Copper Juniors Poised to Benefit from Energy Transition Tailwinds

• Copper is facing a looming structural supply shortage as demand rises due to the green energy transition
• Much higher copper prices are needed to incentivize investment in new copper mines and bring on new supply
• Major copper miners are holding off on new investments until the market is "screaming for it" due to high costs and risks
• Chile-focused copper junior Hot Chili has a strategic marine water concession that could supply multiple copper projects
• Consolidation is occurring among copper juniors as larger miners look for tier-1 assets to acquire

Copper: The Critical Metal Powering the Green Energy Transition

Copper is increasingly being recognized as the lynchpin of the global shift towards renewable energy and electrification. The red metal is a critical component in electric vehicles, wind turbines, solar panels, energy storage and transmission infrastructure. As the world races to reduce carbon emissions and combat climate change, copper demand is set to surge.

However, the copper mining industry is facing a major challenge in meeting this soaring demand. Years of underinvestment, declining ore grades, and a lack of new discoveries have set the stage for an imminent supply crunch. Without much higher copper prices to incentivize investment in new mines, the ambitious goals of the energy transition could be in jeopardy.

Structural Supply Deficit Looms

Market participants are finally starting to realize that there is a very material looming structural shortage in primary copper supply that's coming," explains Nicole Adshead-Bell, CEO of Cupel Advisory. "Primary production is an inelastic response to demand pressures and the only thing that makes the supply side rise materially is investment obviously in new mines. For that investment to occur you need a much, much higher copper price.

The copper price is at the beginning of a major upswing. For big decisions to be made investing billions of dollars into the ground, which is what we need to bring on new primary supply, the copper price has to be above $6. To be exposed to the equity exposure to those underlying commodity price movements, you have to be already invested, and willing to take some downside risk. We're at the very beginnings of what could be a parabolic rise in the copper price!

Incentivizing New Supply

Copper mining executives have become much more disciplined with capital allocation in recent years after being badly burned by cost blowouts during the last bull market. Despite the bullish demand outlook, they are holding off on major investments in new mines until the market sends a clear signal.

The leader of our industry, they're not getting incentivized to take on the risk to bring on new supply. They will be more willing to take on that risk when the copper price is materially higher than what it is today. This refers to comments by Glencore CEO Gary Nagle that the company will not bring on new supply until the market is screaming for it.

Capital expenditures by the copper mining industry are currently running at about half the levels of a decade ago, around $50 billion per year. This chronic underinvestment means few shovel-ready projects can be fast-tracked to meet rising demand. Robert Friedland, billionaire founder of Ivanhoe Mines, estimates the copper price may need to reach $7.50-$9 per pound to stimulate sufficient new supply.

The Water Advantage

One copper junior that appears well-positioned to help fill the supply gap is Hot Chili (TSXV:HCH). The company's low-altitude copper projects on the coast of Chile benefit from access to seawater for processing, eliminating a key risk for miners in the water-stressed Atacama region. Hot Chili had the foresight to secure a marine concession license nearly a decade ago after an extensive 8-year permitting process.

It's the only company within 150 km radius that made that decision. They have an existing license that can be expanded. There are also movements and encouragement from the Chilean government for companies to start working together, instead of seeing 5 desalination plants and 5 sets of piping.

Hot Chili's strategic water rights could help de-risk and expedite the development of multiple copper projects in the region. The company is already in discussions with several peers about potential water off-take agreements. Having a secured water source is likely to become an increasingly important consideration for major miners targeting acquisitions in Chile.

Consolidation Accelerates

As the copper supply crunch draws nearer, consolidation has begun to pick up steam in the junior mining space as players look to gain scale and improve economics. In March, Rupert Resources (TSXV:RUP) announced a deal to acquire a 70% interest in the Hirvi copper-gold project in Finland from B2Gold (TSX:BTO) for $102.8 million, consolidating a promising emerging district.

It's sensible consolidation. Once you have consolidation, you can start looking at your geological package more holistically. There's lots of opportunities that come from that.

With few tier-1 scale copper assets in stable jurisdictions globally, M&A activity is likely to accelerate. Major miners will be closely watching the junior space to identify the most attractive takeover targets to boost their project pipelines. The ongoing wave of consolidation could be a precursor to larger deals as the urgency to secure new supply increases.

The Investment Thesis for Copper

• Copper demand is set to surge due to its critical role in electric vehicles and renewable energy infrastructure
• Structural supply deficit looming due to years of underinvestment and lack of new discoveries
• Much higher copper prices are needed to incentivize new mine development, with forecasts as high as $9/lb
• Consider investing in well-positioned copper juniors in stable jurisdictions like Chile, Peru, Canada and Australia
• Juniors with access to key infrastructure like water and power have a significant advantage
• Expect accelerating M&A as the copper supply crunch draws nearer, focus on the most attractive acquisition targets

The world will need to mine significantly more copper to meet soaring demand from the green energy transition. However, a lack of investment in new supply over the past decade has set the stage for a major deficit to emerge. Copper prices will likely need to move significantly higher to incentivize the development of new mines to fill the gap.

For investors, having some exposure to copper makes a lot of sense to capture the upside from rising prices while also supporting the shift to a lower-carbon future. The key is to identify companies with quality projects in good jurisdictions that can be advanced toward production in a timely manner. Juniors who can position themselves as attractive acquisition targets for larger miners may offer the most compelling risk-reward proposition. As with any mining investment, thorough due diligence is essential.