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Reasonable Concerns Regarding a Copper Dip - In the Short Term
_Solid copper mine production from new or expanded operations is expected to push the market into surplus next year, before growth slows down in the second half of the decade.
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Higher mining output plus additional supply from a stockpile in Congo could further weigh on prices, which are already seeing pressure from weak demand and signs of a slowing global economy. Benchmark prices hit their lowest since Jan. 6 this week.
Macquarie currently expects 2023 global copper mine supply to increase by 2.8%, or around 600,000 tones, due to project ramp-ups and higher output at some existing operations.
JP Morgan sees global copper mine production rising by 2.6% in 2023, inclusive of a 5.5% disruption allowance, which is higher than usual this year due to social unrest in Peru. Analysts typically factor in loss of production from disruptions at 5% of total mined copper supplies.
The growth is driven by two projects: Quebrada Blanca in Chile and Quellaveco in Peru, with some others approaching completion after delays caused by the pandemic.
Additional supply will push the copper market into a surplus of 298,000 tonnes in 2024 after a deficit of 114,000 tonnes in 2023, the International Copper Study Group (ICSG) said on Friday.
Another source of supply is from a large amount of copper stored at Congo’s Tenke Fungurume mine (TFM), which was not exporting the metal for eight months due to a dispute between its shareholders.
After the dispute was resolved earlier this month, TFM, which produces up to 20,000 tonnes of copper per month, is likely to ship the stored metal to China over the coming months, broker Marex said.
Mine production growth is expected to slow down after 2025.
"After a period of solid mine supply growth in the nearer term, we project a major slowing of supply growth in the second half of the decade," Citi said.
Copper demand from China was expected to surge in early 2023 when the world’s leading metals consumer removed its strict Covid curbs, but growth has so far failed to meet initial expectations, pushing prices down.
Considering the facts mentioned above, it's important to remember that the case for the long-term copper bull still exists.
I highly recommend listening to Mining Stock Education's excellent interview with the exceptional Dr. Nicole Adshead-Bell (YouTube link below). As I have mentioned in previous posts, there are many reasons to remain a long-term copper bull; as Dr. Adshead-Bell suggests, investors might consider this dip a wonderful opportunity:
“In our sector [junior mining] it’s never different. And so its very, very predictable corporate behavior and investment behavior. It’s trying to having a layer of objectivity to understand where you are in that cycle and invest accordingly. And so when you start to see, I’ll call it ‘low-risk M&A’, that’s normally the sign that you are at the beginning of a sustained movement in the underlying commodity price and obviously those equities tend to follow that,” shared Dr. Adshead-Bell
Nicole Adshead-Bell is the Director of Cupel Advisory. She is a PhD geologist by trade and has worked in the resource sector for more than 24 years. Her roles within the sector have varied from analyst to M&A facilitator to junior resource company board member. In this interview, Nikki provides commentary on a number of topics such as the current M&A market, risk in the market, importance of selling and a few comments on Hot Chili and Bravo Mining.
YouTube
Expert Advice for Predictable Junior Mining Stock Profits with Dr. Nicole Adshead-Bell
“In our sector [junior mining] it’s never different. And so its very, very predictable corporate behavior and investment behavior. It’s trying to having a la...
@jennymanydots Thanks for the update, Jen.
Now you have to help us understand the investing implications of this relative to the jr explorer investment lifecycle you recently described so well (https://commonstock.com/post/e2988b1a-e922-4603-b61f-a1aee2697931).
If the majors' M&A arbitrage opportunity is the difference between the current valuations and development potential of jr projects and the NPV of production three to four yrs out, are there variables that they take into consideration that are perhaps not obvious from a retail perspective? In other words, what exploreco characteristics make them more or less attractive (or likely) acquisitions that aren't related to their present/potential resource discoveries?
I assume that, for any given play, these will vary depending on its plausible suitors, is it possible (or even necessary) to model specific buyout scenarios to develop real-world enterprise values?
