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The Race for Copper, the Metal of the Future

Summary:
The International Energy Agency (IEA) was founded in 1974 in response to oil embargos the previous year that caused the global price of oil to surge 300% from per barrel to per barrel. From the start, the IEA’s mission has been to help member nations deal with major oil supply disruptions. Over the years, the group’s purview has broadened to include more than just oil security, and in its most recent report, the IEA sounds the warning bell on the global supply of key minerals—particularly copper. “Today’s supply and investment plans for many critical minerals fall well short of what is needed to support an accelerated deployment of solar panels, wind turbines and electric vehicles,” IEA Executive Directive Faith Birol writes. Many of these minerals are produced by a very small

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The Race for Copper, the Metal of the Future

The International Energy Agency (IEA) was founded in 1974 in response to oil embargos the previous year that caused the global price of oil to surge 300% from $3 per barrel to $12 per barrel. From the start, the IEA’s mission has been to help member nations deal with major oil supply disruptions.

Over the years, the group’s purview has broadened to include more than just oil security, and in its most recent report, the IEA sounds the warning bell on the global supply of key minerals—particularly copper.

“Today’s supply and investment plans for many critical minerals fall well short of what is needed to support an accelerated deployment of solar panels, wind turbines and electric vehicles,” IEA Executive Directive Faith Birol writes.

Many of these minerals are produced by a very small number of companies in a small number of jurisdictions. Take rare earth metals, used in everything from semiconductors to smartphone batteries.

China controls between 80% and 95% of the world market, depending on the mineral.

Or look at copper. Chile and Peru are responsible for a combined 40% of global output. The largest copper mine in the world, Chile’s Escondida, is believed to have reached peak production. Meanwhile, the Chilean government has threatened to shut down the mine—57.5% of which is owned by BHP—for its water usage. Oh, and did I mention there’s a strike at Escondida?

These are only near-term risks to global supply. Looking more long-term, the risks increase and could be more severe.

Copper Supply Constraints as Demand Surges

Like gold, fewer and fewer large copper deposits are being discovered, and the time between discovery and production has lengthened over the years as costs rise. S&P Global Kevin Murphy called last decade “dismal” in terms of new discoveries. Of the 224 copper deposits that were discovered between 1990 and 2019, only 16 were found in the past 10 years. Although the earth’s surface still has an abundance of the red metal, most new deposits are of low grade.

The Race for Copper, the Metal of the Future

This could be a problem going forward. As I’ve written about before, the adoption of electric vehicles (EVs) and battery storage technology—both of which rely heavily on copper—is set to accelerate rapidly over the coming decades. Last year, EV sales were around 3 million. By 2040, they could be as high as 70 million.

The Race for Copper, the Metal of the Future

According to the IEA, copper will remain the most widely used metal in renewable energy technologies.

Compared to aluminum, nickel and zinc, its importance is rated high for most new energy-related projects. That’s mainly because its electrical conductivity is the second best after silver and 60% higher than aluminum. Goldman Sachs predicts that by 2030, copper demand will grow nearly 600% to 5.4 million tons.   

The Race for Copper, the Metal of the Future

Commercial Production Begins at Ivanhoe’s Kamoa-Kakula

Although large copper discoveries are becoming fewer and farther between, there are notable exceptions. The IEA mentions Peru’s Quellaveco, majority-owned by Anglo American, and Ivanhoe’s Kamoa-Kakula in the Democratic Republic of the Congo (DRC).

I’ve written about the developing Kakula project several times before. This week, Ivanhoe announced that copper concentrate production officially began at the world-class discovery, several months ahead of schedule.

“Discovering and delivering a copper province of this scale, grade and outstanding ESG credentials, ahead of schedule and on budget, is a unicorn in the copper mining business,” commented Ivanhoe founder and co-chair Robert Friedland, who added that Kakula was discovered only five years ago. This represents “remarkable progress by the mining industry’s glacial standards from first drill hole to a new major mining operation.”

Kakula, Robert says, is now on path to become the world’s second largest copper mining complex and perhaps even the largest. Further, the project is estimated to be the world’s highest grade major copper mine. Further still, Ivanhoe pledges that Kakula will be a net-zero greenhouse gas generator, making the company an attractive ESG play.

