The Case for Investing in Copper: A Critical Metal for the Future

• Copper demand is projected to grow significantly, driven by economic growth, electrification, and the transition to clean energy.
• Copper supply faces challenges, including declining ore grades, aging mines, and a lack of new major discoveries.
• The capital intensity of new copper projects is increasing, raising the long-term incentive price needed for development.
• BHP expects copper demand to grow by around 70% to over 50 million tonnes per year by 2050.
• Scrap recycling is expected to play an increasingly important role in meeting future copper demand.

Introduction

The copper industry is poised for significant growth, driven by increasing global demand for electrification and clean energy technologies. At the forefront of meeting this demand are several key development and exploration companies. Firms like Aldebaran Resources and McEwen Copper are advancing large-scale projects in Argentina, while NGEx Minerals is developing copper-gold assets in the Vicuña District straddling Chile and Argentina. In Chile, Hot Chili and Los Andes Copper are progressing significant copper projects, with Marimaca Copper also making strides in the country. Faraday Copper and Western Copper & Gold are focused on North American projects, aiming to secure domestic copper supply chains. In South America, Regulus Resources is exploring in Peru's established mining districts, while Solaris Resources and SolGold are at the vanguard of copper exploration in Ecuador, an emerging frontier for the industry.

These companies represent the next generation of potential copper producers, each playing a crucial role in addressing the anticipated supply-demand gap and supporting the global transition to a more electrified and sustainable future. Their success in advancing projects from exploration to production will be critical in ensuring adequate copper supply to meet the world's growing needs in the coming decades.

The Growing Demand for Copper

The demand for copper is projected to increase significantly in the coming years, driven by several key factors. Industry analysts estimate that global copper demand could grow by 50-70% by 2050. This growth is underpinned by three main drivers: traditional economic growth, the energy transition, and the digital revolution.

Traditional economic growth, particularly in developing economies, continues to be a major driver of copper demand. As countries industrialize and urbanize, they require significant amounts of copper for infrastructure, construction, and manufacturing. This trend is evident in the regions where companies like Hot Chili, Los Andes Copper, and Marimaca Copper are developing their projects in Chile, a country with a long history of copper production now seeing renewed interest and investment.

The energy transition is perhaps the most significant factor driving future copper demand. As the world moves towards renewable energy sources and transportation electrification, copper plays a crucial role. Wind turbines, solar panels, electric vehicles, and the associated charging infrastructure require substantial amounts of copper. This shift is driving interest in large-scale projects like NGEx Minerals' Los Helados project and McEwen Copper's Los Azules project, both of which have the potential to supply significant quantities of copper to meet this growing demand.

The digital revolution is also driving copper demand. The expansion of data centers, 5G networks, and the Internet of Things (IoT) rely heavily on copper for their electrical and data transmission capabilities. As our world becomes increasingly connected and data-driven, the demand for copper in these applications is expected to rise significantly. This trend underscores the importance of developing new copper sources, such as those explored by Solaris Resources and SolGold in Ecuador.

Supply Challenges

While demand for copper is projected to grow substantially, the supply side faces significant challenges. These factors contribute to a potentially tight market in the coming years, which could support higher copper prices and create opportunities for companies developing new copper projects.

One of the primary challenges is the declining grade of existing copper mines. As mines age, the concentration of copper in the ore typically decreases, requiring more material to be processed to produce the same amount of copper. This trend leads to higher production costs and can make it uneconomical for some mines to operate at lower copper prices. This situation creates opportunities for companies like Regulus Resources, which is exploring high-grade copper-gold deposits in Peru that could offer lower-cost production.

Another concern for future supply is the lack of major new copper discoveries. Despite increased exploration spending, the discovery rate for large, high-grade copper deposits has declined. This scarcity of new projects in the pipeline could lead to a supply gap in the medium to long term. Christian Easterday, CEO of Hot Chili, emphasizes this point, noting the limited options available in the market:

"There are not a lot of products available that juniors or independents are holding that are both meaningful to a major, or near term enough to be where a major miner weighs up the age-old discussion - brownfields versus greenfields and low capital intensity brownfields versus high capital intensity greenfields propositions for growth."

This scarcity of new projects, combined with the challenges faced by major miners in finding suitable acquisition targets or growth opportunities, further exacerbates the potential supply shortfall in the coming years.

