Copper Industry Braces for Major Supply Chain Shift, End Users Scramble to Secure Supply

• Copper miners predict major changes to the industry's supply chain as end users like carmakers and utilities seek to secure supply through more direct partnerships and deals with mining companies.
• Copper supply is predicted to fall significantly short of demand by 2030 due to challenges in building new mines, which could lead to shortages and price spikes.
• Some debate remains on the severity of the predicted supply gap, with options like substitution and recycling potentially offsetting some demand.
• Ecuador plans to reopen its mining cadaster for the first time since 2018 in an effort to combat illegal gold mining, which has been a persistent issue fueled by criminal organizations. New president hopes updating the mining registry will help better regulate the sector ahead of the February 2025 elections.

The global copper industry appears on the cusp of a significant transformation, as major end users of the crucial metal seek to lock in future supply amid predictions of looming shortages. Carmakers, renewable energy developers, utilities and other big copper buyers are starting to pursue more direct partnerships with mining companies to safeguard access to affordable copper in the years ahead.

"Ultimately those that will be utilising the copper — whether that is for charging stations, grid buildout or vehicles — will start to get more interested in how they access this copper," predicts Jonathan Price, CEO of Canadian copper producer Teck Resources. "We will start to see more interest in direct linkages between the miners and those ultimate end users — we are starting to see and hear more of that."^[1]_‍

This potential upheaval in copper's traditionally fragmented supply chain was foreshadowed by BHP's recent failed £39bn takeover bid for rival Anglo American, as well as copper prices spiking to record highs above $11,000 per tonne earlier this year. Those developments highlighted the precarious future copper supply outlook, with Bank of America (BoA) predicting demand to outstrip supply by 5 million tonnes by 2030.

Demand Surge from Clean Energy Transition

BoA sees booming renewable energy, electric vehicle and electrical grid investments doubling copper's demand growth rate to 4% annually, up from the historical 2% rate. "Currently we are not of the view that we face a copper shortage in coming years...in 2013 there were predictions of supply gaps in 2023, but that's not what happened," counters Jimmy Hermansson, a procurement executive at Danish cable manufacturer NKT. "We have secured copper for our order backlog. Beyond that, it's speculative."

But most analysts and executives believe the writing is on the wall, after years of underinvestment in new copper projects that can take around 15 years to come online.

"I think we are heading into a world of serious supply constraints for copper," asserts Christopher LaFemina, analyst at Jefferies. "It's not like you can switch a flip to bring the capacity online."^[1]

Mining executives point to deteriorating ore grades, drawn out permitting times, high costs due to inflation and ESG considerations, and cautious shareholders prioritizing dividends over growth as key obstacles to building new large-scale copper mines.

"It's just getting harder and harder," laments Tristan Pascall, CEO of First Quantum, which saw its massive Panamanian mine recently shut down by government decree. "There's no easy jurisdiction now."^[1]

Industry Consolidation or Enhanced Collaboration?

The industry remains split on whether miners need to join forces into "supermajors" capable of shouldering massive projects on their own, embrace more partnerships and risk-sharing, or integrate more closely with customers to navigate the challenging landscape. The few precedents to date include EV maker Stellantis signing a novel copper supply deal with McEwen Copper to finance its Argentine project, and cable manufacturer Nexans vertically integrating its copper rod production.

"There's enough copper in the world — but the capacity for extraction is not increasing as fast as consumption," explains Vincent Dessale, COO at Nexans, which is targeting recycled copper to meet 30% of its needs as "the key" to navigating tightening primary supply.^[1]

For now, substitution and demand destruction act as key pressure valves on prices. China already uses more aluminum for long-distance power lines, with US producer Alcoa seeing potential for 1 million tonnes of extra aluminum demand from copper substitution. Anglo American strategist Paul Gait notes copper used in plumbing, accounting for 9% of demand, is "the easiest material to remove" if prices remain elevated.

However, with many analysts forecasting prices to reach new record highs later this decade as shortages materialize, the economic incentive for more direct partnerships from the copper industry's biggest customers will likely only intensify. "Copper is likely to go the direction of the battery metals," with miners seeking customer financing and offtake to get projects built, suggests Anglo's Gait. How quickly and successfully the industry adapt will be a key factor to watch.

Ecuador Aims to Tame Illegal Mining Ahead of Elections

Meanwhile, Ecuador's move to reopen its outdated mining cadaster for the first time since 2018 underscores the challenging jurisdictional risk environment miners face around the globe. Illegal gold mining funded by drug cartels has exploded across 19 of Ecuador's 24 provinces in recent years, ensnaring its formal mining sector in violence and corruption.

President Daniel Noboa has ordered government agencies to fully update the country's mining registry within 6 months, in an effort to distinguish illegal operations from authorized ones and enable law enforcement to target them. The 36-year old son of Ecuador's wealthiest man is aiming to demonstrate progress on regulating the mining industry before the country's February 2025 elections.

"Criminal organizations are reinvesting drug trafficking profits into this lucrative [illegal gold] trade, fuelling a violent struggle for territorial control," according to a report by Sofía Jarrín published in September. The illegal gold economy "not only escalates violence, extortion, recruitment, and contract killings but also enables the expansion of other illicit markets, such as the smuggling of mercury, weapons and drugs, further empowering the criminal groups guarding the mining enclaves."

