Author: Chris Welch

Posted: 
Tuesday
,
17 Feb 2009

LONDON (Bloomsbury Minerals Economics) – 

Copper's
near term prospects are bleak, of that few are in any doubt. But, the
loss of many mining projects in the production pipeline due to the
credit crunch and low copper prices gives hope for a copper price
recovery sooner than many would expect. This can only be good news for
the mining industry.

Recent History

The rapid increase in copper prices in late 2005 and early 2006
encouraged all copper miners to operate at maximum capacity
irrespective of operating costs, which had become a small fraction of
copper prices. In spite of the price stimulus, between 2005 and 2007
copper mine production only increased by 4% to 15.5 Mtpy. The inability
of producers to increase production enough to meet the runaway demand
during the 2005-07 period shows how difficult copper mining had become.

From mid-2005 to mid-2008, the copper mining industry was plagued by
rapidly increasing operational and development costs, due to high
energy prices, insufficient technically skilled staff, equipment
shortages and long delays for long-lead items such as SAG mills. The
copper price was incentive enough to encourage production and expansion
during this period. Now that copper prices are more than 60% lower than
at the price peak in mid-2008, the incentives to achieve maximum output
is no longer there.

Present Situation

Miners have reacted to the global economic slowdown and the credit
crunch by drastically cutting capital expenditure, reducing staff, and
altering mine plans to favour cheap ore production rather than
maximising copper output. This shows more dynamism in miners' response
to the demand slowdown than in previous periods of weakening demand.
Production cuts will lessen the extent of the stock build, but will be
no means prevent one in the near term.

The immediate problem facing copper miners of all scales is
maintaining a positive cashflow. Recent acquisitions encouraged by high
metals prices have left several of the major diversified mining firms
with large debts, in particular, Rio Tinto. Its purchase of Alcan has
left the company with a debt of approximately $40 billion. Refinancing
debt and securing more debt financing has become a key issue due to the
credit crunch, particularly those companies crossing from the
development stage to the production stage. Many have had to find
alternative means to fund their operations, or have sold stakes in
their operations to provide cash. Others have turned back to the
shareholders to generate capital by issuing more stock. Some, like
Anvil Mining, which has several operations in the Democratic Republic
of the Congo, have put their mines on care and maintenance to preserve
capital. Until credit becomes easier to acquire, more smaller scale
mines are likely to follow the same path.

Primary copper consumption is in the doldrums. A year on year fall
of 4% to 7% is expected in 2009. As a result, the pressure for miners
to produce is off. However, BME expects consumption to recover in 2010.
This will require a 5% increase in mine production to reach a balanced
refined market, an increase that the industry had not been able to
achieve during the last three years even though copper cash prices were
much higher at over $7,000/tonne.

 

 

2008 copper projects – costly start-up delays

At the start of 2008, we expected that 18 new projects of
significant size would increase mine production by 440 kt, or
approximately 42% of the total increase in mine production for the
year. BME's current mine production estimate for 2008 is a fall of 150
kt down to 15.4 Mt and of the 18 projects, 5 will not enter production
and the remainder will have added only 235 kt.

A fire at Equinox Minerals' Lumwana project in Zambia was the cause
of the largest production loss from a new project in 2008. The project
was originally due to enter production at the start of the third
quarter and produce at least 70 kt of copper-in-concentrate during the
year. The company successfully brought the mine into production in
December, but at a much higher cost than expected at $814 million in
pre-production capital expenditure. Due to the delay in start-up,
Equinox Minerals had no cash flow for the second half of the year yet
had to fund development activities at the project. This led to the
company securing an additional $80 million in debt financing on top of
its previous debt finance facility of $582.7 million. The company also
closed out its put options – or options to sell copper at a set price –
which enabled the firm to raise $11.6 million in cash. The mine is now
on-track and is expected to produce 172 ktpy of copper-in-concentrate
during the first five years of a 37 year operation.

