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As a general rule, the most successful man in life
is the man who has the best information
Pure gold deposits are increasingly difficult to
find.
“What
really bothers me is that in the 1980s or 1990s, we saw three to five
discoveries of 5 to 20 million ounces each, and upwards of 30 to 50 million
ounces a year. That is what makes or breaks the industry. There are no
discoveries of that magnitude now.” Pierre Lassonde, veteran
gold analyst, co-founder/chairman of Franco Nevada Mining Corp., former
president of Newmont Mining Corp.
Each year the mining industry must come up with a
major new gold discovery of five million ounces just to replace what one of
the world’s top gold miner’s digs up. Because large pure gold
deposits are so hard to find - the low hanging fruit has already been picked
- gold miners are turning to deposits that contain other metals like copper.
"In
the case of gold, the world is currently mining it faster than it is finding
it. Furthermore the average size and grade of gold discoveries continues to
decline.” Richard Schodde,
Managing Director of MinEx Consulting
Mining is the story of depleting assets, that asset
must be constantly replenished; miners that want to stay in business must
replace every oz taken out of the ground and there isn’t a lot of the
larger size gold deposits left to find or buy that would really affect most
of these larger company’s bottom lines. Replacing what they’ve
mined let alone finding more productivity/resources is
getting harder and harder.
"It's
not a bad time to diversify if you are a gold miner. There are lots of
reasons to be bullish on gold, at the same time copper has a stronger
long-term outlook. Over the next five years I am by and large bullish and
wouldn't be surprised if copper saw an upper range between
$10,000 to $12,000." William Adams, analyst at
FastMarkets.com
Porphyry Copper/Gold Deposits
Porphyry copper/gold targets are becoming increasingly important in the
global quest to replace declining copper and gold production. These kinds of
deposits yield about two-thirds of the world’s copper and are therefore
the world’s most important type of copper deposit.
Porphyry copper deposits are copper orebodies which
are associated with porphyritic intrusive rocks and
the fluids that accompany them. Porphyry orebodies
typically contain between 0.4 and 1 % copper with smaller amounts of other
metals such as molybdenum, silver and gold.
There are two factors that make these kinds of deposits so attractive to the
world’s major mining companies – firstly by focusing on
profitability and mine life instead of solely on grade your other inputs of
scale/cost can offset the lower grade and this results in almost identical
gross margins between high and low grade deposits. Low grade can mean big
profits for mining companies – Copper/gold porphyries offer both size
and profitability.
The second factor affecting profitability of these often immense deposits is
the presence of more than one payable metal ie for
gold miners using co-product (copper) accounting the cost of gold production
is usually way below the industry average.
So not only are the traditional miners of these
scarce and often immense ore bodies in competition for them but increasingly
yesterdays gold only miners are becoming interested as well. These kinds of
deposits are one of the few deposit types containing gold that have both the
scale and the potential for decent economics that a major gold mining company
can feel comfortable going after to replace and add to their gold reserves.
The Vancouver Sun newspaper said high copper demand combined with limited new supplies have made copper
the new gold as far as profit margins are concerned.
Copper boasts a higher profit margin than gold
– at US$4.29 (U.S.) per pound copper has a 68-per-cent profit margin
over industry average break even costs, compared with gold's 52 per cent.
"As
2011 unfolds, we expect copper to touch $5, yielding an extraordinary 70 per
cent profit margin over average world break-even costs including depreciation."
Patricia Mohr Scotiabank economist
Supply and Demand
Copper is supported by:
- The growth
in demand from Africa, China, India and other emerging markets
- Global infrastructure deficit
- A low
interest rate environment bodes well for the whole resource sector
- The
overall weakness in the U.S. dollar translates into support for dollar
denominated metal prices
In the Scotiabank
Commodity Price Index report for April Mohr said “Copper could still retest the previous
US$4.60 record of February 14. Chinese copper fabricators destocked copper
and produced 2.1% fewer copper semis in January and February due to credit
restrictions and high prices. However a big seasonal pick-up in consumption
in the second quarter will lift prices."
“We
see renewed strength in the second half and you’ve got to be bullish
copper for the next few years. The global recovery is becoming more
broad-based and you’re not going to see any new mines coming on stream
for at least this year.” Christin
Tuxen, analyst at Danske
Bank A/S
Australian equity research firm Resource Capital
Research (RCR) said it expects the copper market to move from a small surplus
in 2010 to a deficit of around 400,000 tonnes by
2011.
