According to the Metals Economics Group report, ‘Strategies for Copper Reserves Replacement Study’ a combination of lower grades and higher costs (taxation, royalty and environmental approval) are pushing up the copper mining industry’s capital and operating costs.
The Study found that from 2001 to 2012 the weighted-average head grade at 47 producing mines (with comparable data) declined by almost 30 percent – now this is normal and historically was never a problem, ore head grades decline because companies mine high-grade zones at the onset of operations in order to cover start-up expenditures.
But grade problems are manifesting themselves, global copper production is coming under stress because the average ore grades of copper in new discoveries and developing projects has also declined over the same period.
Other serious concerns exacerbate declining ore grades, energy costs are increasing, water use is becoming contentious and increasingly expensive and the significant new deposits needed to replace reserves and production at our largest, aging and rapidly depleting copper mines are deeper and in increasingly more remote inaccessible areas.
Capital costs for the building of today’s mega billion dollar mines are shooting skyward, the average capital costs for copper production capacity in new mines increased an average of 15 percent per year over the past 20 years, with much of the increase evident since 2008.
Cash operating costs at major mines also increased significantly, more than tripling over the past 10 years, to an average of almost $1.50/lb in 2012.
But there’s more to running a mine then cash operating costs, much more – there’s the finding or buying of replacement reserves, the building of new mines, the replacement or upgrade of aging equipment and payments for treatment and refining.
Net of administrative costs, a copper mining company had an average total cost of more than $3.30lb to replace reserves and produce copper in 2012.
Globally, 100 significant copper discoveries (defined as a deposit containing at least 500,000 mt of copper in reserves, resources, and past production) were reported in the 1998-2012 period. These discoveries contain almost 400 mt of copper.
That sounds like a lot of copper, and it is, but only one-tenth of all that copper has been converted to reserves and only 15 deposits have reached production. It’s obvious the economic viability of these ‘new’ resources have been influenced by several factors:
- Location
- Politics
- Capital and operating costs
- No social license to operate
- Market conditions
These are all contributing factors that inevitably reduce the amount of copper that reaches production which means the amount of copper available for production in the near term is likely far less than has been found.
Looking at it another way doesn’t make the Metals Economics Group data any less ominous for future copper discoveries and production. Globally there are 23 major copper producers, only ten have made significant copper discoveries since 1999.
Of the 62 discoveries the ten made, just 24 deposits account for 41 per cent of the 229.1 million metric tonnes total of in situ value found. Given that just six per cent of the copper in all 62 discoveries has, so far, been converted to reserves, it’s clear the major mining companies have added almost all of their exploration derived reserves at existing mines and older projects with very little coming from new discoveries - since 1999 new discoveries fall well short of what is needed to replace production.
Chinese copper demand
"The bottom line for economic growth is 7pc, and this bottom line must not be crossed." Chinese Premier Li Keqiang.
China plans for a fresh burst of spending on railways and infrastructure. There is a new urbanization drive to start, social housing will replace the countries shanty towns that over 100 million people call home - that’s a lot of people and a lot of needed copper.
Addiction to credit will be tackled, credit has climbed from $9 trillion to $23 trillion in the last five years reaching 200 percent of GDP. The credit crackdown has triggered growing demand for copper as collateral to raise cash. China’s June copper imports rose to a nine month high and are likely to stay high since using copper backed financing is easier to obtain and cheaper then bank borrowing.
Chile water/power shortage
Chile is the world’s largest producer of copper and that’s expected to continue as more than US$70 billion is expected to pour into the country lifting copper production by 45 percent.
Don’t you believe it, the country lacks sufficient power and is running out of fresh water.
Chile relies on fossil fuels for 70 percent of its power needs and its electricity costs are among the highest in the world. As well the countries two transmission systems are unconnected - power cannot be switched from the southern grid to the northern one in time of shortages. Both grids are very unreliable with the northern one supplying most of the mines.
Chile’s power generation capacity currently stands at 17,000 megawatts. It is estimated that the country will need at least 30,000 megawatts of power by 2020 to keep up with the demand, the increased demand coming primarily from mining projects. Unfortunately the government only plans to add 8,000 megawatts between now and 2020 and there is serious opposition to these plans from environmental groups who have, so far, been wildly successful by suspending several key projects and more than $22 billion worth of power investment. The Chilean Supreme Court recently struck down the planned 2,100-megawatt, $5 billion Castilla thermoelectric power plant project, citing environmental concerns.
Water shortages, because of decreased rainfall and shrinking glaciers, are being felt country wide. The mining industry is being hit hardest – any mine gulps a lot of water, in Chile most copper mines are in or on the edge of the driest desert in the world – the Atacama.
Pumping water from the country’s aquifers is increasingly becoming contentious so mining companies are turning to desalinating seawater and pumping it hundreds of miles from the coast and up to 800 meters above sea level, an expensive proposition.
VMS
Volcanogenic massive sulphide (VMS) deposits typically occur as lenses of polymetallic massive sulphide and are major sources of copper (Cu), zinc (Zn), lead (Pb), silver (Ag) and gold (Au).