In Spain, Inmet Mining has just received approval from the local
water authority to continue the development of its Las Cruces project.
The authority had earlier disapproved of the company's de-watering and
re-injection system and suspended development in the third quarter of
2008. Start-up of Las Cruces is now expected in March this year, 9
months later than previously expected. Las Cruces is expected to
produce 26 kt of cathode copper this year, and will be an important,
and long awaited, new source of refined copper in the region.

Codelco's Gaby mine, otherwise known as Gabriela Mistral, entered
production in May 2008, two months later than expected, and as a
result, produced 12% less copper than previously expected in 2008. The
mine reached its full capacity of 150 ktpy in the fourth quarter, and
in spite of the credit crunch, Codelco has committed to a 10 ktpy
capacity expansion for 2009 and 2010. Gaby, and Codelco's other
projects, should benefit from the $4 billion stimulus package announced
by the Chilean President in January, of which $1 billion has been
allotted to Codelco.

The credit crunch has hit Oz Minerals very hard as it has been
unable to refinance a debt of US$560 million. As a result the start-up
of its Prominent Hill project in South Australia has been brought into
question. The project's commissioning has already been delayed into the
first quarter of 2009 due to a fault with the SAG mill pushing back the
start of ore supply to the concentrator. The company is now looking at
selling a large stake in the project to help meet its refinancing needs
and is looking to the major producers in the area, as they are the only
ones with sufficient cash on their balance sheets.

Katanga Mining's Kamoto mine entered production in 2007 but was
carrying out a large scale expansion in 2008. It expected to increase
the mine's output from 10 tkpy to 40 ktpy during the year, yet
announced in the last quarter that it did not expect to meet its
production targets as ramp up of the operation was proving to be harder
than originally expected. A shortfall in expected copper sales left the
company with a significant financing gap, and in December the company
asked for permission from its shareholders to issue more shares to
raise capital. Katanga has been approached by Glencore, which holds a
large stake in the company, for a possible takeover. Kamoto is part of
the much larger KOV mining complex which has potential to produce 400
ktpy of copper. Katanga's plan to incrementally increase production may
be foiled by the credit crunch should an acquisition not materialise in
the near future.

Of the smaller scale projects that entered production in 2008,
African Copper's Mwana (previously Dukwe) project's start-up delay
caused the company a big problem. The company was left with little cash
in the bank and has asked for the permissions from its shareholders to
issue a further 750,000,000 shares in the company to raise cash. The
project, which is situated in eastern Botswana, was expected to produce
2.5 kt of copper-in-concentrate in 2008, yet only produced 1 kt.

Newmont's Boddington re-start project has been postponed for an
indefinite amount of time. The company has decided not to proceed with
development due to lower metals prices. The project had been expected
to enter production in late 2008, and has potential to produce over 30
ktpy of copper-in-concentrate.

Pan Aust's Phu Kham mine in Laos, Quadra's Carlota mine in the USA,
and Vedanta's Konkola Deep mine in Zambia have all entered production
with little delay, as did First Quantum's Frontier mine.

Project Pipeline – Will there be sufficient copper to meet demand when consumption recovers?

 

Figure 1 – Major project delays

The credit crunch and copper price collapse have reduced 2008 and
2009's expected production significantly. This is well understood. What
is not so well appreciated is the even larger impact on the mid-term
project pipeline. Whilst the firms involved remain committed to their
projects, many have now opted to slow the rate of development, or even
reduce the scope of the proposed mines, to better accommodate the world
where copper is no longer worth $8,000/tonne.

The biggest project to be delayed is the Oyu Tolgoi joint venture
owned by Ivanhoe Mines and Rio Tinto. The Mongolian project has
potential to produce 440 ktpy of copper and 320 kozpy of gold and is of
major strategic importance to the developing nation. However,
development was delayed by the Government requesting a 51% free-carried
stake in the project and also by the re-writing of the nation's mining
law to accommodate a mine of this size. In December, Rio Tinto cut the
non-essential staff at Oyu Tologoi, reducing staff numbers by 40%, in
response to a lower copper price, and also to reduce its short-term
capital expenditure.

