Copper bull market buoyed by depreciating legacy mines, says analyst

As grades get lower, companies will have to increase their capital intensity to pull that production forward, said the VP of Stifel Financial.

In the copper industry, the cost of capital has been too high to justify the returns for mine investors and is the driving force behind the bull market for the past decade — this is a sentiment shared by analysts at Stifel Financial.

“Broadly for larger projects, that’s what I’m seeing in the copper space right now, and kind of how it’s typified,” said Cole McGill, the US investment bank’s vice president, in an interview with Bloomberg this week.

“If you look back to the supply growth rates in the industry from 2009 to 2016 or so, copper supply grew at a compound annual growth rate of around 3.5-4%, so effectively half of GDP, so relatively good considering the Chinese bull thesis was the early 2000s commodity bubble,” he continued.

“Since 2016, when copper prices bottomed at around $2.00-$2.20/lb., you’ve seen an average growth rate on an annual basis of around 1%, so you haven’t seen that growth rate increase.”

The reason for that, said McGill, is what he referred to as the “legacy asset” thesis that is increasingly being understood by the market:

“What I mean by that is if you look at grades at the top 20 copper mines since 2000, they’ve trended down about 15-20%, and if you take out some of the higher-grade African projects, that’s even lower.”

“So, you’re seeing as grades get lower, companies will have to increase their capital intensity to pull that production forward because your reserve grades are getting lower; you’re seeing legacy assets now need to be buoyed by new supply, and the cost is still too high to bring new projects online.”

Effectively, millions of tonnes of more rock will need to be moved and processed to get the same amount of copper, and according to McGill, that’s the kind of relationship the large miners are seeing right now.

He pointed to how the world’s biggest copper miners like BHP, Anglo American and Antofagasta are now only building around their high-grade assets, or their top 3 assets.

“What’s interesting is the BHP-Anglo transaction. Out of all the top miners, BHP is the only company that has seen its proportion of production from its top 3 copper mines decrease decade over decade, so it makes sense that they’re trying to backfill some of their legacy assets for new copper growth.”

McGill also noted that mining companies are now grappling with supply disruptions worldwide, especially Latin America, despite higher prices.