With Ecuador sitting on an estimated 39 million ounces of gold reserves according to mining ministry data, the country's ability to effectively regulate its high-risk mining jurisdictions and attract formal investment will be important to bolstering global bullion supply in the years ahead. While the near-term focus is on gold, major miners like BHP and Newcrest Mining have also secured early-stage copper exploration projects in Ecuador, hoping it can eventually help fill the copper supply gap if well-governed.

Copper Mines in Action

Collective Mining

Collective Mining, backed by the team behind Continental Gold's $2 billion sale, looks to be onto another major discovery in Colombia with its Guayabales project. Positioned in an established 500-year-old mining camp contiguous to Aris Mining's multi-million-ounce Marmato mine, Guayabales has already delivered multiple grassroots discoveries since 2022, headlined by the large-scale Apollo and Trap targets. Both feature the potential for multi-million-ounce, high-grade gold-copper porphyry deposits and remain open for expansion. Colombia's Caldas region is underexplored despite excellent infrastructure and pro-mining sentiment, suggesting potential for a new mineral district capable of filling the project gap facing gold miners globally. With over $45 million in cash, aggressive drilling ongoing, a sustainability partnership model to strengthen community ties, and a number of earlier-stage targets yet to be drill tested, Collective appears poised for a steady stream of catalysts to further validate its exploration model and build upon its initial resource base. The management team's track record of value creation, including a well-timed exit, bodes well for investors able to establish a position ahead of the drills.

ATEX Resources

ATEX Resources' Valeriano project in Chile looks well-positioned to help fill the looming copper supply gap. With a significant resource already defined at attractive grades, including a recent discovery of a high-grade epithermal gold-copper zone, Valeriano has emerged as one of the largest undeveloped copper deposits not controlled by a major. The project's location along Chile's prolific copper belt, support from strategic investor Agnico Eagle, and an experienced management team highlight its potential to become a Tier-1 asset. Upcoming drilling aimed at further resource growth and economic studies should provide key catalysts for ATEX. As the copper industry braces for structural undersupply, projects like Valeriano that can offer meaningful scale, grade and a top mining jurisdiction are poised to attract increasing interest from acquirers and investors seeking exposure to copper's compelling long-term fundamentals.

Hot Chili

Hot Chili's Costa Fuego project stands out among potential new copper suppliers with its rare combination of large scale, low elevation and established infrastructure. Costa Fuego's Indicated resource of nearly 4 million tonnes of copper equivalent sets it apart from most juniors, while its low 740-meter average elevation and proximity to port access provide key cost and development advantages over high-altitude competitors. Securing maritime water rights and power connectivity further de-risk Costa Fuego by eliminating the need for expensive desalination and long-distance infrastructure. Hot Chili's plan to leverage existing port facilities marks another potential capital and operating cost saving. With a PFS expected later this year and further resource growth likely from ongoing exploration, Costa Fuego looks to be rapidly advancing toward development right as the industry faces a dearth of shovel-ready projects. Hot Chili's strong financial backing, experienced team and head-start on permitting suggest Costa Fuego is well-placed to be an early mover in helping fill the copper supply gap.

The three companies profiled each provide meaningful exposure to copper's attractive long-term supply-demand outlook. ATEX and Hot Chili's more advanced-stage projects in established mining jurisdictions like Chile offer a nearer-term path to potentially significant production, while Collective's earlier-stage but high-potential discoveries in Colombia provide attractive optionality for longer-term growth. Their experienced teams and strategic financial backing further strengthen each company's positioning to create shareholder value as the industry's desperation for new world-class copper assets intensifies.

Conclusion

The global copper industry appears poised for transformation, as looming supply shortages expected later this decade force end users to pursue more direct partnerships with miners to lock in supply. Booming demand from the clean energy transition is set to collide with acute mine supply constraints, likely requiring structurally higher prices to rebalance the market. While near-term economic headwinds have eased supply fears for now, investors seeking long-term exposure to a crucial metal for the energy transition should consider well-positioned copper miners and developers.

The Investment Thesis for Copper

• Copper demand is expected to significantly outstrip supply later this decade, with Bank of America predicting a 5 million tonne (15%) supply deficit by 2030
• Surging demand growth of 4% per year (double the historical 2% rate) is expected, driven by renewable energy, electric vehicles and electrical grid upgrades
• However, a lack of new mine development due to permitting challenges, high costs and deteriorating ore grades is limiting the ability to bring new supply online
• Elevated copper prices, potentially reaching new record highs, will likely be required to incentivize enough new production to meet demand

Key Takeaway

Investors can gain exposure through major diversified miners like BHP and Anglo American, pure-play producers like Freeport-McMoRan and First Quantum, or junior developers. Junior copper miners and developers offer investors higher risk, but potentially higher reward exposure to the looming copper supply gap. While major miners provide stability and diversification, junior companies are often more leveraged to exploration success and resource growth, which can drive substantial re-ratings in their share prices. Additionally, juniors with high-quality, scalable projects in attractive jurisdictions can become attractive acquisition targets for larger producers seeking to replenish their project pipelines, offering further upside to investors. Carefully selected junior copper companies with experienced management teams, strong balance sheets, and promising geological potential may offer outsized returns for investors able to tolerate higher risk.

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_References:

1. _{Dempsey, H. and Millard, R. July 2024. Copper miners predict industry overhaul as end users rush to secure supply. Retrieved from: https://www.ft.com/content/220ef9d2-df1e-4b93-b044-fb1957591428}
2. _{Mining.com News. November 2024. Ecuador to reopen mining register for first time in over six years. Retrieved from: https://www.mining.com/ecuador-revamps-mining-sector-with-national-cadaster-reopening/}