In mid 2008, Freeport McMoRan announced several Brownfield expansion
projects for its North American mines, in particular at its Bagdad and
Miami mines. Exploration and development work for all these projects
has now been cancelled, and some 600 workers fired, in response to the
drop in copper prices.

Baja Mining's Boleo copper-cobalt project, located in Baja
California, Mexico, was originally expected to enter production in
2010, but the company decided to fast-track it to enter production in
mid 2009. Boleo has potential to produce 56 ktpy of cathode copper and
has an expected capital cost of over $550 million. In October 2008 the
company announced that due to the drop in copper and cobalt prices and
the lack of available credit facilities, the project could no longer
enter production in 2009. No new timeframe has been given for the start
of production. Also in Baja Caliafornia, Southern Copper Corp, a
subsidiary of Grupo Mexico, has decided to re-evaluate its El Arco
project, which has potential to produce 190 ktpy of copper, due to the
drop in copper prices. The company had announced in mid 2007 that it
would go ahead with the project as copper prices had exceeded the
threshold of $2,650/t ($1.20/lb) that made the project economically
viable.

Nautilus Minerals has cancelled its engineering contract for the
deep sea mining equipment and vessel for the development of its Solwara
1 seafloor copper project offshore of Papua New Guinea. This means that
the project, which has the potential to produce over 100 ktpy of
copper-in-concentrate, is now not likely to enter production before
2011.

Anglo American has pushed back the start-up of its Los Bronces
expansion project to the fourth quarter of 2011, 8 months later than
planned. The expansion project, which is expected to cost $1.7 billion,
will lift production by 170 ktpy to 400 ktpy, with scope to increase
capacity much further by 2016. Importantly, Codelco has won the right
to ENAMI's options to purchase a stage in Anglo American Sur's
projects, giving it the option to purchase all or part of Los Bronces,
which it could, potentially, merge with its own operations.

Further down the project pipeline, exploration work at Xstrata and
Indophil Resources' large scale Tampakan project in the Philippines was
further delayed in late December when an employee was shot by local
communist rebels. The project, which is estimated to contain 12.8 Mt of
copper and 15.2 Moz of gold, was originally expected to enter
production by 2012. The near constant rebel activity, which has caused
many deaths and destruction of one drill rig and several buildings at
the base camp, will likely delay the development of the project
significantly.

The Petaquilla project in Panama is believed to have potential to
support production of 223 ktpy of copper and 87 kozpy gold for the
first 10 years of a 23 year operation. With development costs of over
$3.5 billion, however, it will also be an expensive project to develop.
Its cost is over twice that allotted by Freeport to bring Tenke
Fungurume online, for example. Over 2008, Inmet Mining increased its
stake in Petaquilla to 74% after a dispute arose between Petaquilla
Copper Ltd and Teck regarding Teck's 26% stake. Inmet has committed to
bringing the project to the permitting stage, at which point it will
make a development decision as to whether to take the project to the
production stage. The permitting stage is expected to be reached by
2011.

The Pebble project is being jointly developed by Northern Dynasty
and Anglo American, is located in southwest Alaska and has potential to
produce over 1 Mtpy of copper from a copper resource of over 34 Mt with
additional gold and molybdenum resources of 87 Moz and 1.8 Mt
respectively. Northern Dynasty announced in December 2008 that it
expects the project to be permitted by the end of 2012, with production
start-up to follow in 2016, a year later than the start-up expectation
it announced in 2007. To maintain its stake in the project, Anglo
American is required to provide the next $1.425 to $1.5 billion in
production funding, which is expected to take it through to permitting
stage. Northern Dynasty remains well funded with $40 million available.
Funding should not be an issue with the project before the development
stage as both partners are well funded.

