Metals Supercycle Investing: Copper Market is Heading for a Supply Crunch

• Mine supply of copper is forecast to peak in 2026 before declining, while demand continues rising driven by electrification. This points to a potential supply crunch.
• The project pipeline is at multi-decade lows and significant investment, estimated at $120 billion over 10 years, is required to fill the looming supply gap.
• Major mining companies like Barrick and Newmont are positioning for copper exposure through investments and joint ventures.
• Developing new mines involves major capital requirements, permitting hurdles, and cost overruns, as evidenced by the Quebrada Blanca project example.
• Arizona Sonoran, Valhalla Metals, Benton Resources, and Imperial Metals recently reported promising but early-stage drill results from copper exploration projects.

The copper market is facing a looming supply crunch in the coming years, even as demand for the red metal continues to increase, driven by decarbonization and electrification trends. This dynamic is expected to underpin higher copper prices going forward, presenting potential opportunities for investors in copper mining companies. In a recent industry discussion, Merlin Marr-Johnson of the Copper Bottomed series on the Battery Show provided an in-depth analysis of the copper market fundamentals and outlook. He also reviewed recent drill results announced by several junior copper explorers.

Mine Supply Set to Peak in 2026

Marr-Johnson highlighted forecasts indicating that the global mine supply of copper is expected to peak in 2026 at around 25 million tonnes, before declining in subsequent years. This outlook reflects limited new projects coming online to replace depleting reserves at existing mines.

As Marr-Johnson explained, "The project pipeline is at the lowest level in decades despite higher prices...there are long permitting timelines and lack of investment."

He noted that while some new committed mine production will add 3.1 million tonnes by 2026, well-respected research unit CRU estimates another $120 billion in investment is required over the next decade to fill the looming supply gap. To put this figure in perspective, Marr-Johnson said that "if the average copper mine requires $5 billion in investment, then CRU's estimate means we need 24 of those big new mines to come into production over the next 10 years to fill the gap. It's just so hard to see where that is going to come from."

Demand Growth Remains Robust

At the same time as mine supply peaks, Marr-Johnson noted that copper demand is expected to continue growing, driven by electrification, urbanization, and rising living standards in the developing world. He suggested the baseline demand growth case is solid, although he expressed some doubts about the most aggressive demand projections related to renewables and electric vehicle adoption, given recent cost inflation challenges.

Still, Marr-Johnson emphasized that "the more we electrify, the more our population comes out of poverty...that is going to be a huge copper demand pull going forward." He concluded that "the demand side is robust, [while] the supply side is weak, especially from three years out."

Industry Players Positioning for Copper Exposure

In light of the favorable supply-demand outlook for copper prices, Marr-Johnson noted major mining companies appear to be positioning themselves to gain copper exposure.

Examples he cited included Barrick Gold's recent $24 million investment into junior explorer Hercules Silver on the back of an exploration discovery, and Newmont CEO Tom Palmer repeatedly emphasizing copper in a recent interview. Marr-Johnson also highlighted a new exploration joint venture in Chile formed between Rio Tinto and local producer Codelco.

"It shows that the major mining companies, whether they are gold or base metal companies, are really focused on copper," Marr-Johnson remarked. "When I spoke with Mark Bristow [Barrick CEO]...he said give me a call if you think you’ve got a target which can host 5 million tonnes of contained copper. That’s an absolutely enormous deposit."

Project Costs and Timelines Creating Hurdles

However, Marr-Johnson explained that rising project costs and long development timelines pose hurdles to bringing new copper supplies online. He highlighted ongoing cost overruns and delays at Teck Resources' Quebrada Blanca Phase 2 copper mine expansion in Chile.

The project's capital cost has already increased from an original $5.2 billion budget in 2016 to $8.8 billion currently. As Marr-Johnson detailed, "50% of the increase is due to change in scope...this always kills the budget of these projects." He emphasized, "Remember how much effort is required to produce copper."

The Quebrada Blanca example underscores the challenges ahead to develop the 24 major new mines estimated to be required over the next decade to fill the looming supply gap.

Junior Explorers Report Promising Drill Results

Shifting to recent drilling results from junior explorers, Johnson reviewed highlights from several companies, including:

• Arizona Sonoran Copper - Reported a 165-meter interval grading 1.97% copper from infill drilling at its Parks/Salyer deposit in Arizona. Johnson noted this is a "great company with a good asset," although he remarked the "news release was a right dog's dinner" due to confusing drafting.
• Valhalla Metals - Released results from maiden drilling at its Sunshine project in Alaska, including 21 meters at 6.8% copper equivalent. However, Johnson critiqued the company's use of copper equivalents for exploration results, noting they incorporated significant zinc value and other assumptions.
• Benton Resources - Reported what Marr-Johnson called "excellent copper grades" from initial drilling at its Great Burnt project in Newfoundland, including intervals up to 8% copper. He welcomed the company's plan to expand the current drill program to 4,000 meters.
• Imperial Metals - Drilled 3% copper over 165 meters at its Whiting Creek prospect in British Columbia, near its formerly producing Huckleberry mine. Johnson said the result is at the reserve grade of the past producer and further high-grade discoveries could potentially help restart the mine.

Overall, Marr-Johnson concluded by calling for junior explorers to improve the clarity of their news releases for investors. However, the promising drill results help illustrate that new discoveries will be needed to feed the development pipeline and meet rising copper demand in the face of declining mine supply.

The Investment Thesis for Junior Copper Explorers

For investors focused on the promising copper supply/demand fundamentals, junior explorers offer leveraged exposure to potential new discoveries required to feed future production growth. Promising drill results from early-stage exploration projects, such as those reported in recent months, provide an indication of potential. Investing in a diversified portfolio of explorers with projects in favorable mining jurisdictions can help mitigate the risks inherent in early-stage drilling.

As major mining companies demonstrate an appetite for gaining copper exposure, securing a foothold in prospective exploration grounds ahead of new discoveries could potentially allow well-positioned juniors to realize substantial returns through buyouts or joint venture partnerships. With copper prices expected to remain well supported in the medium term by declining mine supply and continued demand growth, the fundamental outlook appears favorable for investment into the next generation of copper production.