Stunted Copper Supply Growth - July 2011 - Greenfields Research

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Stunted copper supply growthHow soaring copper demand is straining the supply chain and supporting the medium to long term price outlook

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The BIG Questions

How is soaring copper demand straining the supply chain and supporting the medium to long term price outlook?

The BIG Questions

• Where is all this copper demand growth coming from?

• What has all this copper demand meant for prices?

• Can copper supply keep up with demand?

• Why are so few new copper mines coming on stream?

• How will copper supply problems affect long term prices?

Where is all this demand coming from?

Copper – the industry bellwether

Feeding the bulls

Government stimulus, Rise of China, New demand sectors, Industrialisation V2.0

Feeding the bears

Asset bubbles, Western woes, Substitution, Chinese decline

The industry bellwether

Infrastructure3,266Kt (15%)

Manufacturing11,569Kt (52%)

Construction7,264Kt (33%)

ICSG The World Copper Factbook 2010 Presentation(Based on International Copper Association data)

Major Uses of Copper: Usage by End‐Use Sector, 2009


Construction7,264Kt (33%)• Electrical Power• 5,273Kt (24%)• Plumbing• 1,336Kt (6%)• Architecture• 327Kt (1.5%)• Communications• 193Kt (<1%)• Building Plant• 133Kt (<1%)

Infrastructure3,266Kt (15%)






Infrastructure3,266Kt (15%)• Power Utility• 2,541Kt (11.5%)• Telecoms• 725Kt (3.5%)






Infrastructure3,266Kt (15%)• Power Utility• 2,541Kt (11.5%)• Telecoms• 725Kt (3.5%)

Manufacturing11,569Kt (52%)• Industrial• 2,742Kt (12.5%)• Diverse• 2,359Kt (10.5%)• Consumer• 1,814Kt (8%)• Automotive• 1,590Kt (7%)• Cooling• 1,330Kt (6%)• Transport• 967Kt (4.5%)• Electronics• 768Kt (3.5%)



Demand in summaryShort term Long term

Bears

Bulls


Bears

Bulls

Government stimulus

Rise of China


Bears

Bulls

Government stimulus

Rise of China Industrialisation V2.0

New demand sectors

Demand in summary

Asset bubbles

Western woes

Short term Long term

Bears

Bulls

Government stimulus


New demand sectors

Demand in summary

Asset bubbles

Western woes

Short term Long term

Bears

Bulls

Chinese declineSubstitution

Government stimulus


New demand sectors

Bulls versus bears

Government stimulusRise of China

New demand sectorsIndustrialisation V2.0

Asset bubblesWestern woesSubstitution

Chinese decline

Bulls versus bears

Government stimulusRise of China

New demand sectorsIndustrialisation V2.0


Chinese decline

In the short term?

Bulls versus bears

Government stimulus

Rise of ChinaNew demand sectors

Industrialisation V2.0


Chinese decline

In the long term?

What has all this copper demand meant for prices?

Prices are at historical highs

But strong demand doesn’t mean high prices

The example of the 1990s

Economics 101

Supercycles & supply chains


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Average monthly LME cash copper prices (US$/t): 1981-2011

Copper prices: www.indexmundi.com

http://www.metal-pages.com/


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Average monthly LME cash copper prices (US$/t): 1981-2011

Copper prices: www.indexmundi.comInflation data: www.inflationdata.com

http://www.indexmundi.com/

http://www.inflationdata.com/

Strong demand doesn’t mean higher prices

0

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ICSG The World Copper Factbook 2010 Presentation (Based on ICSG data) Copper Prices: USGS; Inflation data: www.inflationdata.com

World Refined Copper Usage versus Copper Prices, 1960-1999


Strong demand doesn’t mean higher prices

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More copper consumed than ever before...

...but historically low prices



Demand & prices in the 1990s

1990 1991 1992 1993 1994 1995 1996 1997 1998 19990

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Demand & prices in the 1990s

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Refined Usage (Kt) Nominal Copper Price (US$/t)




Economics 101

Demand – Supply = Price

– =

Supercycles & supply chains

Supercycles Supply chains

Can copper supply keep up with demand?

Where does copper come from?

Are we running out of copper?

Brownfields - current mine expansions

Can the industry’s ageing mines increase capacity or is the opposite likely?

Greyfields - the scrap market

The collar on copper prices and can it contain them in the future?

Where does copper come from?

