The Market's on its metal

Published by MAC on 2011-01-25
Source: Nostromo Research, Globe & Mail, Bloomberg

& London Calling is appalled

The commodity cycle speeds up - Copper Mountainmine comeback

By Brenda Bouw and David Ebner

Globe and Mail (Canada)

14 January 2011

NEAR PRINCETON, B.C.- Nothing remains of the peak of Copper Mountain in southern British Columbia, destroyed by decades of mining that have left behind three gaping pits about 1,000 metres above sea level.

But it's been quiet up here since the mid-1990s, when the last operation was shuttered because of low commodity prices.

Closed mines come back to life

That's about to change, thanks to a roaring comeback in the price of the main metal produced here. Copper, used in everything from construction and cars to telecommunications and power, is on a record run.

Amid blustery wind and a fresh blanket of snow, the trucks and shovels are rumbling again at this site, home to the Copper Mountain project, located 270 kilometres east of the Port Metro Vancouver, where copper concentrate will be shipped to Japan for smelting.

Sparks from welders' torches crackle and fly inside the massive hangar-like processing mill that stands 10 storeys tall. Outside, several 240-tonne, seven-metre-tall trucks - price tag $3.5-million each - bump along at 15 kilometres an hour, hauling away waste rock from the once-prolific pit 3, to once again get after the suddenly valuable copper-speckled ore.

"The best copper is the copper that has already been found," says Bill Dodds, the mine general manager. "And it's where you probably find more of it."

The Copper Mountain mine is one of a growing number of old, shuttered mines around the world that are being revisited, refurbished and reopened by companies hoping to cash in on the current surge in prices for copper, gold, nickel and a host of other metals.

The revival of old mines is part of the industry's push to meet soaring demand from China and other fast-growing nations that use the various metals in their surging industrial exports and to build out their own infrastructure.

Mining companies are spending billions to boost production on such projects. But it's a race: They must get the old mines operating as quickly as possible before the next downturn hits the notoriously cyclical industry. Some of the mines come with high costs that would quickly make them money-losers if metal prices were to slide.

Today, with copper trading comfortably above $4 (U.S.) a pound, it appears that the comeback of the Copper Mountain mine couldn't have been better timed.

"We are extremely excited to be starting production this year," says Copper Mountain Mining Corp. chief executive officer Jim O'Rourke, who was also head of the former company that made the decision to shut the mine in the mid-1990s.

Copper Mountain has a rocky history. Ore was discovered by a father-and-son prospecting team in the 1880s. The first claim staked at Copper Mountain was by a fur buyer, R.A. Brown, in 1895, but it wasn't until 1920 that the first ore was shipped out from a mine. Low copper prices forced the nascent operation to shut down just two months later - the first of four times in the next eight decades that whipsaw commodity prices closed the doors.

When the mine officially reopens this summer, after some $438-million of reconstruction spending, it will be the first commercial production to come out of the site in 15 years. When the mine last closed in 1996, copper was struggling to stay above $1 (U.S.) a pound, making it difficult to not only turn a profit but replace the 20-year-old trucks and aging infrastructure.

Around the world, old mines like Copper Mountain are new again. Mine reopenings are running at a brisk clip - an average of about two per month over the past 21 months worldwide, according to Halifax-based Metals Economics Group. That includes four reopenings in March last year and three in each July and April.

The revitalization is bringing a variety of mines back to life.

Once-dormant gold mines have been restarted in several resource-rich locations, including Northern Ontario, as the soaring metal trades near record highs. Canadian mining giant Teck Resources Ltd. is considering reopening an old metallurgical coal mine in B.C. amid relentless demand for the raw material used in steel making. In Papua New Guinea, talks are under way to reopen the massive Bougainville copper mine, closed for 20 years, at a cost of $3-billion. Old uranium mines are reopening in parts of the western United States after years of sitting idle, as the price of the metal used as fuel for nuclear reactors climbs alongside rising global demand for energy.

While old mines reopen, mining companies are also furiously consolidating, in order to combine resources and capital to speed up development of new mines. In the past week alone, four substantial mining deals involving Canadian firms were announced, all with the goal of rapid growth.

Inmet Mining Corp., for example, characterized its merger with Lundin Mining Corp. as a must to "survive and thrive" in the copper business, while Cliffs Natural Resources Inc.'s $4.7-billion bid for Consolidated Thompson Iron Mines Ltd. opens the door for Cliffs to the crucial Chinese market. HudBay Minerals Inc. is hoping to revitalize its growth plans by reaching into copper-rich Peru with a $520-million deal for Norsemont Mining Inc.

But the rush to get bigger, faster brings risks. All the new waves of supply from reopened mines and new projects are likely to weigh on the market in coming years, some industry experts warn. Prices for copper, aluminum, nickel, coal and iron ore may still rise for a year or two, but amid the fast growth in supply, many predict demand to level off, followed by prices. The possibility of a slowdown in China, as the country takes steps to rein in inflation and credit growth, adds to the risk.

