We Need to Talk About Copper

By
Crux Investor
·
October 16, 2021

There is a buzz around a whole suite of battery metals, as the profile or their importance in our lives comes into focus. The demand story, however, is just one of many long-term fundamental factors that will affect metal prices for years to come. This note focuses on copper, and other battery metals will be addressed in separate notes later.

Trust the Experts - Long-Term Demand Drivers

As part of any research into the long-term supply / demand drivers for copper, we urge you to take note of the meticulously researched annual economic and commodity outlook, published by BHP Group. BHP is not alone in reaching the conclusion that copper is a vital metal for the world of the future, it just presents the information cogently and concisely. In short, BHP sees powerful demand drivers in the form of population growth, urbanisation, decarbonisation, and rising living standards.


Within a broad suite of commodities BHP highlights copper as one of the metals with a vital role in the electrification of transport, in the decarbonisation of stationary power, and mitigating the impacts of climate change. BHP makes particular note of the energy transition requirements, as laid out by the IPCC in 2015 Paris Agreement.

Trust the Experts - Long-Term Supply Factors

BHP writes in its review that any of the modelled demand pathways

cannot occur without an enormous uplift in the supply of critical minerals such as … copper. ...With … disciplined historical supply backdrop as a starting point, any sustained demand surprise seems likely to flow almost directly to tighter market balances.” And the current supply constraints means that there will be “the need for additional supply, both new and replacement….and... that higher–cost supply will be required to enter the cost curve…. as the decade proceeds.”

Providing additional colour to the supply-side fundamentals, we note that declining discovery rates of all mineral types have been observed in recent years, including base metals and within that sub-group, copper.


An excellent report by copper analyst Leigh R. Goehring published in January 2021 notes that the industry has seen

“a decrease in the quantity of the initial mineral reserve and a decline in the quality of the remaining mineral reserves”.

Crucially, due to the asymmetric distribution of copper grade within the main copper-bearing deposits that are geologically classified as “porphyries”, the industry has pretty much reached the limit of low-grade mining from existing resources. Even with higher prices to render less rich material commercial, lowering the cut-off grade only works up to a point with copper, and that point has largely been reached. Including lower-grade material (by modelling higher prices) in future mine plans will not be enough to replenish reserves at current demand levels, let alone at the demand levels predicted for the remainder of the decade.

Source: Goehring & Rozencwajg, Princeton University

Trust the Experts - Supply/Demand Fundamentals

In parallel with the lack of investment (and therefore success) in exploration, BHP continues to “see the need for additional supply, both new and replacement….and... that higher–cost supply will be required to enter the cost curve…. as the decade proceeds.”

Goehring & Rozencwajg summarise the situation beautifully:

“Because of increasing depletion issues, the lack of new world class mines coming online, and geological constraints embedded in copper porphyry deposits, our research tells us that copper supply will show little growth this decade. Strong demand is about to collide with severe copper supply problems. Copper prices are heading much, much higher.”

We quote extensively to demonstrate that these are not just our in-house views. Copper prices are trending higher, and investors should be positioned accordingly. Crux Investor, like BHP, is confident that investors should have the right assets in the right commodities, with demand diversified by end–use sector and geography, allied to the right social value proposition.

Evergrande, the China slowdown and above-ground stocks

There are, however, near-term risks to copper prices as high energy prices impact demand and the China property market deals with the blowback from years of over-leverage and inefficient capital allocation. China consumes 54% of global copper supply, and the Chinese housing market alone consumes 11% of the total figure. Lead-indicator price series such as First Quantum and Rio Tinto suggest that metal prices will fall in the short-term. Where the majors go, everyone else follows soon after. Note, however, that above-ground stocks continue to be drawn down. In the last six weeks, over 50,000 tonnes of stocks have withdrawn from LME stocks, and Shanghai stock levels are at lows last seen since 2011.


What next?

A cyclical supply-constrained copper market with strong and legislated demand drivers is in place. Short-term price weakness may be present over the next few months. Investors are advised to research target companies with a view to having at least a toehold position by the end of Q1 2022.

Companies to watch

Marimaca Copper

Copper companies to watch: Marimaca Copper

The first company we are monitoring is Canadian-based and Toronto Stock Exchange (TSX) listed, Marimaca Copper.

The company is mainly focused on its flagship project, the aptly named “Marimaca Copper Project” located in the coastal Antofagasta region of Chile. Another one of the project’s main objectives is the vigorous assessment of exploration potential around the project area. The Marimaca Copper Project prides itself on being the only major copper discovery globally in the last five years. Throughout the project’s duration, substantial exploration prospects have come to light. This follow-up exploration work may lead to the discovery of a new copper district in Chile. It seems as if the Marimaca Copper Project might just be the most significant copper discovery in recent years!

