Decarbonisation will see copper demand double in 13 years, requiring another 25 Escondidas, warns S&P

14th July 2022
Barry FitzGerald

The 30-40% slump in copper stocks in response to the 31% crunch in the copper price since its early March highs has naturally enough triggered thoughts that the copper stocks are now in deep value territory.

Not necessarily for the short term. The short-term continues to be dominated by fears of recession in the major economies because of the attack on inflation through higher interest rates and the new concerns around COVID-19 in China.

But it is a different story for the longer term as copper is front and centre to the biggest thematic of our times – decarbonisation through the electrification of everything.

The lasting nature of the thematic as the world sets out to become net zero by 2050, if not earlier, has huge implications for the copper market and as a result, the valuation of copper stocks.

That came through loud and clear in a just-released deep dive by S&P Global into the copper demand outlook and how the global push for net zero emissions by 2050 could be “short-circuited” unless copper supply steps up in a meaningful way.

The study does not predict copper prices, but it does the next best thing by estimating global copper demand will double from the current 25mtpa to 50mtpa by 2035.

The additional 25mtpa requirement is the equivalent of needing another 25 Escondida mines in production. The Chilean mine is currently the world’s biggest copper producer and is owned by BHP and Rio Tinto.

Having 25 more of them in production by 2035 – or enough new and expanded mines to deliver the additional 25mtpa - is simply not going to happen. Bad news for net zero by 2050, but great for the copper price no doubt.  

Speaking on the release of the copper study, and after addressing the Federal Government’s Sydney Energy Forum earlier in the week, S&P Global’s vice chairman Daniel Yergin said that given the global consensus for net-zero emissions by 2050, it was critical to understand the metals required to realise the ambition.

“The world has never produced so much copper in such a short timeframe as would be required. On current trends, the doubling of global copper demand by 2035 would result in significant shortfalls,” Yergin said.

“This ‘New Era of Copper Demand’ would result in unprecedented and untenable shortfalls in supply.”

S&P Global’s findings are pretty much in keeping with what BHP and others having been saying for a while now.

And that is to expect some near-term weakness in the copper price as previously committed new mines come on stream and the odd economic bump is encountered. But watch out come 2025 when the decarbonisation imperative unleashes a monstrous demand surge.

Add in a situation where a lack of new mine developments and falling grades at existing operations like Escondida will start causing supply deficits around 2025 anyway, and the level of incentive pricing needed to ensure the required demand response will be well north of current pricing.

Having said that, the current price of $US3.34/lb is not all bad anyway. While it is down 32% on the early March highs, it is down a lesser 21% on its 2021 average, yet up by 19% on its 2020 average of $US2.80/lb.

Sunstone, Stavely, Caravel:

While the fall in the copper price has knocked the stuffing out of the copper producers (OZ Minerals and Sandfire are down by 36% and 34% since early March), the copper explorers are down by 50% or more.

All the more reason then to start thinking about them as leveraged plays to the decarbonisation copper thematic come 2025, giving them the same sort of deep value appeal that will work its way through the producers before long.

Sunstone Metals (STN) is an example of the sort of junior that seems poised to benefit from the coming copper supply deficits.

It is trading at 4.2c for a market cap of $110m. That’s down from 12c earlier in the year despite flagging its El Palmar project in northern Ecuador has all the hallmarks of becoming a “large” gold-copper porphyry project.

Following the recent release of more drill results at El Palmar, and at Bramaderos in the south, the market is beginning to wonder about the scale of the resource Sunstone could be on to at both the projects.

Morgans suggested an exploration target of 2-5 million ounces of gold equivalent in just the shallow section of El Palmar, while Far East Capital suggested 5-10m ounces of gold equivalent might be on the cards for Bramaderos (a maiden resource estimate there is due by the end of the year).

The use of gold equivalents by both goes to Sunstone recently flagging that it was undertaking metallurgical studies that would allow it to report the mix of gold and copper mineralisation on that basis. The idea is that will give investors a better feel for the size of the prize at both projects.

Porphyry mineralisation is typically low grade but bulk tonnage, making for low costs of production because of the scale of operations, and the mix of metals. They are what all the big miners want.

Stavely Minerals (SVY) was a 40c stock in March but is now back at 15.5c.

Its cause was not helped by the recent release of its maiden resource estimate for its Cayley Lode deposit at its copper-gold project in western Victoria’s Stavely volcanic belt being announced on the market’s worst day in 10 years.

The shallow resource estimate of 9.3Mt at 1.2% copper, 0.2g/t gold and 7.1g/t silver means the company has a development opportunity on its hands from a both an open-cut operation and selective mining of higher-grade parts of the lode at depth.

Executive chairman Chris Cairns reckons the maiden resource is potentially the start of a 20 year-plus mining story.

The project’s potential to host a big porphyry at greater depths is alive and well but for the time being, the focus is very much on advancing the Cayley Lode into development, along with a chunk of the overlying oxide copper blanket.

Regional porphyry/structural exploration targets are to get more attention after the recent fund raising so newsflow before the end of the year is set to be strong. And in case there is any doubt, Cairns is a super-bull on copper.

He reckons $US10/lb is achievable in response to the copper demands of the global decarbonization effort.

Caravel Minerals (CVV): It was a 30c stock in early March and is now back at 15.5c for a market cap of $60m. Like Stavely, it has released good news in a currently bad market for copper stocks.

Caravel’s good news was confirmation in a pre-feasibility study that its namesake project in WA’s central wheatbelt was a robust project capable of producing 62,000tpa of copper-in-concentrates over an initial 28 years.

It is a low-grade, bulk mining, porphyry-style show (583Mt at 0.24% copper for 1.42Mt of contained copper) which because a low strip ratio and the scale of the operation, was found to be capable of achieving all-in sustaining costs of $US2.55/lb.

The base case financial model assumed a long-term copper price of $US4/b for a pre-tax NPV of $1.06 billion before project enhancements currently being worked on, with an update likely next month.

It is the sort of Tier-1 location copper project the world will need to meet the wall of copper demand coming from decarbonisation.

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