The Coming Copper Crunch: Why Supply Constraints Should Boost Prices and Equities

• Copper prices are currently weak around $3.73-$3.75 per pound due to a strong dollar and weak Chinese economic data
• Copper supply facing structural pressures like declining grades and delays in new projects coming online
• Highlights some copper explorers and developers with strong recent drill results, but cautions valuations may already reflect potential
• Notes mispricing opportunities in some juniors like QC Copper and Gold despite sideways trading as fundamentals remain strong
• Overall thesis is copper supply constraints over the next decade should drive commodity price increases benefitting copper equities

Supply Curbs Signal Pricing Tailwinds for Copper

Copper prices have softened in recent weeks, dipping below $3.75 per pound in January 2023. Concerns over slowing growth in China and a surging US dollar have weighed on the red metal. However, profound supply-side pressures building in the copper market point to a coming crunch over the next decade that should propel prices higher. With few new large deposits being discovered and existing mines facing declining grades, annual global mined copper production growth is set to drop well below the 3% rate seen over the past 30 years. This backdrop makes a compelling case for investors to gain exposure now to select copper mining equities before fundamentals drive repricing across the sector.

Chile and Codelco Highlight Supply Issues

Chile, which produces over a quarter of the world's copper, has seen output from state-owned miner Codelco drop to its lowest level in 25 years. The company's chairman, Juan Benavides, stated in January that "the drop in production is due to the natural and expected decline in ore grades at our structural projects.” Codelco’s structural copper projects have faced delays from challenges like community opposition and funding shortfalls.

Chile’s National Copper Commission (Cochilco) also put out a sobering 10-year forecast for the country’s production. Growth is now projected to average just 1.7% annually from 2023-2032, a downgrade from prior estimates. The report notes “Compared with last year’s 10-year forecast, due to the delay of projects under construction, Chilean copper production will grow at a slower rate this decade.” Several major projects have even fallen off the 10-year horizon for the commencement of operations.

This trend of declining quality resources and execution risks slowing supply growth is playing out globally. Mining major Anglo American saw its copper production rise only 2% last year, while BHP posted a slightly better 7% year-over-year increase. However, meeting incremental growth beyond current expansion plans will prove increasingly difficult for the world’s largest diversified miners. Juniors and mid-tier copper developers will face even greater hurdles in bringing new greenfield deposits online.

Explorers Uncover New High-Grade Hits

Despite the challenges, junior explorers continue searching the globe for the next generation of copper resources. Several companies announced promising high-grade drill results in January 2023.

Canadian explorer NGEx Minerals intercepted a remarkable 26 meters of almost 26% copper equivalent at its Los Helados project in Chile's Andes mountains. NGEx President Wojtek Wodzicki commented on these exceptional findings:

"Our second campaign of drilling at Los Helados is well underway and we’re excited about these initial results. Not only are we demonstrating the size and continuity of our new high-grade discovery but we’re beginning to understand the orientations of the zones and the overall deposit geometry.”

While Los Helados has world-class potential based on early drilling, investors must carefully weigh the risks around developing such a complex, high-altitude deposit. Similarly impressive intercepts often fail to become mines.

Other explorers uncovered new zones closer to infrastructure in more mining-friendly jurisdictions. American Eagle Gold hit 302 meters of over 1% copper equivalent at its NAK copper-gold project in Canada's British Columbia. Arizona Sonoran also extended mineralization in the shallow oxidized zone of its Cactus project in Arizona. Results like these increase the probability of building harvestable resources to feed future supply deficits.

Mispricing Opportunities Among Developers

In addition to explorers defining emerging copper resources, select developers offer mispriced opportunities to gain leverage from rising copper prices. QC Copper & Gold stands out with its Opemiska project already holding over 12 billion pounds of copper near existing infrastructure in mining-friendly Quebec. Yet the company trades at a modest C$23 million valuation. As QC advances Opemiska toward a construction decision over the coming years, its market capitalization fails to reflect the asset’s fundamentals.

Pan Global Resources offers similar upside potential from its early-stage Escacena project in Spain. The past-producing copper-gold mine returned promising grades of 1.5% copper and 2.6 grams per tonne of gold from recent drilling by Pan Global. As the company targets expanding and better defining this mineralization, its C$50 million valuation leaves substantial room for growth.

NGEx Minerals

This exploration company continues drilling promising high-grade copper zones at its Los Helados project in Chile's Andes Mountains. NGEx recently reported 262 meters of 26% copper equivalent. However, considering the project is located at a high altitude with complex mineralogy, there are significant obstacles to development despite spectacular early drill intercepts. NGEx offers a major upside on success, but investors must weigh the risks inherent in all exploratory plays.

American Eagle Gold

Navigating a mining project through completion in British Columbia holds simpler logistics than in the high Andes. With that advantage, American Eagle has uncovered long intervals over 1% copper equivalent, like a recent 302-meter intercept.  The next round of drilling could validate American Eagle's Nik project as an economically viable copper deposit. Further success would ratchet future valuation considerably higher.

QC Copper and Gold

With over 12 billion pounds of resources and numerous completed studies, QC Copper's Opemiska project should trade substantially higher than its current $25 million market value. As permitting and other hurdles clear toward production decisions, QC's stock holds appeal as a mispriced pure copper developer play.

Pan Global Resources

Assays of 1.5% copper and 2.6 grams/ton gold at Escacena in Spain offer promising debut numbers on Pan Global's latest target. With multiple zones still requiring drill tests, further high-grade results could drive material resource growth. Investors must budget patience with Pan Global still early in the discovery curve at Escacena.

Arizona Sonoran Copper

Intercepts of 2%-plus copper extended mineralized zones at Arizona Sonoran's Cactus project. Encountering deeper primary sulfide copper outside oxide ore drives additional exploration potential, for which Arizona Sonoran holds both time and cash runway now with Sumitomo Metal as a project partner.

The Investment Thesis for Copper

• Structural supply deficits from declining grades and project delays should drive copper prices materially higher this decade
• Select junior developers to hold assets substantially undervalued compared to resources and advancement potential
• Targeted exposure among explorers in mining-friendly jurisdictions can provide outsized lift from new discoveries
• Diversified portfolio approach is recommended given elevated risk levels for individual companies

In summary, while macroeconomic issues may periodically weigh on copper prices, the clear trend toward supply contractions sets the stage for a coming copper crunch. Investors should exploit mispriced opportunities among certain copper equities to position for the metal’s next structural bull market. Those able to identify companies poised to expand resources or advance projects in these conditions stand to realize outsized returns as positive supply-demand fundamentals attract generalist interest back to the sector.