In the case of copper, "as more supply comes on, the price will slowly come down," says Peter Campbell, a mining analyst with Jennings Capital. After a near-term rise, he sees copper prices tumbling back down to about $2.50 a pound by 2015.

As prices decline, higher-cost producers will be hurt "because the margins are just too skinny," Mr. Campbell says.

"They don't call it a commodity cycle for nothing," he says.

"Sometimes it ends in tears."

Mine values

Old mines, though, can become company makers.

Vancouver-based Quadra FNX Mining Ltd. got its start from a once-shuttered mine discarded by mining giant BHP Billiton Ltd.

Australian-based BHP closed the Robinson copper mine in Nevada in 1999, when the 70-cent copper price meant the open-pit operation was no longer making enough money to satisfy its growth plans.

The state's Robinson Mining District had been producing copper since the early 1900s, and Quadra, confident copper would eventually rebound, bought the mine in April, 2004. Production began a few months later and has been operating since, with an expected mine life until 2016.

Today, Quadra FNX has mines and development projects in North America, Chile and Greenland.

"Robinson was a great starting project for a new company at the time," says Quadra FNX CEO Paul Blythe. But timing is everything, and Mr. Blythe says valuations of mine projects today have soared. Mines for sale today "tend to be sold by auction and they tend to command a price that would make a person cautious, I think, as to whether you wanted to get into a bid situation or not."

Consider Baffinland Iron Mines Corp.'s Mary River iron ore project in Canada's high Arctic. Construction hasn't even started and it already has sparked a bidding war between steel giant ArcelorMittal and a U.S. private equity firm. On Friday, the two companies came together to make a joint offer at $1.50 a share, which is nearly double the original bid price made last fall.

Seizing the advantage

Copper Mountain Mining's Mr. O'Rourke has lived through a number of commodity cycles in his more than 30 years of operating and developing mines across North and South America.

It's knowing just how quickly prices can fluctuate that has Mr. O'Rourke and his team working around the clock to ensure that the Copper Mountain mine is completed on time and on budget. With copper currently trading around $4.30 a pound and forecasts it could surpass

$5 next year as demand outstrips supply, the months ahead could the company's best chance to reap rich profits.

"If we take advantage of the time, take advantage of the revenue, do lots of exploration, the mine could be there for 15 to 20 years," says Mr. O'Rourke, who came out of "retirement" to make the project a reality.

Copper Mountain Mining is far ahead from where it started after buying the mine in 2006. Its production decision was based on a price of $1.80 a pound.

"The extra $2.50-per-pound margin on our planned 100-million-pound-per-year production provides huge upside for the mine," Mr. O'Rourke says.

What's more, the company is estimating production costs at the mine of around $1.30 a pound. At today's prices, that's a gain of $3 a pound, or about $300-million a year in cash flow. While the company still has to pay off debt and other expenses, the higher the margin the more money it can set aside for future growth, including possibly a future acquisition.

"It's a great base for a junior company - to form the base for us to grow from," Mr. O'Rourke says.

Time pressure

If the commodity picture plays out as some predict over the next few years, Copper Mountain Mining has about 18 months to squeeze higher profits out from the revival of its B.C. mine. That's if there are no problems and production begins on time.

At the Copper Mountain site, about 350 construction workers are busy on the sprawling 18,000-acre property (7,300 hectares) amid the undulating mountain top above steep slopes.

The concrete was first poured last February. Crews know the pressure is on to make sure the June 1 opening date is not missed. "Getting it going June 1 is the minimum," says mine general manager Mr. Dodds.

One great advantage of resurrecting a dead mine is that some important infrastructure is already in place. Copper Mountain was already connected to the BC Hydro grid and, much more importantly, already had a tailing lake. At three kilometres long, this key but often controversial storage pit for mine processing waste - some 34,000 tonnes of ground ore dust each day - was the huge stumbling block that eventually sunk Taseko Mines Ltd.'s proposed Prosperity copper-gold mine in B.C. last fall.

While much of the work is done at the Copper Mountain mine, there are "lots of bits and pieces to go." Pieces come from everywhere. The shovels from Germany, the trucks from Illinois, loaders from Japan, the 34-tonne grinders in the mill made in Paraguay.

Seven of the big 240-tonne Komatsu 830E trucks are on site, with the other half dozen to arrive by February. They show up in pieces and are assembled on site. Stacked piles of $40,000 tires, haul boxes in two, and truck chassis/frame/engine sit in the snow outside a maintenance shop. The trucks are part of 23 pieces of heavy equipment, worth a total of $85-million.