There are almost 350 known VMS deposits in Canada and over 800 known worldwide. Historically they account for 27% of Canada’s Cu production, 49% of its Zn, 20% of its Pb, 40% of its Ag, and 3% of its Au. VMS deposits are estimated to have supplied over 5 billion tonnes of sulphide ore. This includes at least 22% of the world’s Zn production, 6% of the world’s Cu, 9.7% of the world’s Pb, 8.7% of its Ag, and 2.2% of its Au.
VMS deposits consist of a massive to semimassive stratabound sulphide lens. Most are underlain by a sulphide-silicate stockwork vein system.
Individual massive sulphide lenses can be over 100 meters thick, tens of meters wide, and hundreds of meters in strike length. VMS deposits range in size from 200,000 tonnes to more than 150 million tonnes and most often occur in clusters.
VMS deposits have long been recognized, by both major’s and junior’s, as potential elephant country – and because of their polymetallic content these types of deposits continue to be one of the most desirable because of the security offered against fluctuating prices of different metals.
A VMS Venture
A copper/zinc VMS project that I’m following is VMS Ventures TSX.V – VMSand HudBay Minerals joint venture at the Reed Copper project in the southern half of the Flin-Flon – Snow Lake Greenstone belt in Manitoba, Canada. VMS has 30 percent of the project and is carried to production, HudBay holds 70 percent and is the operator.
On the basis of ore composition, VMS deposits form two broad groups: copper/zinc and zinc/lead/copper. Economically significant quantities of silver and gold can occur in both above-mentioned deposit compositions.
Currently the Reed Lake Copper Project has an indicated resource of 2.55 million tonnes grading 4.52% copper with upside potential.
The two companies are focusing on completing an underground ramp down to the 260 meter level to allow for a full production rate of 1300 tonnes per day.
Preliminary extraction is expected to begin later in 2013 though at a reduced rate with full production expected to be reached by early Q2 2014. There exists excellent potential to expand the resource using underground drilling – it’s not uncommon for deposits in the Flin-Flon – Snow Lake Greenstone to double or triple in size, HudBay’s Trout Lake mine is a good example of considerable mine life extension after mining had started.
As of the end of June the two Companies have invested approximately $46 million of the estimated $72 million to complete construction of the project.
With its low Cap Ex and high grade (the Discovery Hole assayed an incredible 43.05 meters of 4.38% copper, 1.56% zinc, 0.85 grams per tonne gold and 13.09 grams per tonne silver, including 10 meters of 11.19% copper. Hole #RD-08-41 included 33.46 meters of 10.36% Copper, which included 18.08 meters of 13.80% copper) the Reed Copper Project remains economic to much lower copper prices than most new mines planned to come on line in the future. The projects Pre-Feasibility study (PFS) showed that at a spot copper price of $3.20/lb, a 44.8 percent internal rate of return (IRR) is achieved. The base case from the projects Pre-Feasibility study used a price of $2.95/lb Cu for a 34.7 percent IRR.
Think the zinc
“Worldwide auto production continues to increase and US housing starts have risen significantly in the last year. As well, major infrastructure programs have begun this year in China, India, Japan, Brazil and Indonesia. All of these factors should result in stronger demand for zinc in the next two years.
We are also forecasting a decline in mined zinc of approximately 4 million tonnes in the next three years on a worldwide basis due to mine closures. These closures include the Brunswick mine in New Brunswick, the Century mine in Australia, and the Lisheen mine in Ireland.
We are projecting zinc prices to rise to US$1.20/lb by the end of 2014 and US$1.40/lb by the end of 2015 given that our projections include increasing zinc demand over the next two years and the removal of a significant amount of supply over that same time period.” CHF Capital Markets, Zinc Prices Today, June 24th 2013
A new mine being developed in a geo-politically safe jurisdiction can take advantage of:
- Pre-existing infrastructure such as transport corridors, processing and power plants
- A known, established permitting process
- No green, or environmental opposition
Conclusion
Because of the base case numbers in the PFS I believe investors have downside price protection against any short term drops in the spot price of copper. As well the Reed Copper Project offers cash flow upside as copper and zinc prices begin to rise again - there’s also tremendous discovery potential to increase the life of the mine.
Another price appreciator for VMS Venture shareholders might come from their 27.5 percent ownership of North American Nickel TSX.V - NAN. NAN’s currently running a large drill program on their Nickel/Copper/PGE Manitsoq Project in Greenland.
Perhaps declining ore grades, higher Opex costs, Capex overruns, permitting delays, social unrest and resource nationalization versus some serious cash flow and a shot at an exploration homerun should be on all our radar screens? They’re on mine.
Are they on yours?
If not, they should be.
Richard is the owner of Aheadoftheherd.com and invests in the junior resource/bio-tech sectors. His articles have been published on over 400 websites, including:
WallStreetJournal, USAToday, NationalPost, Lewrockwell, MontrealGazette, VancouverSun, CBSnews, HuffingtonPost, Londonthenews, Wealthwire, CalgaryHerald, Forbes, Dallasnews, SGTreport, Vantagewire, Indiatimes, ninemsn, ibtimes, businessweek.com, moneytalks and the Association of Mining Analysts.
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Legal Notice / Disclaimer
This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment.
Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified.
Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Richard Mills only and are subject to change without notice. Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission.
Furthermore, I, Richard Mills, assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this Report.
Richard does not own shares of any company mentioned in this report.
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