Record Copper Price by Year-End?

This week, analysts at CIBC announced that they adjusted their end-of-year copper price forecast to $5.25 a pound, Kitco reports. The estimates are now 22% and 32% above 2021 and 2022 consensus estimates.

The supporting factors include “positive economic data, USD weakness, continued Chinese demand and tight global inventory levels,” CIBC wrote.

If true, this should be supportive of copper miners such as Ivanhoe going forward.

The Race for Copper, the Metal of the Future

Index Summary

  • The major market indices finished up this week. The Dow Jones Industrial Average gained 0.94%. The S&P 500 Stock Index rose 1.24%, while the Nasdaq Composite climbed 2.06%. The Russell 2000 small capitalization index gained 2.44% this week.
  • The Hang Seng Composite gained 1.56% this week; while Taiwan was up 3.49% and the KOSPI rose 1.02%.
  • The 10-year Treasury bond yield fell 2 basis points to 1.596%.

Blockchain and Digital Currencies

Strengths

  • Of the cryptocurrencies tracked by CoinMarketCap, the best performer for the week was Helium, rising 35.82%.
  • Ripple is set to use its RippleNet blockchain technology to process the first real-time payments between Oman and India. Oman’s second-largest bank, BankDhofar, and Pune-based IndusInd Bank are partnering with Ripple, allowing BankDhofar’s customers to use its app to transfer up to $2,600 to accounts in India, which is the world’s largest receiver of remittances. This news comes a week after National Bank of Egypt announced that it is joining RippleNet to set a remittance corridor with the United Arab Emirates.
  • The volume of Ethereum futures traded on various exchanges reached record levels in May, with contracts worth more than $1.6 trillion exchanging hands during the month. This is almost a 50% increase from the volume seen in the previous month, buoyed by the second-largest cryptocurrency by market capitalization reaching a new high of $4,362.35 in May. Although the cryptocurrency market has seen a short-term correction, trading activity in the futures market has remained strong.

Weaknesses

  • Of the cryptocurrencies tracked by CoinMarketCap, the worst performer for the week was Terra, down 33.26%.
  • Binance Smart Chain (BSC), the world’s largest cryptocurrency exchange’s smart contract blockchain, has come under scrutiny recently as decentralized finance (DeFi) protocols built on the blockchain suffer an increasing number of hacks and exploits, with the recent hack of bEarn Fi resulting in an $11 million loss. Binance representatives suggest that it cannot do much to roll back the exploits and that it is common in DeFi to see such exploits, even though the exchange has significant control over the BSC and is far more centralized than competing blockchains. Furthermore, another flash loan attack this week on the BSC led to a loss of $7.2 million from the BurgerSwap DeFi protocol.
  • Senior officials at the United Kingdom Financial Conduct Authority (FCA) reported that cryptocurrency businesses in the nation are struggling to meet Anti-Money Laundering (AML) standards set by the regulators. According to the FCA, only five crypto-related businesses have received registration from the regulatory body and over 90% of the businesses have withdrawn their applications as they failed to adopt robust AML control frameworks as well as employ proper staff. The FCA has expanded its oversight on the crypto industry this year, and in March, it announced that crypto firms will have to submit yearly financial crimes reports.

