Anglo American (LSE:AAL)
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5 Years : From Jun 2012 to Jun 2017
Future copper mine growth will be a matter of survival of the fittest, and eventually filter down to a limited number of market participants due to the challenges developing new supplies will hold, the head of Anglo American PLC's (AAUKY, AAL.LN) copper division told Dow Jones Newswires.
John MacKenzie said during an interview in the annual CESCO industry week in Santiago that because all the "easy" copper is already being developed or in production, the increased challenges will eliminate players unable to handle the scale necessary to make them work.
"As you get into lower grades in the future, and remoter areas, those tend to require scale to make them work, and tend to require massive infrastructure investment, rail, ports, power," he said. "I do think the scale of what is going to be needed to make those projects economic is going to limit the number of players who can actually develop those sorts of projects."
The situation works both ways, he noted, "as it is obviously going to start defining what the incentive price has to be for those resources to be developed, but it does take a leap of faith that those prices are going to remain the same when you are going to be investing many, many billions of dollars in a new project."
The trend toward developing copper mines in more remote, risky or challenging terrains has risen over the last decade as mining firms raced to snap up prospective deposits. Congo, Afghanistan and Pakistan have all moved firmly onto the radar of mining companies, but with some attached costs.
"As a generalization for the copper industry, people are going to have to start going to some of the more challenging places to develop new production, and I think with that comes costs," MacKenzie said. "Prices of copper have risen fourfold in the last 8 years but margins haven't done the same. Costs have risen, and are being hard-coded into the market now, so I don't think in the next price cycle decline either operating or capital costs will vanish. What makes copper in our view an attractive commodity for the foreseeable future is the challenges in bringing sufficient supply on to meet that demand."
Challenges for existing mines include declining grades, mines having to go deeper or underground, complexities around infrastructure, power and water availability, and rising labor, raw materials, community and environmental costs or requirements, he told Dow Jones.
"What we're also seeing is that the process of bringing on new supply has had a history of disappointing. If one looks at previously announced dates of when projects would be developed, those having been moving steadily outwards, and all the factors causing that are unlikely to go away," he said.
This means the industry is "still playing catch-up, ten years after the copper bull run started, on the supply side," MacKenzie said. "Even with the best will in the world, it is not that easy to bring new supply on, so I think we will see some supply coming on but what we believe is that you need quite a lot more to meet the forecast demand. Even with those projects that have a high probability of being developed, those will still leave deficits."
Anglo is forecasting a copper market supply-demand deficit in 2012, moving into a small surplus "for a year or two" as new projects come onstream and then returning to further market deficits.
Turning to the demand side, MacKenzie said Anglo American's view of the copper market "remains very, very positive," with China, the world's largest copper consumer, continuing to lead the way in consumption growth, despite recent signs of slowing.
"By 2020 we see China will account for over half of all copper consumption in the world. We don't see that demand picture fundamentally changing," he added.
-By Andrea Hotter, Dow Jones Newswires; +44 (0)20 7842 9413; firstname.lastname@example.org