Companies like Aldebaran Resources, with its Altar project in Argentina, and Faraday Copper, developing the Copper Creek project in Arizona, are working to address this gap by advancing significant new copper resources.

The development of new copper projects also faces increasing challenges. These include rising capital costs, longer permitting timelines, and growing environmental and social considerations. The capital intensity of new copper projects has been steadily increasing, with recent projects requiring over US$25,000 per tonne of annual production capacity, compared to around US$7,000 per tonne in the early 2000s. This trend highlights the importance of projects like Western Copper & Gold's Casino project in Yukon, which benefits from existing infrastructure and could offer lower development costs.

The Role of Recycling

While primary copper production faces challenges, recycling is expected to play an increasingly important role in meeting future demand. Industry projections suggest that scrap supply could increase from around one-third of global copper supply today to about half by 2050. This growth in recycling can help mitigate some of the supply challenges but is unlikely to fully offset the need for new primary production from projects developed by companies like Hot Chili, Los Andes Copper, and Marimaca Copper.

Emerging Copper Producers

Several junior mining companies are working to bring new copper projects online to meet the growing demand. These companies offer investors potential exposure to the copper market through exploration and development projects.

Aldebaran Resources is advancing the Altar copper-gold project in Argentina. With a large resource base and ongoing exploration, Altar represents a significant potential future copper source. Similarly, McEwen Copper is developing the Los Azules project, also in Argentina, which is one of the world's largest undeveloped copper deposits.

In Chile, the world's largest copper-producing country, companies like Hot Chili and Los Andes Copper are progressing their respective projects. Hot Chili's Costa Fuego project benefits from its low elevation and proximity to existing infrastructure, potentially reducing development costs. Los Andes Copper's Vizcachitas project is one of the largest advanced copper projects in the Americas not owned by a major mining company.

Faraday Copper is focused on advancing copper projects in the United States, including the Copper Creek project in Arizona. As countries seek to secure domestic supply chains for critical minerals, projects in stable jurisdictions like the U.S. may attract increased attention.

In Ecuador, companies like Solaris Resources and SolGold are exploring and developing large-scale copper-gold projects. Ecuador has emerged as a frontier for copper exploration in recent years, with several world-class discoveries made.

These junior mining companies, along with others like NGEx Minerals, Western Copper & Gold, and Regulus Resources, represent the next generation of potential copper producers. Their projects could play a crucial role in meeting future copper demand, and their successful advancement could provide significant returns for investors.

Copper Price Dynamics

The interplay between growing demand and supply challenges is likely to significantly impact copper prices in the coming years. While short-term price fluctuations can be influenced by factors, including global economic conditions and market sentiment, the long-term outlook for copper prices appears positive

Industry analysis suggests that the long-term incentive price for copper – the price needed to incentivize the development of new projects – has increased significantly. In the early 2000s, a copper price of around $2.50 per pound was sufficient to generate a 15% internal rate of return (IRR) for new projects. Today, that figure is closer to $4.00-$4.50 per pound, reflecting the higher capital intensity and challenges of developing new copper mines.

This rising incentive price provides a potential floor for long-term copper prices, as new supply will be needed to meet growing demand. If prices remain below this level for an extended period, it could lead to underinvestment in new projects and eventual supply shortages, which would likely drive prices higher.

Hayden Locke, President and CEO of Marimaca Copper, provides insight into the current market dynamics:

"Every mining company that's diversified wants more copper in their portfolio, but the actionable options are very thin on the ground. The things that they can actually comfortably invest in that they feel can be brought into production at these prices are very thin."

The potential for higher long-term copper prices bodes well for the economics of projects developed by companies like NGEx Minerals, Aldebaran Resources, and McEwen Copper. These companies are advancing large-scale projects that could be well-positioned to benefit from a higher copper price environment.

Environmental, Social, & Governance (ESG) Considerations

As with all mining activities, copper production comes with environmental and social considerations. However, copper's critical role in the transition to clean energy provides a compelling ESG case for the metal. The carbon emissions avoided through copper's use in renewable energy and electric vehicles far outweigh the emissions associated with its production.