Rio Tinto, which has now refocused its corporate objectives to
reduce its debt of nearly $40 billion as quickly as possible, has
shelved the development plans for its La Granja projects and most
likely its Resolution project as well, situated in the Peru and the USA
respectively. The La Granja project in particular has a "world class"
resource of between 4 and 8 billion tonnes grading 0.5% copper. It is
currently undergoing a pre-feasibility study, which was originally
expected to be completed in 2010. Rio Tinto announced a $652 million
investment into its Resolution project in August 2008. The investment
was to take the project to pre-feasibility study level by 2010, with an
aim to bring the project into production by 2020. In December 2008, Rio
Tinto announced that it would cut 14,000 jobs, and reduce capital
expenditure in 2009 by 56%, to $4 billion. This suggests that the
pre-feasibility study on the project will not be completed on time.

The development schedule of the Freeport McMoRan controlled Tenke
Fungurume project has yet to be affected by the credit crunch or the
global economic slowdown, yet it has suffered from rapidly escalating
development costs. Freeport has also found operating in Central Africa
to be more difficult than expected. The project remains on track to
enter production in the second half of 2009, but no guidance has been
given as to whether the output from the mine for 2009 and 2010 has
changed to reflect the lower price of copper. The company has sunk over
$1 billion into the project and expects to spend a further $650 million
to bring it into production, which raises total costs to approximately
twice the development cost estimate it used when it purchased its
57.75% stake in the project. The company has reduced its capital
expenditure by $215 million for 2009 and expects the proposed mine to
produce over 100 ktpy of copper during its first years of production.

The best capitalised projects in the pipeline at present are those
that are owned by Chinese companies like the Galeno and Toromocho
projects in Peru, owned by MinMetals Corp and Chinalco respectively.
Chinese firms are heavily involved in Peruvian copper projects and are
committed to spend approximately $6 billion on projects over the next
three years. At Toromocho, Chinalco has just secured a $2 billion loan
from Exim bank. This will enable construction at the project to start
in mid 2009. Production of 210 ktpy of copper is expected to begin in
2012 with the mine operation expected to continue for at least 30
years. Minmetals has also recently signed  a loan agreement with a big
Chinese bank as well as a Peruvian bank that will provide 60% of the
funding for its Galeno project. Galeno is expected to produce 150-200
ktpy of copper for over 20 years but has not given a time frame for its
construction.

Other projects that remain on track are First Quantum's $300 million
Kolwezi tailings project in the Democratic Republic of the Congo, which
has a capacity of 30 ktpy cathode and is due online in 2010, and
Antofagasta's $1.9 billion Esperanza project in Chile with a capacity
of 195 ktpy copper-in-concentrate and expected production start-up in
2010.

Figure 2.  Closure and delays tabulation

Insufficient production in 2011 and 2012 – return to market deficit

In 2009, BME expects the refined copper market surplus to be over
500 kt corresponding with a drop in consumption of 4% this year in our
base case scenario. Using this base case scenario, in 2010 we expect a
recovery in consumption, with year on year growth of 9%, followed by
8.7% growth in 2011. This would be more than sufficient to work off the
build up in stocks during this year, requiring a significant increase
in mine production and refined production. Copper prices are unlikely
to recover until 2010, given the stock build we expect this year, so
there will be less incentive for miners to increase production, thus
leading to a stock shortage in 2011. This, we expect, will take the
refined copper market back into deficit, possible by several hundred
kt, with potential for a strong recovery in prices.

It is important to note that the 4% consumption drop this year is
our base case, and there is potential for a much steeper reduction in
consumption; with potential for a consumption loss of 7% that would
lead to a much larger build in stocks and a lower copper price. If the
pessimistic scenario occurs, though the stock build would be bigger,
further production cuts on a larger scale, and less new production,
would then lead to the stock build still being worked off reasonably
quickly, with a return to a market deficit in 2010 and a larger deficit
in 2011. If this is sufficient to work off the larger resulting
overhang of stock, copper prices could recover sooner than expected.

Bloomsbury Minerals Economics Ltd is a London based metals price
analytical firm that focuses on copper. Christopher Welch writes for
BME's Copper Briefing Service and its Quarterly Report on Copper. BME
also creates fundamental price models for all the LME metals. Please
visit our website for more information – www.bloomsburyminerals.com.