On the precipice of pit 3, across the 200-metre deep chasm, drillers are at work to poke holes to fill with explosives to blow away waste rock, the last preparations for mining. It is on this flat ground, above the pit, that once existed the town of Copper Mountain, back when Granby Consolidated Mining operated an underground mine below.

There's no hint left of the buildings that housed the men who toiled below ground, the first to haul copper ore out of here.

The current plan calls for the mine to be in business until 2028.

There's already hope for longer production, particularly after more positive exploration results were released on Thursday. Pits 1, 2 and

3 are individual gashes in the land; when Copper Mountain Mining Corp. is done, it will be one massive superpit.

Looking at the hardrock below, Mr. Dodds says: "In 17 years there'll be no trace of it."

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JPMorgan: This industrial metal is beginning to trade like gold and silver

By Helen Sun

Bloomberg

17 January 2011

The world refined copper market is expected to have a 500,000-metric-ton to 600,000-ton deficit in 2011, even with a significantly weaker demand scenario, according to JPMorgan Securities Ltd.

Disruptions last year seemed to have wiped out most of mine supply growth, metals strategist Michael Jansen told a conference in Shanghai. "As demand further recovers into 2011, supply-side issues will become more influential," he said.

Copper for delivery in three months in London advanced to a record of $9,754 a metric ton on Jan. 4 after rising 30 percent last year as the improving global economy and rising investment demand for commodities prompted buying. The International Copper Study Group is expecting a 435,000-ton global deficit in the refined metal this year.

While current prices are sufficient to encourage brownfield and greenfield developments, longstanding issues, including capital availability, relative merit of projects, resource nationalism, and geotechnical issues, remain key impediments for supply increase, said Jansen.

"Copper is also increasingly being seen as scarce and is in many ways adopting some store of value attributes normally associated with precious metals," he said in his presentation.

Jansen said his current forecast for the average London cash price is $9,713 a ton this year. In slides shown earlier at the conference he had predicted $9,000 a ton.

Copper closed 0.4 percent higher at $9,650 a ton yesterday on the London Metal Exchange.

Editors: Richard Dobson, Neil Western.

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Musings on the Record Price of Copper

By Mickey Fulp

Resource Investor

6 January 2011

The spot price of copper jumped to $4.40 on Dec. 31, exceeding previous highs set daily over the previous week. Today we discuss copper's meteoric price rise during the past five months, dissect current supply and demand fundamentals, and opine on the direction of the market in the short term.

Just under a year ago, I predicted a short term correction in the price of copper based on analysis of supply and demand (Mercenary Musing, January 18, 2010; Mercenary Musings Radio, January 28, 2010). My prediction quickly came to pass but was of shorter duration than I expected.

My radio partner Rob Graham and I re-visited the copper market twice in 2010. In our second interview (Mercenary Musings Radio, May 6, 2010), I was bearish on the short term prospects for copper. The price went on a downtrend that lasted until financial markets righted themselves in early July after a short summer doldrums. By late July, I became bullish on the red metal (Mercenary Musings Radio, July 27, 2010). The price was going up, I felt it would continue, and since then the robust copper market has seldom paused for a respite:

The record copper price is being driven by speculators, hedge fund buying, and Chinese stockpiling and hoarding. Although copper is up 55% since its low of $2.77 in late June, the supply and demand fundamentals simply do not support all time record prices.

I currently see several reasons why the copper market is overbought and a correction is in order:

• Projected world supply deficits for 2011 have been promulgated as extremely bullish for the copper price. However, these predictions are only eight to 11 days worth of current yearly consumption. This is insignificant. Whether there's an actual surplus or deficit in 2011 is primarily dependent on the health of the world's economy and supply factors. One of the estimates factors in an annual supply disruption at 4% of projected world demand. If that fudge factor is removed, the projected 11 day deficit turns into a 3 day surplus. Projected estimates of 2011 supply or deficit are certainly with the margins of error of the predictions.
• Worldwide copper warehouse inventories are trending up. The current LME, Comex and Shanghai warehouse stockpiles, although down 30% from highs in March, are still over two to three times the average for five years preceding 2008's global financial crisis. Inventories are now equal to 10 days of global consumption; this is down from 12 days in March, but is still high compared to the average of 3-4 day stockpiles from 2002 to 2007. LME warehouse inventories have gone up for 14 consecutive days.
• The Baltic Dry Index global freight rates are at a four-month low suggesting that underlying real commodities demand is weakening.
• Copper is in contango and no longer in backwardation as it was from early November until early December. This indicates a lessening of current demand.
• This is the season of low consumption: Northern Hemisphere winter and slow construction season; Western World holidays; and Chinese New Year for 15 days in early February.
• The Chinese, with an interest rate increase on Christmas Day, are attempting to contain inflation. Food inflation is a major concern in developing Asian countries, particularly China, India and Indonesia where it is the poor's major expense, constituting nearly 50% of income. Significant interest rate increases will cause commodities prices to drop with hedge fund divesture into attractive income-producing sectors.