According to JPMorgan Securities Ltd, the world
refined copper market will have a 500,000-metric-ton deficit in 2011.
BHP Billiton Ltd. (BHP), the world’s largest
mining company, said in January that output from their Escondida
mine in Chile, the world’s largest copper mine, would drop by as much
as 10 percent in the year ending in June because of lower ore grades.
Codelco,
based in Santiago and the world’s largest copper producer, said on
March 25 that supply from its mines fell for the fifth time in six years.
London based Anglo American Plc and Kazakhmys Plc reported lower output this year.
Michael Jansen, metals strategist at JPMorgan
Securities Ltd, predicts a deficit of 500,000 tons to 600,000 tons this year.
Macquarie expects a shortfall of 550,000 tons.
Morgan Stanley projects copper prices will average
$4.45 a pound in 2011, up 24 percent from an earlier estimate.
Australia & New Zealand Banking Group Ltd
expects copper to average $4.57 a pound this year, up 12.5 percent from a
previous estimate.
European copper producer Aurubis
said that the global economy continues to recover, according to the IMF, and
should achieve a growth rate of 4.4% in 2011 followed by 4.5% in 2012. This
indicates sustainably high copper demand that cannot even be harmed by
China's restrictive interest rate policy or the economic weakness of certain
countries.
The market will see a wider deficit because of
steady demand growth in emerging markets, including China and Brazil, a
gradual economic recovery in the US and Europe and tight mine supplies. This
year's deficit will be the most since 2004, according to company data. Hidenori Kamoo, general manager
of the marketing department at Pan Pacific Copper Co
Tom Albanese, CEO Rio Tinto Group, the world’s
second largest mining company, said that the industry has struggled to
maintain supply because of declining ore grades, delays to mine expansions
and disruption from strikes.
Ore grades averaged 0.76 percent copper content in 2009, compared with 0.9
percent in 2002. CRU, a London based research company.
Chile mined 6.6 percent less copper in February than a year earlier, the
fifth decline in the last six months. National Statistics Institute
“There
are still reasons to be bullish on copper into next year. The market is still
going to be tight.” David Wilson, analyst Societe Generale SA
Freeport-McMoRan Copper & Gold Inc., the world’s largest publicly
traded copper producer, said in January that it would produce less metal than
forecast this year.
Barclays Capital says copper demand growth
will slow to 4.1 percent this year, down from 9.6 percent in 2010 - still
more than twice the anticipated 1.7 percent expansion in supply. Barclays
forecasts an 889,000 ton shortfall for 2011.
“We’re still
seeing an incredibly tight market. China has to buy copper. They can’t
find substitutes.” Kevin Norrish, managing director,
Barclays Capital
RBS forecast average prices between $10,000 and
$11,500 in 2012, 2013 and 2014.
Barclays Capital saw copper trading on average at
$12,000 in 2012.
StanChart's Zhu saw prices at just under $12,000 in 2014.
Christine Meilton, chief
consultant at CRU Group said there was a risk some copper projects, expected
to come on stream in 2012 and 2013, will be delayed because of red tape, poor
infrastructure and funding difficulties.
“We
suggest the upcoming summer period could be a very exciting time for LME
copper prices. The market is positioning for declining LME copper inventories
during the June-July-August period. In response, we believe copper prices
should move higher.” John Redstone, analyst
Desjardins Securities Inc.
Redstone is maintaining his average copper price
forecast of $4.50 per pound in 2011 and $5 in 2012.
Urbanization
"For
at least the next three years we are still very bullish on copper as the
market will remain in deficit over that period, even under the most conservative
global demand forecasts, and there is a possibility that this deficit could
be more prolonged if demand grows faster than expectations. Copper is highly
exposed to Asia, and urbanization in China and India will provide upside
momentum for at least the next 10 years and perhaps as long as 20 years."
Judy Zhu, analyst Standard Chartered Bank
Urbanization is a macro-trend, in 1800 two percent
of the global population was urban, by 1950 it was
30%. The UN projects that by the year 2030 there will be 1.5 billion more
people living in cities.
China has one fifth of the world’s population, India has another 1.2
billion people and Africa
adds another billion. China and India
consume a lot of copper, so increasingly will Africa.