Moreover, many of the junior mining companies mentioned earlier are incorporating sustainable practices into their project designs from the outset. For example, Hot Chili's Costa Fuego project plans to use seawater for processing, reducing its impact on local freshwater resources. Solaris Resources has implemented a participatory mining model at its Warintza project, working closely with local indigenous communities.

Investors should consider these ESG factors when evaluating copper investments, as projects with strong sustainability credentials may be better positioned to secure financing and approvals in the future.

Many of the companies mentioned are prioritizing ESG considerations in their project development. For instance, Regulus Resources has implemented community engagement programs at its AntaKori project in Peru, while Western Copper & Gold has been working closely with First Nations groups in Yukon. Marimaca Copper has designed its project with a focus on minimizing water use in Chile's Atacama Desert.

Risks & Challenges

While the long-term outlook for copper appears positive, investors should be aware of potential risks and challenges. These include:

• Short-term price volatility: Copper prices can be volatile in the short term, influenced by factors such as global economic conditions, trade tensions, and currency fluctuations.
• Project development risks: Many of the junior mining companies mentioned are still in the exploration or development phase. There are inherent risks associated with bringing new mines into production, including technical challenges, permitting delays, and cost overruns.
• Geopolitical risks: Copper projects are often located in jurisdictions that may carry political or regulatory risks. Changes in government policies or regulations can impact project economics and timelines.
• Technological disruption: While unlikely in the near term, potential technological breakthroughs in areas such as material science could impact copper demand in the long run.
• Macroeconomic factors: A global economic slowdown could temporarily reduce copper demand, impacting prices and the viability of new projects.

Investment Options

Investors interested in gaining exposure to copper have several options:

• Major diversified mining companies: Large, established miners offer exposure to copper along with other commodities, providing some diversification.
• Junior mining companies: Companies like those mentioned earlier (Aldebaran, McEwen Copper, NGEx Minerals, etc.) offer potentially higher returns but come with increased risk.
• Copper ETFs: Exchange-traded funds that track copper prices or baskets of copper-related stocks provide a more diversified approach to investing in the sector.
• Copper futures and options: These financial instruments allow for direct exposure to copper prices but require a higher level of market knowledge and risk tolerance.

Investors interested in junior mining companies have a range of options to consider. Companies like Solaris Resources and SolGold offer exposure to the emerging copper frontier in Ecuador, while Faraday Copper and Western Copper & Gold provide opportunities in North America. For those interested in South American copper development, firms such as Aldebaran Resources, McEwen Copper, NGEx Minerals, Hot Chili, Los Andes Copper, Marimaca Copper, and Regulus Resources offer various stages of project development across Argentina, Chile, and Peru.

The Investment Thesis for Copper

• Growing Demand: Copper demand is projected to increase by 50-70% by 2050, driven by economic growth, electrification, and clean energy transition.
• Supply Constraints: Declining ore grades, lack of new discoveries, and increasing project complexity create potential supply shortages.
• Rising Incentive Prices: Higher capital intensity for new projects supports a higher long-term copper price floor.
• Critical for Clean Energy: Copper's essential role in renewable energy and electric vehicles aligns with global sustainability goals.
• Multiple Investment Options: Investors can gain exposure through major miners, junior explorers, ETFs, or futures, catering to different risk appetites.
• Potential for Higher Prices: The combination of growing demand and supply challenges could lead to sustained higher copper prices in the long term.
• Emerging Producers: Junior mining companies offer high-growth potential as they develop new copper projects to meet future demand.
• Recycling Growth: Increasing importance of copper recycling presents opportunities in the circular economy.
• Geopolitical Importance: Copper's critical status may lead to increased government support for domestic projects in some jurisdictions.
• Long-Term Mega Trend: Copper is positioned at the intersection of multiple long-term global trends, offering sustained investment potential.

The copper market is poised for significant growth in the coming decades, driven by global megatrends such as the energy transition and continued economic development. While supply challenges exist, they create a potentially favorable environment for copper prices in the long term.

For investors, copper offers exposure to these global trends and the potential for attractive returns. However, as with any investment, thorough due diligence is essential. Understanding the specific drivers of copper demand, the challenges facing supply, and the risks associated with individual companies or projects is crucial for making informed investment decisions.

As the world continues its march towards a more electrified and sustainable future, copper is set to play a starring role. For investors willing to navigate the complexities of the market, copper presents a compelling opportunity to participate in this global transformation.