By Scott Patterson
CAIMANES, Chile--The future price of copper and the growth of
companies that produce it could hinge on a single precious
resource: water.
Mining the important industrial metal requires huge volumes of
water to control dust and separate copper from the earth. But a
seven-year drought enveloping Chile, the world's largest producer,
is forcing big miners to curb output and pitting them against small
communities like this one high in the Andes.
Water-related production problems are one reason some analysts
say copper prices aren't likely to lose much more ground after
falling nearly 20% so far this year. Over the long term, they say,
the price of copper could move higher as global production fails to
keep pace with rising demand.
Anglo American PLC of the U.K. has said water shortages could
curb as much as 18,000 tons in annual production starting this year
at its Los Bronces mine, based in northern Chile's Atacama region,
home to the driest desert in the world.
Freeport-McMoRan Inc. is scrambling to secure water supplies for
its Morenci copper mine in Arizona--a state that accounts for a
third of the company's copper output.
And here in Caimanes, a decadelong legal fight over water has
unfolded between local farmers and Chilean mining company
Antofagasta PLC. The farmers say an Antofagasta tailings dam, used
to create a reservoir for mine waste, has created a water shortage.
Antofagasta says the drought is to blame.
A judge this year sided with the farmers and ordered Antofagasta
to demolish the nearby Los Pelambres mine, which produces 2% of the
world's copper. The mine is still operating as the company
appeals.
"We will have to stop operating if the tailings dam can't
operate," Antofagasta's chief of mining, Ivan Arriagada, said in an
interview.
Companies are scrambling to adapt. Anglo-Australian miners BHP
Billiton Ltd. and Rio Tinto PLC are building a $3.4 billion
desalination plant in Chile after warning that water shortfalls
could crimp production at their jointly owned Escondida mine--the
world's largest, also in Atacama.
Still, some analysts say water-related supply disruptions,
declining ore grades--the ratio of pure copper to waste
products--and slowing growth of new projects will push copper
production into a deficit, where demand outstrips supply by the end
of the decade.
CRU Group, which tracks commodity trends, expects copper prices
to wane over the next year or two before rebounding in 2017 and
topping $6,000 a ton by 2019, when it expects the market to tip
into a deficit. That is below the metal's record high of $10,000 a
ton reached in 2011 but still historically high.
The slowdown is expected to be the worst in Chile, which yields
nearly six million tons of the industrial metal a year--more than
triple the next biggest supplier, China, and a third of global
output. The five largest copper mines in the world by output are
located in Chile, with Los Pelambres coming in No. 4, according to
CRU Group.
Water shortages are adding to problems like high energy prices,
labor costs that rival those in the U.S. and a sharp decline in ore
grades that is causing miners to think twice about starting new
projects in the country.
After years of increases, Chile's copper production in 2014 fell
30,000 tons from the previous year to 5.75 million tons, according
to Cochilco, Chile's state copper commission, as water constraints
and poorer ore grades curbed output.
Cochilco said in a recent report on water consumption that it
expects seawater consumption by Chilean copper mines to increase by
14% a year by 2026, even as freshwater usage declines about 2% a
year.
A major uncertainty for copper prices is demand. Copper
consumption in China, which uses more than 40% of the world's
total, is uncertain. Jeffrey Currie, head of commodities research
at Goldman Sachs Group Inc., said in October that prices could fall
an additional 20% by the end of 2016, partly due to softening China
demand.
Among the most dramatic examples of the water-resource issue is
the dispute over the dam built for Los Pelambres, a flagship
operation that accounts for more than 50% of Antofagasta's mining
revenue.
"We had enough water for the whole town, the animals, the
crops," said Juan Tapia Bonilla, a local tree farmer. He added that
the situation changed when Antofagasta built a dam in 2008. "This
cut the water."
The residents were also concerned about the safety of the dam in
an area known for earthquakes. Their concerns were highlighted
earlier this month when a tailings dam burst at a Brazilian
iron-ore mine, killing as many as 12 people and flooding a nearby
village.
Antofagasta argues that a drought that began around the same
year the dam opened is largely responsible for the region's water
problems. The company also says the dam was authorized after an
environmental-impact study was approved by the Chilean government
and that destroying it could send waste products flowing into the
valley below.
Antofagasta says it stepped up its engagement with the community
in Caimanes in August.
The opposition persists. Residents have waged a legal battle
against the dam, launched hunger strikes and staged protests that
have caused operational problems resulting in an estimated loss of
8,000 tons of copper.
Antofagasta said copper production in the first nine months of
the year fell 11% from a year ago, due in part to "community
actions" at Los Pelambres.
Write to Scott Patterson at scott.patterson@wsj.com
(END) Dow Jones Newswires
November 26, 2015 10:01 ET (15:01 GMT)
Copyright (c) 2015 Dow Jones & Company, Inc.
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