendly regions such as North America, Australia, Europe and select countries in South America.

The risk of political unrest or even government takeover of a mine is much lower in these areas.

The other half of the mines are in super risky jurisdictions. Places where it isn’t uncommon to see people carrying AK-47s around. In fact, you’d probably see the guards at those copper mines holding AK-47s.

These jurisdictions are not known for having great respect for property rights, contracts and often, even human rights.

These copper-producing districts are in Russia, Mongolia, Kazakhstan, the Middle East and parts of Africa.

Declining Ore Grades

You pick up a few things running one of the biggest mining conferences in Canada...

And one of the best indicators of a mine’s quality and potential profitability is called ‘ore grade’. It’s a simple measure how much metal there is in each tonne of rock that’s dug up.

For example, ore grades for gold deposits are measured on a gram per tonne basis. For copper, it’s a percentage basis.

The lower the grade, the more digging and processing a company has to do to produce copper. That means higher costs.

According to Bloomberg, the reserve grade of the world’s copper producers has fallen by 58% since 2003.

But Grade Isn't Everything...

The next chart takes the information above and overlays it with global annual primary copper production.

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 is only 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.

In Ten Years, Expect a Significant Copper Price Rise

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 into the exploration, development and production of copper in the last decade.

Yet, in that span of time, only four 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 five years of global supply.

While many small exploration companies may claim to have made big discoveries, there haven’t been any significant one-billion-pound-plus copper discoveries in the last five 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 is spending more than ever before looking for copper.

The problem is 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…

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, Indonesia 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.

With a growth rate of 4.5% (lead by the electric vehicle movement), we can see a major gap between copper production and demand in the next two decades.

Could we see a time when copper gets treated as a precious metal?

It’s clear there isn’t enough copper in the world for it to be mined economically at under $3 per pound in order to catch up to 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%?