Building a copper mine necessitates certain infrastructure like water, electricity, and transport, The Marimaca Copper Project has easy access to all of the above. Accessibility coupled with a simple open pit design offers a low-risk / high reward project with a low capital cost to production.

Recently appointed president, director, and chief executive officer (CEO), Hayden Locke, is passionate about moving Marimaca towards construction, and ultimately production. The management team of the Marimaca Copper Project also includes Luis Albano Tondo, serving as chief operating officer (COO). Tondo has been a part of the team since June 2017 and brings almost 30 years of mining engineering experience to the table. Tondo’s experience has mainly been in Latin America at mid-tier copper and gold producers.

The preliminary economic assessment (PEA) of the Marimaca Copper Project is at the forefront of the industry with a pre-production capital cost of USD$ 285 M or approximately USD$ 7000 per ton of capital intensity. With numbers like these, The Marimaca Copper Project is placed in the lowest decile (ten percent) of the global copper development universe. In addition, the all-in sustaining cash cost of USD$ 1.29 per pound of copper, places them in the lowest fifteen percent on the industry cost curve, according to leading energy research and consultancy, Wood Mackenzie.

The Marimaca Copper Project has a projected life of mine (LOM) of over 10+ years with an average production target of 40ktpa of grade A copper cathode in the first six years with an average of 36ktpa thereafter.

The very low combination of capital and operating cost places Marimaca Copper in a position where its post-tax net profit value (NPV) is over USD$ 0.5 B. This NPV equates to a net asset value (NAV) of over ten dollars compared very favorably to its current share price, which was at USD$ 4.40 at the time of writing.

With its impressively low capital and operational costs, Marimaca may be able to fulfill its promise of making game-changing discoveries and becoming a copper producer.

Enduro Metals

In the heart of British Columbia's Golden Triangle, we find the second company on our watch list.

Enduro Metals has a simple yet ambitious objective, to become the top-tier exploration company unearthing major discoveries in British Columbia's Golden Triangle. The Golden Triangle is known for its world-class mineral deposits and the hosting of multiple successful mines.

Enduro Metals hold one of the largest junior land positions in the Golden Triangle with its 648km2 Newmont Lake property. This property contains at least four large and distinct mineralized systems. The geology, exploration results, mineralization, and location of these mineralized systems align with some of the richest deposits situated in the Golden Triangle. The company, run by the young and determined CEO, Cole Evans, is a step above its competitors with its tech-savvy and next-generational approach to exploration.

Evans first became involved on the geological side of the project in the fall of 2018, with a private company he owns, HEG & Associates Exploration Services Inc. (HEG), which is also the largest shareholder in Enduro Metals. Evans initially invested CAD$ 150,000 of his own money. He was impressed with Enduro Metals at that stage and continued to invest throughout 2019. In the fall of 2019, Evans identified the necessity and saw the potential in renovating Enduro’s management team. He decided to invest more time and capital and so became Enduro’s majority shareholder and CEO.

This corporate takeover led Evans to rebuild the company and generate what is now Enduro Metals.

The innovative management team includes names such as Malcolm Davidson, the chief financial officer (CFO), and Dylan Hunko, the chief operating officer (COO). Davidson is a dynamic corporate executive with nearly 20 years of experience in the operation, financing, and development of Toronto- and New York-listed stock exchange companies. Hunko, the co-founder of HEG, has worked closely with Evans for many years and brings with him extensive exploration experience of the Golden Triangle

The board of Enduro Metals is comprised of individuals such as David Watkins. Watkins is a well-known name in mining circles with more than 45 years of experience in building and managing mining companies. Watkins is familiar in copper circles through his time spent as the president of Minnova Inc that was later acquired by Inmet Mining. Rob Mc Ewen, from McEwen Mining Inc., also forms part of this dream team as the second-largest stakeholder in Enduro Minerals.

Evans has been very clear about his short-term goals, associated with high-grade near-surface gold. Recent lab results however show broad bulk tonnage deposits of approximately 1% Copper. Enduro Minerals released a press statement on the 18th of October 2021 where it reported a new alkalic porphyry system at its Newmont Lake project. These results confirm a new copper-gold porphyry discovery in British Columbias’ Golden Triangle, with further results pending.

The share price of Enduro Metals at the time of writing was CAD$ 0.22 with a market cap of CAD$ 46.25 M. With this bright young technical team, backed by industry veterans such as Rob McEwen, the words of Cole Evans ring in our ears,

“We know a lot of other things going on at the property and that whole story is getting tied together and is going to be shown to people.”

We are excited about those “other things” and a future where Enduro Minerals announces its Copper plans.

Chakana Copper

The Canadian-based Chakana Copper, through its Peruvian subsidiary, Chakana Resources S.A.C. has a straightforward objective, to find and advance mineral projects to an economic resource within a single commodity cycle for further development by mid-tier and/or major mining companies.

