The Copper Bull Market - Why Supply Constraints Could Supercharge Prices & How to Profit

• Copper prices have reached $4.31/lb, but experts believe $8-10/lb may be needed to incentivize new production due to rising demand and constrained supply.
• Copper demand is driven by electrification, renewable energy, EVs, and technology, while supply is limited by aging mines and lack of new large-scale projects.
• Companies discussed this week includes Entrée Resources, McEwen Mining, Pampa Metals, Emerita Resources, and Metals Acquisition.
• Investors should be selective, focusing on companies with world-class discoveries, strong management, and projects in favorable jurisdictions, while being mindful of risks.
• The copper market appears poised for a sustained bull run, offering significant upside potential for investors who can identify well-positioned companies.

The copper market is experiencing strong demand fundamentals, with prices recently reaching $4.31/lb or over $9,000/ton. However, industry experts believe incentive prices for new copper development may need to reach $8-10/lb or $15,000-$20,000/ton. This article examines the supply and demand dynamics underpinning the bullish copper market and profiles several promising exploration and development companies discussed by Merlin Marr-Johnson.

Copper Bottomed, Episode 14, with Merlin Marr-Johnson

Supply Constrained as Demand Poised to Surge

Copper has seen steady 3% annual demand growth for decades, driven by electrification, renewable energy, AI, and high-tech applications. However, supply is increasingly constrained. Many of the world's largest copper mines are aging, with several major operations dating back to the early-to-mid 20th century. A burst of new mine development occurred from 1990-2010, spearheaded by Western companies taking advantage of historically low interest rates. However, the past 15 years have seen limited new large-scale mines despite ultra-low rates, with Chinese companies leading the handful of new projects. Marr-Johnson notes that "despite the historic low interest rates, [Western companies] haven't been able to bring new copper projects into production because the return hasn't been there." This points to growing geological challenges in finding and developing economic deposits.

Promising Copper Exploration & Development Companies

Marr-Johnson profiles several exploration and development companies that have recently released drill results or other market-moving news:

• Entrée Resources (ETG) has a 20-30% carried interest in the massive Oyu Tolgoi mine in Mongolia being developed by Rio Tinto and Turquoise Hill. Recent drilling in the Hugo North extension returned long intercepts of 2-3.5% copper equivalent. Entrée currently has a $300M market cap and Marr-Johnson was very impressed by their presentation, despite an ongoing arbitration process with project partners. He notes "this looks really interesting" for investors comfortable with jurisdictional risk.
• McEwen Mining (MUX) owns 49% of the Los Azules copper project in Argentina, with drill intercepts up to 92m of 1.5% copper. However, Marr-Johnson expressed reservations about how the results were communicated, the project's complex ownership structure, and its Argentina jurisdiction.
• Pampa Metals (PM), a $14M market cap company, has reported 304m of 1% copper and 422m of 1% copper in initial drill holes at their Cerro Bondadoso project in Chile. Marr-Johnson was intrigued by these results but noted the early-stage nature of the project and jurisdictional risk.
• Emerita Resources (EMO) reported 69m of 0.7% copper and 0.9 g/t gold at their IBW project in Spain, but Marr-Johnson interpreted commentary from company executives as suggesting they are "still trying to find the key" and that "this doesn't work yet" despite the headline intercept and $100M market cap.
• Metals Acquisition (MTAL), a $900M company, reported 11-19m intercepts of 10-12% copper at their CSA mine in Australia. While impressed by the grades, Marr-Johnson noted these represent underground drilling 1-2 km below surface, raising questions about the deposit geometry and if the "pretty charming operational results" implied by the valuation are realistic.

The Investment Thesis for Copper

• Copper demand is poised for continued strong growth, driven by global electrification, renewable energy, EVs, and technology applications. Steady 3% annual growth is likely to accelerate.
• Copper supply is increasingly constrained due to aging mines, declining grades and exploration success, water issues, and heightened political risk in key producing regions. Geological challenges are limiting new Tier 1 discoveries.
• Much higher sustained copper prices will be needed to incentivize new production. Current prices around $4/lb are not sufficient. Experts see potential for $8-10/lb or higher.
• Despite the strong macro backdrop, copper equities have seen divergent and inconsistent share price reactions to exploration results. Larger, more liquid producers have outperformed, while juniors have lagged.
• Investors should be selective, focusing on companies with world-class discoveries, proven management teams, and projects in favorable jurisdictions. Ongoing due diligence is essential.
• Entrée Resources appears to be a compelling opportunity, with exposure to a Tier 1 asset at an attractive valuation. McEwen Mining and Pampa Metals are higher risk options for investors comfortable with Argentina and earlier-stage projects.

Key Takeaways

The copper market appears poised for a sustained bull market, driven by accelerating demand and structural supply constraints. Much higher prices will be needed to incentivize new production. For investors, the challenge is identifying companies with legitimate world-class discoveries and proven teams that can navigate the technical and non-technical risks. Selectively chosen copper equities offer significant upside potential, but ongoing due diligence is essential in a market where share price reactions have been inconsistent and at times counterintuitive. Entrée Resources stands out as a particularly compelling opportunity, while others like McEwen Mining and Pampa Metals may be considerations for risk-tolerant investors. Overall, the copper market appears to be in the early innings of a secular bull market.