Apologies if this is a repeat, just came across it today but it's from December.

Copper deficit a fixture for the future

Chris Cann in London, 15 December 2011

COPPER will almost certainly go into surplus for the first time in many years but the lack of significant discoveries and the challenges faced by today’s developers mean that a brief period of over-supply will be followed by another prolonged period of deficit.

Chief executive of Metals Economics Group, Michael Chender, told the Mines & Money conference in London last week that shrinking demand was likely to underpin a surplus of copper for about three years but the current lower prices and reluctance of companies to take risks on genuine greenfields exploration meant that the future supply chain would be scantily populated.

Figures produced by his company showed that spending on copper exploration had gone up by 500% since 2005, with the largest portion of that money (25%) being plunged into historically fertile copper acreage in Chile and Peru. However, the amount of money being applied to greenfields exploration was disproportionately low. Numbers showed greenfields exploration was concentrated in Australia (16%), with Chile and Canada also receiving attention with 10% of the spend. Brazil and Mexico dropped off the top 10 chart, replaced by China and Mongolia.

The discovery figures as measured by successful drill intercepts told a similar story. On first examination, the strong copper price of recent years looks to have led to an increased spend and more discoveries but closer examination shows that the discoveries are concentrated on brownfields sites. Chender said this reflected a risk-averse attitude since 2008.

Further along the supply pipeline to initial resource delineation, mainly from juniors, there is a kink in the chain with resource announcements falling away in 2010 and improving only slightly this year.

Chender said there was an obvious lag between positive drill results and announcing a resource. Furthermore, he said the lag between discovery and production was about 20 years, which made it impossible to tell whether the dip in resource announcements we’re seeing at the moment is down to a declining discovery rate or that natural lag.

These figures from the upstream portion of the supply chain indicate a lull in the number of significant copper projects coming onstream in the long-term, but examination of the challenges facing feasibility stage developments show that the delivery of new projects may dry up even sooner.

Chender said that Metals Economics’ numbers showed that if all the copper projects at the feasibility stage made it to production, some 8 million tonnes of contained copper metal – half of current production – would hit the market. On the face of it, this looks like a pretty reasonable result.

“But what happens when you apply a couple of reality principles?” he asked. “Firstly, taking out the extremely high risk countries – whether it’s because of politics or lack of regulatory regimes. This knocks about 2.8Mt or a third of capacity off.

“Then we look at what happens in a price environment that generally won’t support a copper grade of under 0.5% copper and that knocks off another 20%. And this is before we get into specific project economics, so these numbers are actually quite conservative because a lot of small mining projects in junior hands will be delayed regardless of economics because they can’t get project finance, equity is too expensive and it’s hard to find a buyer because the bulk of the market is not interested in smaller projects.”

There are also higher capital and operating costs to consider, political and social unknowns, and a “lack of quality or credible third party feasibility studies”.

In order to insure the supply chain against such challenges, there are three areas on which the industry must concentrate, according to Chender. Firstly, industry pressure on the Chilean Government must continue so large copper miners are not allowed to sit on quality copper developments. A similar situation in South Africa’s platinum sector several years ago invoked a change in the Mining Act that invigorated the junior platinum space. A number of quality projects are now at various stages on their way to market.

Secondly, miners must spend some time analysing old data in areas of China that Chender described as very prospective for copper mineralisation. That has the potential to add many major projects to the supply pipeline.

And thirdly, major miners and technology companies must bite the bullet and invest in expensive technologies that are needed to access deeper copper deposits.

Miners pay lip service to the importance of continuity of exploration throughout the stages of the commodity cycle – the recent supply deficit and record prices are evidence of this. In order to restock the supply-side, this must change, however, a period of lower prices in coming years is likely to only exacerbate the other challenges the industry faces, putting the copper supply pipeline under continued pressure.