Simplified copper production supply chain

MineMines sulphide ore

to produce concentrates

SmelterSmelts

concentrates to produce anodes

RefineryRefines anodes to produce cathodes

~12.0Mt ~12.0Mt ~12.0Mt

Copper cathode image: http://en.wikipedia.org/wiki/Whim_Creek_Copper_MineProduction estimates based on ICSG June 2011 Press Release

http://en.wikipedia.org/wiki/Whim_Creek_Copper_Mine


Mine Production (Mt)

Economic Reserves (Mt)

Depletion

16.2 630 ~39 years

2010 estimatesU.S. Geological Survey Mineral Commodity Summaries, January 2011




Depletion

16.2 630 ~39 yearsCommodity Mine Production

(Mt)Economic

Reserves (Mt)Depletion

Platinum Group Metals 380 tonnes 66,000 tonnes ~174 years

Bauxite (Aluminium) 211 28,000 ~132 years

Coal (2008 data) 7,500 948,000 ~126 years

Cobalt 0.088 7.3 ~83 years

Iron Ore 2,400 180,000 ~75 years

Nickel 1.55 76 ~49 years

Oil (2009 data) 30.79 billion barrels 1,341 billion barrels ~44 years

Molybdenum 0.234 9.8 ~42 years

Silver 22,200 tonnes 510,000 tonnes ~23 years

Zinc 12 250 ~21 years

Gold 2,500 tonnes 51,000 tonnes ~20 years

Lead 4.1 80 ~20 years

Tin 0.261 5.2 ~20 years2010 estimates (unless stated)

U.S. Geological Survey Mineral Commodity Summaries, January 2011Except coal & oil: U.S. Energy Information Administration, International Energy Statistics (online)




Depletion

16.2 630 ~39 yearsCommodity Mine Production

(Kt)Economic

Reserves (Kt)Depletion

Mexico 230 38,000 ~165 years

Australia 900 80,000 ~89 years

Peru 1,285 90,000 ~70 years

Poland 430 26,000 ~60 years

Kazakhstan 400 18,000 ~45 years

Russia 750 30,000 ~40 years

Indonesia 840 30,000 ~36 years

Other 2,300 80,000 ~35 years

USA 1,120 35,000 ~31 years

Chile 5,520 150,000 ~27 years

China 1150 30,000 ~26 years

Zambia 770 20,000 ~26 years

Canada 480 8,000 ~17 years

U.S. Geological Survey Mineral Commodity Summaries, January 2011

2010 estimates

So what’s the problem?

Left chart: Robin Bahr, Credit Agricole, Global Copper Market Trends 2011-12 for the ICSG Environmental & Economic Committee Meeting, 14th April 2011

Escondida & Grasberg data from Rio Tinto Operation Reviews Q4 2002-10

Global average copper mine head grade, 1978-2018

2001 2002 2003 2004 2005 2006 2007 2008 2009 20101.00%

1.20%

1.40%

1.60%

1.80%

2.00% Escondida (Concs)

2001 2002 2003 2004 2005 2006 2007 2008 2009 20100.75%

1.00%

1.25% Grasberg

Average global grade decline:

~0.015% /year~0.15%/decade

Average decline: ~0.05% /year

Average decline:

~0.017% /year

Grade is King!

Chart: Robin Bahr, Credit Agricole, Global Copper Market Trends 2011-12 for the ICSG Environmental & Economic Committee Meeting, 14th April 2011

Operating cost data based on Costmine (Infomine USA) Mining Cost Service 2010


1.4% 1.2% 1.0%0

500

1,000

1,500

2,000

Mining + Milling Cost (US$/t)

Milling

Mining

Increase in mining + milling costs related to grade decline for a hypothetical open pit copper mine with a stripping ratio of 2:1, processing recovery of 95% and producing 100,000 tonnes of copper per year

Grade is King!




