New Copper Discoveries Point to Supply Shortfall in 2024

• New copper deposits discovered in the Democratic Republic of Congo by Ivanhoe Mines - over 3 million tons of contained copper.
• Supply constraints emerging - smelters having trouble sourcing copper concentrate.
• Production issues at the Cobre Panama mine could impact the forecast surplus next year.
• Strong demand outlook based on renewable energy goals, stimulus spending, and moderating inflation.
• Drill results from junior explorers show potential but need more work to prove economic viability.

Copper prices have held steady lately around $3.69 per pound, supported by resilient demand growth and emerging supply constraints. In this 90-minute video transcript, Merlin Marr-Johnson, an economic geologist and mining analyst, provides his weekly insights into key developments shaping the copper market. The analysis covers major new discoveries, smelter capacity issues, production problems at a major new mine, demand outlook, and drill results from junior explorers. Marr-Johnston's perspectives offer useful takeaways for investors seeking to capitalize on the opportunities in the copper sector amid the current volatile markets.

Major New Copper Discovery in the DRC

The most consequential news last week came from Ivanhoe Mines, which announced a massive new copper discovery at their Kamoa-Kakula project in the Democratic Republic of Congo (DRC). Initial drilling results outline an indicated resource of 16 million tons grading 3.55% copper, plus an inferred resource of 154 million tons grading 1.89% copper. This equates to over 3 million tons of contained copper resources. The remarkably high grades are around 7 times the global average copper grade of 0.5%, which means exponentially less rock would need to be mined and processed to extract each ton of copper. If successfully developed, this deposit could be a generational low-cost, high-margin copper mine that transforms both Ivanhoe and the DRC's economy. However, the extremely remote location in the western DRC poses substantial infrastructure challenges in order to realize its potential.

Emerging Supply Constraints

Early signals are emerging that copper supply is having increasing difficulty keeping pace with downstream processing capacity. Smelters are reportedly struggling to source enough copper concentrates to meet demand, forcing them to offer enhanced terms and incentives to secure supplies from mines. Commodities giant Trafigura is actively helping Chinese smelters obtain sufficient copper concentrate imports. Chinese authorities are also facing pressure to relax tight restrictions on copper scrap imports as smelters scramble for feedstock. These dynamics suggest the refined copper market is much tighter than initially forecasted.

Major Production Problems at Cobre Panama

Serious production issues are surfacing at Cobre Panama mine in Panama, one of the world's largest new copper developments. Output is already being throttled back due to protests that are obstructing port access and blocking crucial deliveries of supplies, reagents and fuel. Lawyers surveyed on the escalating situation believe there is a significant chance Cobre Panama's mining license will ultimately be revoked, which could force the massive mine to shut down for 6-12 months. This would remove roughly 150,000 to 300,000 tonnes of expected copper supply next year, representing a large slice of the projected global 460,000 tonne copper surplus in 2023. These mounting problems reinforce that copper supply fundamentals appear tighter than analysts projected earlier this year.

Resilient Demand Outlook

On the demand side, government stimulus spending, infrastructure initiatives, and the global push towards decarbonization and renewable energy point to resilient copper consumption despite economic headwinds. Governments reaffirmed commitments to triple renewable power capacity by 2030 at the recent COP27 climate summit. Renewable energy systems require 4-5 times more copper per megawatt than conventional power, so this enormous growth will necessitate substantial copper volumes. Inflationary pressures also look to be moderating, which reduces the pressure on central banks to aggressively hike interest rates, offering some economic reprieve. Manufacturing and construction activity in top consumer China have also rebounded firmly from their slump earlier this year. So overall copper demand still looks robust, even if global economic growth decelerates.

Drill Results from Junior Explorers

Marr-Johnston examines early-stage drill results reported last week by several junior mining explorers. Pacific Ridge Exploration intersected some promising copper and gold grades at their project in British Columbia. However, excessively promotional language and overuse of metal equivalents made it difficult to objectively assess the actual significance of the results. Kodiak Copper also reported strong initial copper-gold intercepts from drilling in southern B.C., though not as spectacular as hoped after their eye-catching discovery hole last year. Aston Bay's drilling in Nunavut confirmed large near-surface copper mineralized zones, but doubtful if it can be economically mined in the remote Arctic region. Emerita Resources hit exceptionally high-grade copper-zinc-lead mineralization in drilling at their project in Spain, though more details were needed to fully evaluate the results. Pan Global Resources reported very encouraging shallow high-grade copper-tin intercepts in southern Spain, with excellent potential to expand the deposit further. Overall the juniors unveiled intriguing upside, but much more work is needed to demonstrate whether these early-stage exploration projects can become economically viable mines.

Investment Thesis for Copper

• New mine supply growth is clearly not keeping pace with copper demand growth, especially considering depletion at existing mines. New discoveries take well over a decade to advance into actual production.
• Substantial supply disruptions are likely in coming years considering aging mines, rising ESG pressures, political instability, permitting obstacles and deficits in exploration spending.
• The demand outlook remains very robust driven by global decarbonization initiatives, electrification of transport, and infrastructure mega-projects. Copper remains essential for nearly all renewable energy technology.
• Copper prices need to rise quite substantially from current levels to properly incentivize the enormous investment required to develop an adequate new mine supply. Current prices cannot support sizable new mine developments.
• Junior mining explorers offer exciting upside potential but also extremely high risks. Investors must carefully assess drill results, geology, jurisdiction, infrastructure and other factors. Most projects never become mines.

Copper market conditions appear to be tightening at a faster pace than initially anticipated. New supply is challenged on many fronts while demand drivers remain largely in place globally. These shifting dynamics are bullish for copper prices, despite economic uncertainty. While risks remain around economic trajectories and possible material substitutes, copper's absolutely essential role in decarbonization and electrification makes it an appealing target for long-term investors. Junior explorers may offer exciting upside potential but require extensive due diligence given the high risks. Overall, copper stands out as a compelling strategic investment in the challenging natural resource markets.