Opportunities

  • PayPal Holdings Inc. announced its plan to allow users to withdraw cryptocurrencies to third-party wallets. The payments giant enabled cryptocurrency purchases on its platform in October 2020 for U.S. customers and is set to roll out the offering in select countries in 2021. Currently, users can only buy Bitcoin, Ethereum, Bitcoin Cash and Litecoin using their PayPal accounts. The company has not provided a launch date for its withdrawal feature, but the initial roll out of the third-party wallet integration is expected to be gradual and location based.  
  • The U.S. Securities and Exchange Commission (SEC) has begun official review of two separate Bitcoin exchange-traded fund (ETF) applications submitted by Fidelity Investments and Anthony Scaramucci’s SkyBridge Capital. Both applications were filed in March, with SkyBridge Capital partnering with First Trust Advisors to list an ETF on the NYSE Arca. Fidelity Investments reported that its ETF product will track Bitcoin’s price using a propriety index which derives prices from multiple feeds. Currently, the SEC has six ETF applications in its pipeline for review.
  • VanEck, the New York-based investment management company, is set to list its cryptocurrency exchange-traded products (ETPs) on the Euronext stock exchanges in Amsterdam and Paris. Its VanEck Vectors Bitcoin exchange-traded note (ETN) and VanEck Vectors Ethereum ETN will start trading on June 1, with a total expense ratio of 1%. The company reported that the ETNs will provide exposure to investors without them holding the crypto themselves, and that VanEck’s custodian, Bank Frick, will keep the cryptocurrencies held by the ETNs in cold storage to guarantee their security. VanEck has also applied with the U.S. SEC to list a Bitcoin ETF.

Threats

  • Iran’s President Hassan Rouhani announced on national television that he is enforcing a ban on cryptocurrency mining in the nation until September 22. The ban, which is set to be enforced immediately, comes on the back of an unusually dry spring season in the country, leaving Iran struggling with hydropower shortages. Rouhani also mentioned that the nation’s authorized miners use only 300 megawatts of electricity while unauthorized operations account for 2,000 megawatts of electricity usage. Iranian cryptocurrency miners account for 3.82% of Bitcoin’s total hash rate.   
  • Bank of Korea’s governor Lee Ju-yeol believes that excessively leveraged cryptocurrency trading poses threats to the country’s financial system as it puts households at risk of financial damages, given the instability and volatility of crypto markets. He added that the South Korean central bank expects the increasing crypto trading to have a negative impact on the financial system in any respect and has pledged to monitor transactions of the nation’s financial institutions involved with leveraged crypto trading and could curtail new loans to prevent defaults.
  • The Chinese government’s latest efforts to curb cryptocurrency mining in the nation have led some investors to believe that only the biggest miners can survive as they have the resources to shift their operations underground and continue mining in other parts of the country. Even with enough capital to relocate operations overseas, the mining companies will have trouble finding suitable sites as there is little to no idle capacity in major mining hubs like Kazakhstan and Russia. Furthermore, there are growing concerns about mining power becoming too centralized and that a few miners could manipulate the market and shut out smaller miners if they gain over 50% of the network’s mining power. Chinese crypto miners account for 65.08% of Bitcoin’s total hashrate.

Gold Market

This week spot gold closed at $1,903.77m, up $22.52 per ounce, or 1.20%. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week higher/lower by 0.06%. The S&P/TSX Venture Index came in up 0.95%. The U.S. Trade-Weighted Dollar ended the week flattish, up just 0.05%.

Date Event Survey Actual Prior
May-25 New Home Sales 950k 863k 917k
May-25 Conf. Board Consumer Confidence 118.8 117.2 117.5
May-27 Hong Kong Exports YoY 25.9% 24.4% 26.4%
May-27 Durable Goods Orders 0.8% -1.3% 1.3%
May-27 GDP Annualized QoQ 6.5% 6.4% 6.4%
May-27 Initial Jobless Claims 425k 406k 444k
May-31 Germany CPI YoY 2.3% 2.0%
May-31 Caixin China PMI Mfg 51.9 51.9
Jun-1 Eurozone CPI Core YoY 0.9% 0.7%
Jun-1 ISM Manufacturing 61.0 60.7
Jun-3 ADP Employment Change 690k 742k
Jun-3 Initial Jobless Claims 410k 406k
Jun-4 Change in Nonfarm Payrolls 678k 266k
Jun-4 Durable Goods Orders -1.3%

