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WHY WE BELIEVE IN COPPER’S LONG-TERM VALUE

 

At Oracle Mining, we believe copper offers the best long-term value of all metals. Why? Because copper has always been, and will continue to be, one of the world’s most important metals. As new applications are discovered and as demand in developing countries grows, we believe copper’s value will only increase.

Indicative of copper’s rising demand, the price has more than quadrupled in the past decade. In 2002, copper traded for less than $1.00/lb. Just three years ago, the price traded well below $2.00. In the past year, copper has ranged between $3.00 and $4.53/lb and averaged $3.86.

 

 

 

What’s Driving the Price of Copper?

 

Three key factors are keeping copper prices high:

 

  1. Increasing copper consumption as developing countries modernize
  2. Lagging production from mines
  3. Lack of new large deposits to replace declining production
  4. Declining copper grades

 

Before examining these dynamics, an overview of copper’s properties and uses will provide important context for understanding the metal’s crucial role today and in the future.

 

For 10,000 Years, One of Humanity’s Most Important Metals

 

Copper is one of humanity's most important metals because it is malleable, ductile (can be drawn into wire), an excellent conductor of heat and electricity and resistant to corrosion. The use of copper dates back more than 10,000 years. Our modern technological and mobile world could not function without copper, and the metal's many useful properties are resulting in demand growth—particularly over the past two decades. Despite increases in mine production, more than doubling since 1980, unprecedented demand has strained supplies and pushed prices to the record levels of recent years.

 

What is Copper Used For?

 

Copper is essential for society's most important functions, including electrical wiring, plumbing, communications, currency, and marine applications. This unmatched utility means that rapidly modernizing countries; such as China and India, require staggering amounts of new copper to build infrastructure, homes, factories, office buildings, ships,, wind turbines, trains, jets and automobiles. Copper and copper-based products are also used in appliances, decorative brassware and locks and keys. Compounds of copper serve as fungicides, wood preservatives, copper plating, pigments, electronic applications and specialized chemicals. New and innovative applications for the metal are continually being discovered and include antimicrobial surfaces, leading edge electronics and green energy.

 

Wire

 

The most common and important of all copper uses is electrical wire. Copper wire is the most efficient, non-precious metal used to conduct electricity. It is also used in semi-conductor circuitry and in telephone and data transmission lines.

 

Transportation

 

The automotive and aviation industries use copper extensively in motors, wiring, radiators, connectors, brakes and bearings. High speed trains can use anywhere from two to four tonnes of copper. Boats and ships also rely on copper-nickel alloys to reduce marine biofouling which improves fuel consumption by reducing drag.

 

Industry and Society

 

Copper is used for gears, bearings and turbine blades. Copper's excellent heat transfer capabilities make it an ideal choice for heat exchange equipment, pressure vessels and vats. From the beginning of civilization copper has been used by various societies to make coins for currency. In addition, in areas known to have copper-deficient soil, copper is used by farmers as a supplement in livestock and crop feed. Copper can also kill or inhibit health threatening fungi, bacteria, and viruses, including water-borne organisms. Aesthetically appealing, copper and its alloys, such as architectural bronze, are used in roofing, and as facades, canopies, doors and window frames. Copper's excellent corrosion resistance make it essential for seawater applications, including vessels, tanks, piping, propellers, oil platforms and coastal power stations and roofing.

 

Where Does Copper Come From?

 

The world's copper supply comes from two primary sources: Mining/Refining and Recycling. Chile is by far the world's top producer of copper from mines, accounting for over one-third of all copper mined.

 

 

 

Developing Countries Using Enormous Amounts of Copper

 

While copper consumption in developed countries has remained stagnant or even fallen over the past five years, the appetite for copper in developing countries is growing at an astonishing pace. In China, Brazil and India for example, copper consumption is rising dramatically and contributing to an overall rise in world copper consumption.

 

 

 

China: Consuming Nearly 40% of the World’s Copper

 

For perspective on where these trends are headed, consider that North American consumers use about 10kg of copper per capita. In China, however, even after years of economic growth, per capita copper usage is still only about 5.4 kg. As China’s populace urbanizes, builds up its infrastructure and becomes more of a consuming society, copper consumption will likely approach or even surpass North American levels; the country’s rate of copper consumption is expected to increase 9% annually through 2016. With more than 1.3 billion people in China compared to North America’s 530 million, even slight increases in Chinese consumption will translate into enormous demand growth and likely offset any declines in developed countries.

 

 

Even with its relatively low per capita consumption, China consumes significantly more copper than any other country. In 2011 China accounted for nearly 40% of the 19.74 million tonnes of refined copper used worldwide. Accordingly China is by far the world's biggest importer of copper. However, the copper China imports is used for both its domestic needs and a rapidly-expanding manufacturing industry. Thus China has also become the world's second-biggest exporter of semi-fabricated copper products, after Germany.