Now let's look at the factors that argue for a short term bullish view on the copper price:

• Hard commodities, with exception of gold and to a lesser extent hybrid metals (platinum, palladium, and silver), are bulk industrial materials with prices largely controlled by supply and fundamentals. Growth of consumption in the BIIC (Brazil, India, Indonesia, and China) countries is continuing for all base metals but especially copper as the developing world demands electricity. "Dr. Copper, the only metal with a PhD in Economics" is reflecting strong consumption from worldwide emerging markets.
• Countries in the world are depreciating their fiat currencies because of overwhelming debt obligations, huge budget deficits, and overall slow global economic growth. The across-the-board currency devaluation is especially important for the United States dollar since all commodities are priced in the world's reserve currency. Commodity prices naturally will appreciate as the dollar depreciates.
• Speculative money has been pouring into the copper sector and most other hard and soft commodities for the past six months. The main driver is low interest rates and a weak dollar. High risk money will always flow into the sector where short term return is perceived as highest.
• At the present time, commodities are the preferred sector for speculators and hedge funds. This is a similar situation to the first half of 2008, which was the last time we saw across the board record commodities prices.
• Copper is in record territory and the price could continue to go up with no resistance points to the upside.

There's a wild card in the hand we've been dealt to determine the short term direction of the copper market. Two major financial institutions, Blackrock Capital and JP Morgan, have made application to the New York Stock Exchange to launch physical copper ETFs. They have yet-to-be approved for trading. Although they use different business models, both could control significant positions in the inventory markets. The former is of concern for its ability to honor redemptions in physical metal and has an option to pay in cash. The latter could cause short term market disruptions if dominant long positions lead to forced reductions by the LME. In addition, ETF Securities of London is establishing base metal funds for copper, nickel, tin, and aluminum.

Some pundits are calling for as much as a 10-20% increase in copper prices if and when physical copper ETFs are trading. They certainly will add near term volatility, tighten supply markets, and cause price increases. On the other hand, given today's record high price of copper, perhaps the market has already factored in the debut of physical metal ETFs.

If copper prices continue to go higher, we will see a negative impact on major industrial activity with increasing capital and operating costs. This scenario happened previously in early to mid-2008 before commodity prices collapsed in the later part of the year.

At this juncture, it does not appear to me that basic supply and demand fundamentals are strong for the copper market in the short term. There is evidence to indicate that the market is overbought by speculators and hoarders. That said, there are other factors, especially the new copper ETFs that could drive prices substantially higher.

Although I subscribe to Austrian economic theory and disdain Keynes, I will not forget what he said: "The market can remain irrational longer than you can remain solvent." Irrational exuberance for copper could continue at increasing prices.

I also remember the old adage: "The cure for high prices is high prices". Markets always will revert to the supply and demand fundamentals of capitalism.

I get really nervous when the all the experts, pundits, mavens, gurus, savants, and wizards are jumping on board the same bandwagon, whether bull or bear. The current consensus amongst analysts is for a higher copper price.

This is a frothy, risky, volatile market right now. At times like these, I prefer to sit back and wait. I see very high risk in the copper market at present and will watch from the sidelines while the game is played out and winners and losers are determined.

Will the price of copper go up or down in the short term? In the words of former St. Louis Cardinals pitcher and wing nut Joaquin Andujar: "There is one word that says it all: You never know."

I am not buying or selling copper or copper-gold stocks at present. That said, it's always good to take profits when a market reaches all time highs. I will leave that personal decision up to you as a diligent lay investor.

Despite my queasiness about the current state of affairs, I remain a long term secular bull for copper and other industrial commodities. Simply put, we are not finding and developing enough big copper deposits to satisfy the projected world demand for the next 20 years. I will address this issue at some later date.

Mickey Fulp
MercenaryGeologist.com

The Mercenary Geologist Michael S. "Mickey" Fulp is a Certified Professional Geologist with a B.Sc. Earth Sciences with honor from the University of Tulsa, and M.Sc. Geology from the University of New Mexico. Mickey has 30 years experience as an exploration geologist searching for economic deposits of base and precious metals, industrial minerals, uranium, coal, oil and gas, and water in North and South America, Europe, and Asia. Mickey has worked for junior explorers, major mining companies, private companies, and investors as a consulting economic geologist for the past 22 years, specializing in geological mapping, property evaluation, and business development. In addition to Mickey's professional credentials and experience, he is high-altitude proficient, and is bilingual in English and Spanish. From 2003 to 2006, he made four outcrop ore discoveries in Peru, Nevada, Chile, and British Columbia. Mickey is well-known throughout the mining and exploration community due to his ongoing work as an analyst, writer, and speaker.