Strengths

The Race for Copper, the Metal of the Future

  • The best performing precious metal for the week was palladium, up 1.45% on curtailed supply news. Gold continues to do well, as hedge funds raised their net long position to the highest level since January. ETFs have had inflows throughout May, following three months of sales. The recent weakness in Bitcoin is helping the price of gold, as well as a weak dollar. There is also belief that Russia will resume buying of gold for its central bank. The central banks in India and Thailand also have been buying gold recently. Gold stored at the Bank of England has been selling for premiums recently, implying that there is active central bank buying. The Bank of England stores and sells gold on behalf of other central banks.
  • Barrick Gold held an investor day discussing its Nevada Mines operation. There are 200 possible exploration targets that could bolster the production profile and extend production visibility to 15 years. Current guidance for the mine is a 200,000-ounce decline in 2022. The company also highlighted that it cut G&A by half after its deal with Newmont at the Nevada Mines operation.
  • Wesdome Gold will restart its gold mine at the Kiena siter in Val d’Or, Quebec. The mine is anticipated to have a seven-year life, producing an average of 84,000 ounces at US$380 per ounce cash costs.

Weaknesses

  • The worst performing precious metal for the week was platinum, but still had a positive gain of 1.04%. Gold miner Dacian Gold is seeking early support for an equity raising that could see it raise about $40 million. The news comes only days after Dacian Gold released drilling results at Mt. Marven, which is located at its 100 per cent owned Mt. Morgans Gold Operation in Western Australia. It also comes about 12 months after Dacian Gold last tapped shareholders for fresh funds. On that occasion, Dacian Gold raised $98 million in a placement and non-renounceable rights issue.
  • AngloGold has reported that following a ground incident last week at the Obuasi Mine in Ghana (where one miner remains missing) that it will need to undertake an in-depth assessment of mine design, mine schedule, and ground management plans before progressively restarting the mining operations. The early indications are that this was caused by the failure of a horizontal or sill pillar, in one of the smaller mining stopes. This will see AngloGold suspend its 2021 production guidance of 300,000-350,000 ounces at a total cash cost of $660-$710 per ounce.
  • Bloomberg wrote a report indicating that Barrick Gold’s earnings lack strong momentum in 2021. Output will fall this year 3% as non-core assets are disposed of. Gold production expansion may be difficult until 2030. 

Opportunities

  • Montage Gold reported good results at its Kone silver mine. Consensus was for a 200,000-ounce operation with a mine life of 10+ years. A recent preliminary economic assessment guides to 249,000 ounces per year of silver with a mine life of 15 years. The payback period on exploration is 2.8 years.
  • MMC Norilsk Nickel PJSC, the world’s largest producer of palladium, expects a significant shortfall of the metal this year after flooding at its Arctic mines upended its December projection for an almost balanced market. Increased demand combined with flooding at Nornickel’s Oktyabrsky and Taimyrsky mines, along with incidents at the company’s concentrator, will produce a palladium deficit of 900,000 ounces.
  • Gold and precious metals along with and many mined commodities have hit record prices this year as the global economy bounces back from Covid-19 but business are finding materials and general supplies limited. For instance, the price of copper—used in construction and to conduct electricity—has nearly doubled over the past 12 months to a record of $10,762 a metric ton earlier in the month. Miners, however, have been cautious towards deploying new capital. Executives seem to be more focused on delivering financial performance, that discipline is now raising the specter of supply restraint which should keep prices firm.

Threats

  • An attempted coup in Mali, Africa’s third-largest gold producer, threatens to derail presidential elections planned for February that are meant to return the nation to civilian rule. The move comes after an Aug. 18 coup saw the ouster of former President Ibrahim Boubacar Keita and adds to the chaos in the West African country. Mali produced 66.5 tons of gold in 2020, making it the third-largest producer of the metal in Africa, according to the Mali Mining and Petroleum Conference and Exhibition. Companies including B2Gold, Barrick Gold and AngloGold Ashanti operate in the West African nation.
  • B2Gold provided an update confirming that the evolving political situation in Mali has not impacted operations at the Fekola Mine. This comes after Mali’s interim President Bha Ndaw and Prime Minister Moctar Ouane were arrested by the military on May 24th.  
  • Gold has done well over the past two months, but with several FOMC meetings between now and year-end, the risk of “taper talk” may be a headwind to the price of gold because yields may increase.  

Read the full article at https://www.usfunds.com/investor-library/investor-alert/the-race-for-copper-the-metal-of-the-future/

May 28, 2021

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

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