 

 

There is little dispute that China’seconomy, and therefore its copper consumption, will continue to grow into the foreseeable future. The greater question is how much. Projections vary, but the trend indicates per capita consumption of refined copper could nearly double in the next ten years, to 10kg. China’s annual economic growth rate averaged 9.9% between 1980 and 2010, and reached 10.3% in 2011. For 2012 and beyond, forecasts show that growth will slow, but not dramatically. The IMF, for example, predicts China’s economy will expand at an annual rate of 8.25% in 2012 and 8.75% in 2013.

 

More Copper Required for China’s New Five-Year Plan

 

China recently published its latest Five-Year plan for National Economic and Social Development. A number of initiatives in this report will require massive amounts of copper, including:

  • Investment in transmission networks
  • Continued urbanization
  • 36 million new affordable apartments for low-income people
  • Upgrading existing ports, construction of new ports
  • A new airport for Beijing
  • New hospitals
  • Expansion of conventional rail and high speed rail
  • Investment in nuclear and hydro power

 

Brazil: Copper for New Homes, New Infrastructure

 

In addition to China, Brazil has also emerged as a growing user of copper. From 2002 to 2008, per capita copper consumption in Brazil increased 50% to 2.1kg, approximately 30% higher than the country’s GDP growth in those years. Copper usage dropped in 2009 with the world economic decline, but rebounded in 2010 to 360,000 tonnes (about 1.9kg per capita) and an estimated 400,000 tonnes in 2011. Brazil’s red-hot construction industry is now using enormous amounts of copper as it builds homes for a growing middle class and also expands its infrastructure to host the 2014 soccer World Cup and 2016 Olympic Games.

 

Copper for India’s Power Needs

 

Next consider India, where nearly 1.2 billion people are presently using 0.4 kg of copper per capita. India’s economy is not nearly as industrial or urbanizing as China’s or Brazil’s. However, the country is modernizing and investing heavily in infrastructure, especially for electrical power, which requires large amounts of copper. According to the International Energy Agency, India's power production will need to rise by 15 to 20% annually to keep pace with economic and population growth. Meeting this power target alone would double India's annual copper consumption.

 

 

The Production/Consumption Equation: Shortfalls Expected

 

 

World copper mine production has increased dramatically in the past 40 years, and particularly in the last decade.

Despite the massive production growth, world copper mining has barely kept pace with consumption and, in recent years, fallen behind. Thus, the price has increased dramatically over the past ten years.

The table below, from the mutual fund, U.S. Global Investors, offers compelling evidence of why copper demand and prices are likely to remain high.

 

Global Forecasts:
COPPER PRODUCTION & CONSUMPTION IMBALANCE

 

 

 
2008
2009
2010
2011
2012
2013
2014
2015
2016
World Refined Cu Production
18,361
18,344
1,8816
19,583
20,565
21,928
23,218
24,021
25,219
Y/Y Change (%)
1.7%
-0.1%
2.6%
4.1%
5.0%
6.6%
5.9%
3.5%
5.0%
World Refined Cu Consumption
18,097
17,655
18,598
19,746
20,912
22,067
23,245
24,256
25,329
Y/Y Change (%)
0.7%
-2.4%
5.3%
6.2%
5.9%
5.5%
5.3%
4.3%
4.4%
Global Balance
264
689
218
-163
-348
-138
-27
-235
-110
Copper Price (LME (c/lb)
315
234
315
330
390e
410e
380e
360e
360e

 

 

 

 As the above table shows, copper is expected to remain in a shortfall position in 2012 and through 2016.

The graph below, from Codelco, Chile’s state-owned copper mining company and the world’s largest copper producer, shows a similar but slightly more positive perspective for potential mine production. A crucial element in this graphic is the decline in production from existing mines and how the “Probable Projects” barely keep pace with expected consumption.

 

 

 

 

Over the past seven years, forecasts for world mine copper production have consistently exceeded actual production figures. The following chart graphically illustrates how current projections for future copper production may be optimistic.

 

 

 


 

So with forecasted high prices, and with refined copper production reaching record levels, why does the industry struggle to keep pace with demand?

 

 

Declining Grades, Not Enough New Mines

 

The key factors affecting production of new copper are declining grades (with fewer high-grade discoveries), and not enough new mine production to meet demand.

The chart below provides a graphic view of the decline in world average copper grades since 1985, plus the declining grade forecasts based on new mines under construction.

 

 

The grade declines have been particularly acute in Chile, which produces about 38% of the world’s mined copper. For example at Escondida, the world’s largest copper mine and producer of 9.5% of the world’s global copper supply, the average copper content of mined ore has fallen from 1.72% in 2007 to 0.97% at the end of 2011. That’s a drop of nearly 43% in four years.

There are simply fewer high-grade copper deposits being discovered. Presently about 60% of global copper mine production comes from massive, low-grade porphyry open pit deposits. Despite their lower grades, these operations provide economies of scale and can operate profitably at today’s copper prices. But while a number of large porphyry mines are expected to begin production over the next five years, the lower grades mean that overall production will likely fall short of growing demand. However, the length of time from discovery to production has increased due to higher standards of global industry and extensive permitting and permit review process.