That seems impossible in a lot of cases. The one that's top-of-mind is nickel, not copper: Canada Nickel Company (CNC.V). In a recent Crux Investing interview, the CEO mentions:
- the various deal structures available (Royalties, takeaway, etc.) that are possible
- with various players (sr. miners & royalty cos, obviously, but even auto OEMs looking to secure long-term battery supply chains) across
- their district-wide portfolio of exploration prospects.
Despite the kaleidoscope of moving parts (think mobile dancing above a crib), it's still possible that the 'M&A lens' has a specific hue that imparts differentiating contrast.
@gubbeen Thank you for the comments, Gubbeen. I'm afraid as you mentioned in your comments above - it's such a complex picture that it would be difficult to model any specific buyout scenarios. Let's look at the recent acquisition of ATAC by Hecla after they shunned a bid by Victoria Gold. Most retail investors were caught off guard by Victoria Gold's initial offer - perhaps because of this issue:
Use of the Beaver River watershed has been a live issue in recent years. The territorial government denied approval for a road accessing a gold deposit, and a lawsuit is still before the courts over mining exploration between the local First Nation, the Yukon government and a Vancouver-based mineral exploration firm.
Mining.com posted this article detailing Hecla's offer and you can see that the fine points (proximity to other assets, suitability for portfolio of current assets, extent to which exploration has been carried out, economics of the project, and potential roadblocks to be overcome - such as the road mentioned above - some teams are better equipped to deal with this), are usually beyond that of the average retail investor's scope of knowledge, but can make an acquisition appealing for a major:
The Rackla property – ATAC’s main asset – comprises two separate projects (Rau and Nadaleen), each with a distinct type of gold occurrences. The Rau project hosts the advanced-stage Tiger gold deposit containing measured and indicated resources of 4.5 million tonnes grading 3.19 g/t for 464,000 oz.
A 2020 preliminary economic assessment (PEA) outlined an annual output of 45,000 oz. for the Tiger deposit, giving the Rau project a pre-tax net present value (at 5%) of C$118.2 million and a 54.5% internal rate of return.
The Nadaleen project hosts a group of Carlins-style targets, the most advanced being Osiris, with an indicated resource of 5.5 million tonnes grading at 4.12 g/t for 732,000 oz. and inferred resource of 9.4 million tonnes grading 3.47 g/t for 1 million oz.
The Connaught property, another precious metals asset being added to Hecla’s portfolio, is located 65 km west of Dawson City. The project has historically been explored as a high-grade silver-lead-zinc-copper-gold vein prospect modelled after mines in the Keno Hill district.
Under the proposed transaction, Hecla would acquire all of ATAC’s issued and outstanding shares for C$0.14 each, payable in Hecla common stock, overtaking the C$0.12-a-share offer made by Victoria Gold in January 2023.
Shares of ATAC surged 42% by noon Toronto time to trade at C$0.14 following news of the Hecla deal. This gives the company a market value of approximately C$28.4 million.
“We believe the potential transaction will provide significant value to ATAC shareholders. Hecla is an ideal acquirer for the Rackla gold property, given its adjacent Keno Hill mining project and demonstrated commitment to the Yukon and its communities,” ATAC CEO Graham Downs said in a news release.
Hecla also intends to make a C$2 million strategic investment into a new exploration company that would hold the remaining copper-focused assets of ATAC, which include the Idaho Creek, Catch, Rosy and PIL projects. Hecla would have a right of first refusal to acquire all of the spinout company’s assets, as well as a number of units equivalent to 19.9% of the company’s equity.
“The spinout of a new copper-focused exploration company provides additional value to shareholders. With the foundation of our existing copper assets,” said Downs, adding that it is “well positioned” to aggressively explore for copper – a key critical metal – throughout BC and Yukon.
I'm afraid CNC.v is not one that I know well enough to share any insight on, but I did write in a previous post about "The Need for Nickel", as majors are most definitely on the hunt in the Ring of Fire. If you're an investor in the company, I would suggest performing some thorough DD on how their properties are effected by First Nation's views on development in the area as that seems to be an issue that has proven insurmountable in the past.
I hope this was helpful information, best of luck to you!
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