Urbanization and the accompanying necessary
infrastructure build out - power, construction, energy and transportation
– needed to accomplish developing countries
urbanization/industrialization plans are obviously key drivers in increased
copper consumption.
Infrastructure Deficit
Equally as important is the fact we have a global
crisis in existing infrastructure. The demand this crisis is going to place
on copper might very well be more than the demand coming from developing
countries to build new infrastructure.
The amount of money, commodities and effort required
is going to be massive:
- The
American Society of Civil Engineers (ASCE) estimated, in 2005, US
infrastructure investment needed to be $1.6 trillion dollars over the
following five years
- European
Union Energy Sector alone requires - $1.2T over 20 years
In a 2007 report, Booz Allen Hamilton estimated that
investment needed to “modernize obsolescent systems and meet expanding
demand” for infrastructure worldwide between 2005 and 2030 was about
US$ 41 trillion.
Infrastructure spending by sector:
- Water and wastewater
$22.6 trillion
- Power $9.0 trillion
- Road and rail $7.8 trillion
- Airports/seaports
$1.6 trillion
Infrastructure spending geographically:
- Middle East $0.9 trillion
- Africa $1.1 trillion
- US/Canada $6.5 trillion
- South America/Latin
America $7.4 trillion
- Europe $9.1 trillion
- Asia/Oceania
$15.8 trillion
In January of 2009 CIBC World Markets issued a study
that said a sharp deterioration in existing infrastructure could lead to as
much as $35 trillion in public works spending over the next 20 years.
Infrastructure spending geographically:
- North America
$180 billion/year
- Europe $205 billion/year
- Asia $400 billion/year
- Africa $10 billion/year
The World Economic Forum’s report, Positive
Infrastructure, released in May 2010 finds
that the world faces a global physical, hard asset, infrastructure deficit of
US$ 2 trillion per year over the next 20 years.
In 2009 the ASCE updated their 2005 report on US
infrastructure - no area rates higher than a C+. Roads, aviation, and transit
declined in score while dams, schools, drinking water, and wastewater held at
D or lower. One category, energy, improved, from a D to a D+. Below are the 2009 grades and
new spending requirement:
- Aviation D
- Bridges C
- Dams D
- Drinking Water D-
- Energy D+
- Hazardous Waste D
- Inland Waterways
D-
- Levees D-
- Public
Parks and Recreation C-
- Rail C-
- Roads D-
- Schools D
- Solid Waste
C+
- Transit D
- Wastewater D-
- America's Infrastructure GPA: D
- Estimated 5 Year Investment: $2.2 Trillion
The 2009 fiscal stimulus package - the American
Recovery and Reinvestment Act (ARRA) - included $72 billion for
infrastructure upgrades - enough to cover six percent of the 5 year
infrastructure deficit estimated by the ASCE. Half a percentage point in
maintenance cost will cut the life span of an infrastructure asset by 10
years.
Electrical Grid
ASCE’s Report Card for America's
Infrastructure gives the US Electric Grid a rating of D, its summary:
“The U.S. power transmission system is in
urgent need of modernization. Growth in electricity demand and investment in
new power plants has not been matched by investment in new transmission
facilities. Maintenance expenditures have decreased 1% per year since 1992.
Existing transmission facilities were not designed for the current level of
demand, resulting in an increased number of "bottlenecks," which
increase costs to consumers and elevate the risk of blackouts.”
“Our
grids today are more stressed than they have been in the past three decades.
If we don’t expand our capacity to keep up with an increase in demand
of 40 percent over the next 25 years, we’re going to see healthy grids
become increasingly less reliable.” Today, with the grid operating
flat-out, any disruption—like the downed transmission line that sparked
the 2003 blackout in the Northeast—can cripple the network.”
Kevin Kolevar, assistant secretary for electricity
delivery and energy reliability at the Department of Energy
April 15th 2011 the International Copper Study Group (ICSG) said “global growth in copper demand for 2011
is expected to exceed global growth in copper production and the annual
production deficit, estimated at about 250,000 metric tons of refined copper
in 2010, is expected to be about 380,000 t in 2011. In 2012, refined usage is again
expected to increase in all major world markets, with global demand expected
to rise by more than 4%.”
The ICSG does not forecast copper production
catching up with demand anytime soon, certainly not in 2011 or 2012.
