'Incredibly slow' copper miners inching toward investment decisions but pipeline remains thin

With incentive prices for new copper mine capacity on the rise, the world's red metal miners remain extremely cautious in making decisions to invest in new capacity, which, combined with scarce investment over the past five years and depletion at existing mines, supports forecasts that faltering supply will drive a growing copper market deficit starting in 2020.

Miners are looking for higher long-term copper prices to consider investing in new capacity as their continued focus on returns and wariness of cost inflation and price shocks has led to more stringent metrics in evaluating projects.

One year ago, CRU's chief copper strategist Vanessa Davidson estimated an incentive price of US$3.00/lb for investments in new capacity. "I won't say exactly what our latest number is but it's significantly higher," Davidson told BNamericas this week at the 2018 World Copper Conference in Santiago, Chile. "Part of it is a question of the majors looking at higher hurdle rates. The emphasis on rates of return and ensuring that capital is employed wisely is behind that."

Davidson told the conference that the industry is looking for at least a 15% discount rate at projects, and that today the long-term copper price required to meet that hurdle is around US$3.75/lb. Copper averaged US$3.16/lb in 1Q18.

"The 15% discount rate is associated with a higher long-run cost than would have been the case a year ago," the analyst said on the sidelines of the event.

Jorge Gómez, president of the Collahuasi JV in Chile, noted that some copper projects under development in 2014-15 reached a capital intensity as high as US$40,000/t, compared to typical rates of US$10,000-12,000/t prior to the super-cycle price boom. A typical tier 1 copper project in 2018 will require capex of US$16,000/t of installed capacity versus US$9,000/t in 2009, according to CRU.

The effect is that miners have been "incredibly slow" to move on projects. "We are seeing that prices are a lot better, margins are a lot better since the end of 2017 for the producers, but people are still very cautious about making decisions and some of the projects that we though would have the go-ahead by now, haven't," Davidson said, mentioning Quellaveco and Quebrada Blanca phase 2 as examples.

"People are planning. They're trying to make sure that they've though through all the issues at the projects they're developing. It's a different approach in this cycle," she added.

Anglo American's copper CEO Hennie Faul told the conference that the company's greenfield Quellaveco project, in southern Peru, is a "blank page opportunity" to apply the best practices identified at other operations in the last few years and the company has done much work in technical and social derisking at the project. An investment decision at Quellaveco is now widely expected by mid-year.

The paradox lies in what Davidson says is a strong consensus that deficits - and higher prices - are coming. CRU forecasts 2018 prices at US$7,000/t (US$3.18/lb) but says a shortage will emerge in 2020 and grow over the coming years, driven precisely by the lack of investment in new supply, as well as growing evidence that an electric mobility revolution could take up the slack from a more generalized slowdown in China. Specifically, the volume of copper used in electric vehicles and related infrastructure could rise from less than 200,000t in 2017 to more than 5Mt in 2035.

Rio Tinto's copper chief Arnaud Soirat echoed the deficit forecast at the conference podium.

CRU forecasts global copper mine production growth will slow to 1.2% per annum in 2016-22 and just 0.2% per annum in 2022-25 after booming at 4.7%/y in 2011-16. Of the few large near-term startups in the global pipeline, the two biggest ones, Grasberg Block Cave (Indonesia) and Chuquicamata Underground (Chile), are required just to stand still at current production rates.

There are a few potential elements that could provide upside supply surprises, Davidson noted, such as the reactivation of on-hold projects, increased copper byproduct output from cobalt mines and more Chinese copper scrap.

OPERATING COSTS

Rising prices are certainly a boon for copper companies, driving cash flow even for the marginal producers, but the mood at the mines remains centered on cost control and optimization, particularly as most of the cash cost reductions achieved in the last five years were a function of more favorable US dollar exchange rates and reduced input costs.

Collahuasi's Gómez told the conference that the mine, one of the world's biggest with 524,000t in 2017, brought cash costs down to US$1.14/lb in 2017 and expects to achieve less than US$1/lb in 2018.

Freeport-McMoRan president of Americas and COO Harry Conger said that loading and haulage is now the biggest mining cost, and the company's focus here has resulted in truck availability of 89% with a 6% yearly decline in the operating cost per hour of the trucks, particularly with real-time optimization of truck operation and by better coordinating maintenance and shift changes.

"Every percentage point of utilization improvement is like getting 3.5 free haulage trucks. So as we make these improvements over the years we need less equipment to move the same amount of rock," Conger said, noting the company's total fleet amounts to 350 trucks.

While the continued effort on productivity and optimization in itself does not preclude investment in growth projects, it highlights miners' seriousness about the lessons learned post boom and unwillingness to lay out for new capacity until they are absolutely sure of long-term profitability.