Geology, risk hinder new copper supply

It will take more time, and lots more money, to bring new copper supply on line, as miners venture into more challenging geographies and geologies to meet soaring demand. Passion for the red metal, used in wiring and construction, has surged on rapid urbanization in China, India and Brazil. This thirst, coupled with project delays around the world, sent LME copper prices soaring 260 percent from a December 2008 low to a record high of $10,190 a tonne in February.Rising copper brings rising profits, prompting everyone from junior explorers to diversified giants to spend increasing amounts of cash in search of the next motherlode.

“Where we sit today, we’re well above the incentive price to bring on new supply,” said BMO Capital Markets analyst David Radclyffe. “It’s a question of when, not if, that new supply arrives.”

The first new wave of copper projects and expansions is set to roll out over the next two to three years, with more than 60 percent of this supply coming from Latin America.

While the copper price has dipped almost 3 percent so far this year, analysts say there is still enough of a shortfall to make challenging projects worthwhile.

“At the end of the day, we’re still short copper assets,” said Radclyffe. “The companies are spending a lot more on exploration this year and hopefully that does lead to some more discoveries.”

The biggest challenge for the sector is not that there is no copper left, but that all the “good” stuff is gone.

“There’s no ‘peak copper’ theory,” said Fidelity Investment Canada portfolio manager Darren Lekkerkerker. “The problem is the easy-to-get stuff, we’ve already got.”

Lekkerkerker, who co-manages a resource fund with copper equity investments, said producers need to either take a second look at challenging, high-cost projects, or start exploring in countries that may be less politically stable.

But moving into new regions is challenging. Companies face major risks in places where government royalties and mining taxes may be unclear, and, in extreme cases, assets may be nationalized.

Infrastructure may also be poor or non-existent.

Ivanhoe Mines’ (IVN.TO) $5 billion Oyu Tolgoi project in Mongolia, some 80 km (50 miles) from China’s northern border, is a perfect example, said Lekkerkerker.

The mine was delayed repeatedly as the company negotiated an investment agreement with the government, and then put roads, power and water into the remote Mongolian desert.

“They discovered it in 2001 and they’re going to start producing next year. That’s 11 years later,” Lekkerkerker said. “It just illustrates how long it takes.”

GOING GREENFIELD

Global metal exploration spending rose 45 percent in 2010, while copper exploration spending climbed 40 percent, according to research firm Metals Economics Group (MEG).

Copper companies spent $2.4 billion in 2010 on exploration, and that is expected to rise 40 percent this year.

“People are looking further up the pipeline to find value,” said MEG Chief Executive Michael Chender on the sidelines of the CESCO exploration forum. “They basically need to replace and grow reserves in the long term.”

Latin America exploration spending rose 48 percent, according to MEG.

“There’s no question that people are spending money on the ground,” said Macquarie Research mining analyst Pierre Vaillancourt.

But the traditional copper supply regions are saturated, and big producers are spending more money further afield.

Southern Copper (SCCO.N), which owns projects in Peru and Mexico, is exploring for new deposits in Ecuador, while First Quantum (FM.TO) is focusing on Africa, with projects in Zambia and Mauritania. Global giant Rio Tinto (RIO.L) has invested in Mongolia.

Still, even if someone announced a massive new discovery tomorrow, it would be years before the copper hits the market — especially if the project is in a more risky region.

“It’s a big effort to bring on new production,” Radclyffe said. “Any exploration success that occurred this year would be very hard to bring on production until the next decade.”

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