"The
global economy is running a major infrastructure deficit as the cost of
decades of under-investment is now surfacing." Benjamin Tal,
analyst CIBC World Markets
High Speed Rail (HSR)
To attract new businesses to our shores, we need the
fastest, most reliable ways to move people, goods, and information —
from high-speed rail to high-speed internet.
Excerpt from US President Obama’s recent State of the Union address
Obama is calling for eighty percent of Americans to
have access to high speed rail by 2036 - currently no American has access to
high speed rail.
A projection from rail proponents FourBillion.com
indicates that building the 9,000 miles of high speed corridors identified by
the U.S. Department of Transportation would:
- Create 4.5
million permanent jobs and 1.6 million construction jobs
- Save 125 million barrels of oil
- Eliminate
20 million pounds of CO2 per mile per year
- Reinvigorate U.S. manufacturing
- Generate
$23 billion in economic benefits in the US Midwest alone
These new lines also require massive support
infrastructure: stations, metro transport links in cities and modern
signaling/safety systems.
Copper is the key to the increased speed of modern
high speed trains. Today’s high speed trains do not have a motor
located in the locomotive, instead they use a series
of motors and transformers located under the length of the train. New
high-speed trains with their electric traction engines use from 3 to 4 tonnes of copper per train.
An additional 10 tonnes is used in the power
(catenary system – overhead cable made of
copper or copper-alloy that is suspended horizontally above the track and
supplies the trains electricity) and communications
cables per kilometer of track.
China’s already found an area where it could
rapidly increase public investment to stimulate growth - rail construction.
China's total investment in high speed rail was
first reported to be about US$300 billion - the Chinese planned a 12,000km
high speed passenger network supplemented by 20,000km of mixed traffic lines
capable of 200-250kph.
Recent reports indicate that over US$600 billion
will be spent on rail construction during the 2011-2015 Five Year Plan. By
2020 there would be at least 16,000 km of passenger dedicated high speed
rail. The total rail network by 2020 would be 120,000 km - 80% of it
electrified.
By early fall 2010, the
Ministry of Railways announced that China had more than doubled the length of
high speed track to over 7000km.
China has plans to construct its high speed rail
line through Asia and Eastern Europe in
order
to connect to the existing infrastructure in the European Union (EU).
Additional rail lines are planned into South East Asia as well as Russia
– this will likely be the largest infrastructure project in history.
The project will include three major high speed
lines:
- UK/Europe
to Beijing (8,100 km) and then extend south to Singapore
- A second
line will connect into Vietnam, Thailand, Burma and Malaysia
- The third
line will connect Germany to Russia, cross Siberia and then back into
China
Financing and planning for this monumental project
is being provided by China – who is already in negotiations with 17 countries
to develop the project . In return the
partnering nation will provide natural resources to China.
"We
will use government money and bank loans, but the railways may also raise
financing from the private sector and also from the host countries. We would
actually prefer the other countries to pay in natural resources rather than
make their own capital investment." Wang Mengshu,
a member of the Chinese Academy of Engineering and a senior consultant on
China's domestic high-speed rail project
The exact route of the three lines has yet to be
decided, but construction for the South East Asian line had already begun in
the Chinese southern province of Yunnan and Burma is about to begin building
its link. China offered to bankroll the Burmese line in exchange for the
country's rich reserves of lithium, a metal widely used in batteries.
Russia and China have announced plans to build a new
trans-Siberian link. Iran, Pakistan, and India are each negotiating with
China to build domestic rail lines that would link into the overall
transcontinental system.
China has mastered the art of building high speed
rail lines quickly and inexpensively. “These guys are engineering driven — they know how to
build fast, build cheaply and do a good job.” John Scales,
the lead transport specialist in the Beijing office of the World Bank.
China hopes to complete this massive infrastructure
project within 10 years
Conclusion
Major infrastructure projects typically boost
productivity throughout the economy. Massive stimulus packages that focus on
creating jobs at home - through public works projects – will, in this authors opinion, become very popular with governments
looking to generate massive employment and restart the global economy.
Interest in the junior mining space is going to
become intense but there is still time for investors to capitalize on the
coming infrastructure boom.
Are junior resource companies, run by quality
management teams with outstanding copper projects, on your radar screen?
If not maybe they should be.
Richard Mills
Aheadoftheherd.com
If you're
interested in learning more about the junior resource market please come and
visit Richard at www.aheadoftheherd.com. Membership is free, no credit card or personal
information is asked for.
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