The company’s sole asset, the Soledad Project, was acquired in February 2017 under a 100% purchase option agreement with Condor Resources. The project is based in the Ancash province of Central Peru forming part of the Ticapampa-Aija Mining District in the Cordillera Negra. This region is by no means a stranger to mining, with various other mining operations being found there.

The high-grade Soledad project boasts numerous high-grade quartz-tourmaline-sulfide breccia pipes that crop out at the surface. Twenty-three mineralized breccia pipes have been confirmed to date with ninety-two exploration targets in total. The highlights of the first five holes include copper (Cu) percentages ranging from 0.39% Cu up to 2.41% Cu and copper equivalent percentages (Cu-Eq) ranging from 2.87% to 12.37%. The breccia pipes form a cluster within 4 km2 and are spaced between 176m and 625m with a vertical relief between the pipes of over 500m. Drilling on the breccia pipe has confirmed a vertical extent of mineralized breccia from surface to 490m of depth. It is speculated that the pipes extend much deeper. A total of 26,850m of drilling has been completed in 2021, with the objective of this drill program being to complete resource definition by drilling on six breccia pipes, where permits are in place.

The strong management team of David Kelley (CEO, president, and director), Xavier Wenzel (CPA & CFO), and Mario Chirinos, the general manager (GM) of Peru, have 30+ years of experience in mining, 20+ years in finances, and 15 years of legal experience. The executive management team and board have a proven track record of success in the minerals industry ranging from raising capital, exploration endeavors, discovery, development, and monetizing the asset through divestment. The inclusion of Gold Fields, one of the world's largest mining firms, as a cornerstone partner adds to the company’s strong capital structure.  

The treasury of Chakana Copper is also looking strong, with CAD$ 4.75 M in the bank. This amount is sufficient to allow Chakana Copper to finish its resource estimate and get it published to market. Chakana Copper has also brought in Andrew Foley, the chief geophysicist of Gold Fields, to assist in orientation surveys. Foley is implementing new geophysical approaches such as gradient array-induced polarization. Chakana Copper has identified 110 targets where further exploration will be conducted. The new geophysical approaches coupled with blind drill targets will no doubt add to the future success story of the Soledad Project.

With the impending increase in demand for copper, a Market Cap of CAD$ 60.2 M, and a share price still low at CAD$ 0.56, Chakana may be poised to grow into a development project for high-grade Cu, Au and Ag perfectly positioned for the global copper shortage.

Western Copper and Gold

Our final company on this watch list is New York and Toronto stock exchange-listed Western Copper and Gold. The history of Western Copper and Gold stretches as far back as 1996 where Western Copper holdings merged with Thermal Exploration. A few name changes in between and the acquisition of Lumina Resources and here we are today!  

Western Copper and Gold is currently developing its exclusive asset, the Casino Copper and Gold Project in the Yukon district of Canada. The Casino Copper and Gold Project is set to deliver 21Moz of gold, and 11Mlbs of copper over a staggering 47-year life of mine. The company president and CEO, Paul West-Sells, is excited for what this project may become in the future.

Most recently Rio Tinto has joined the Casino Project as a strategic investor, focusing on the technical, regulatory, and community aspects of the project. Rio Tinto will appoint a member to the project technical team and appoint one director to the company, should they increase their ownership from 8% to 12.5%

The team of Western Copper and Gold includes Paul West-Sells, president and CEO as well as Ken Williamson, a former investment banker with extensive board experience, serving as director and interim chairman. Varun Prasad serves as the chief financial officer, Cameron Brown as the vice president (VP) of engineering, and Shena Shaw as VP of environmental and community affairs.

Some setbacks have slowed the project's development. One setback is the legal requirement that the Casino Project proposal undergoes a panel review. This panel review is the highest level of environmental and socio-economical assessment under the Yukon Environmental and Socio-economic Assessment Board (YESAB). Western Copper and Gold intend to submit an environmental and socio-economic effects (ESE) statement by December 2021 to YESAB, with the primary driving factor being a feasibility study conducted by M3 Engineering & Technology Corporation of Tucson, Arizona. The principal objective of the feasibility study will be to demonstrate positive economic indicators for the Casino Project.

The Casino project has been in development since 2008 and a preliminary economic assessment (PEA) has been released this year. The PEA boasts a payback period of 3 years with a net profit value (NPV) of USD$ 3.62 B pre-tax. The capital cost associated with the development of the Casino Project as a traditional open-cast mine is set to be $3.25 B. The capital cost includes the total project development including power generation and all associated infrastructure. Adding further to the impressive PEA is a cash flow of $965 M per year over the first four years, through gold heap leaching the first two years. Column testing on various lithology samples has indicated a potential gold recovery of 70%.

The Casino Project is one of the largest copper-gold projects in Canada and in combination with the PEA and the creditability of Rio Tinto and its investment, the Casino project is already making waves in mining circles.

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