1.4% 1.2% 1.0%0

500

1,000

1,500

2,000


Milling

Mining

0.0% 0.5% 1.0% 1.5% 2.0% 2.5%0

500

1,000

1,500

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3,500

f(x) = 60.823740881 x^-0.701015752R² = 0.999997291041528


Increase in mining + milling costs related to grade decline for a hypothetical open pit copper mine with a stripping ratio of 2:1, processing recovery of 95% and producing 100,000 tonnes of copper per year

Can mine production keep pace with demand?Simplified copper production supply chain

MineMines sulphide ore


SmelterSmelts



~12.0Mt ~12.0Mt ~12.0Mt




Sulphide Mine

Mines sulphide ore to produce concentrates

SmelterSmelts


RefineryRefines anodes

to produce cathodes

SXEW Mine

Mines oxide ore to

produce cathodes

~12.0Mt

~12.0Mt

~12.0Mt

~4.0Mt



The miracle of SXEWTypical oxide capped

copper sulphide deposit


copper sulphide depositConventional mining of sulphides (pre-1970s)


copper sulphide depositConventional mining

of sulphides (pre-1970s)

Modern mining of sulphides & oxides (post-1970s)

Can mine production keep pace with demand?World Copper Mine Production, SXEW versus Concs, 1900-2009

ICSG The World Copper Factbook 2010 Presentation (Based on ICSG data)Copper cathode image: http://en.wikipedia.org/wiki/Whim_Creek_Copper_Mine

Can SXEW supply continue to grow?

Depth chart: Robin Bahr, Credit Agricole, Global Copper Market Trends 2011-12 for the ICSG Environmental & Economic Committee Meeting, 14th April 2011

Indicative depth of discoveries, 1980s, 1990s & 2000s

Can SXEW supply continue to grow?

Depth chart: Robin Bahr, Credit Agricole, Global Copper Market Trends 2011-12 for the ICSG Environmental & Economic Committee Meeting, 14th April 2011

Sulphuric Acid chart: Cochilco, The Chilean Sulfuric Acid market Estimations Through 2015, Aprll 2009


Sulphuric Acid Import Prices, CIF Meijillones,

Chile, 2001-2008

Mine production growth stalling

2006 2007 2008 2009 20100

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10,000

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20,000

25,000 Mine Production (Kt) Mine Capacity (Kt)

2005-2010 Data: ICSG Press Release 23rd May 2011

World Copper Mine Capacity versus Production, 2005-2010

+6.5%

+5.5%

+3.5%

+4.2% +1.9%

+0.9%+2.6%+0.4%+3.3%+0.5%


Sulphide Mine

Mines sulphide ore to produce concentrates

SmelterSmelts


RefineryRefines anodes

to produce cathodes

SXEW Mine

Mines oxide ore to

produce cathodes

~12.0Mt

~12.0Mt

~12.0Mt

~4.0Mt



What about non-mine production?

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World Copper Mine Production versus Copper Usage, 1960-2010

2000-2009 Data: ICSG The World Copper Factbook 2010 Presentation 2010 Data: ICSG Press Release 23rd May 2011

What about non-mine production?

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World Copper Mine Production versus Copper Usage, 1960-2010

0.8Mt shortfall (~17%)

3.2Mt shortfall (~16.7%)

2000-2009 Data: ICSG The World Copper Factbook 2010 Presentation 2010 Data: ICSG Press Release 23rd May 2011

Can copper supply keep pace with demand?


Sulphide MineMines sulphide ore to produce concentrates

SmelterSmelts concentrates to produce anodes


SXEW MineMines

oxide ore to produce cathodes

ScrapLow grade “old

scrap” for smelting into anodes and high grade “new

scrap” for refining into cathodes

~4.0Mt

~12.0Mt ~15.0Mt ~15.0Mt

~3.0Mt




World Refined Copper Production, Primary, Secondary & SXEW, 1960-2009

ICSG The World Copper Factbook 2010 Presentation (Based on ICSG data) Copper cathode image: http://en.wikipedia.org/wiki/Whim_Creek_Copper_Mine

Can scrap supply continue to grow?

“New scrap”

“Old scrap”

Generated during manufacturing

Usually high grade

Production linked to industrial

production (IP)

Production is price sensitive

Generated from disused end-use

products

Usually lower grade

Production linked to construction

Production is price sensitive

Scrap acts as marginal supply

2005 2006 2007 2008 2009 20100

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World Secondary Copper Production, 2006-2010

Scrap supply tight

2005 2006 2007 2008 2009 20100

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Scrap chart: Robin Bahr, Credit Agricole, Global Copper Market Trends 2011-12 for the ICSG Environmental & Economic Committee Meeting, 14th April 2011


World Secondary Copper Production, 2006-2010



Sulphide MineMines sulphide ore to produce concentrates



SXEW MineMines





~12.0Mt ~15.0Mt ~15.0Mt

~4.0Mt

~3.0Mt



New mines required!Simplified copper production supply chain

Sulphide MineMines sulphide ore




SXEW MineMines





Exploration & Development

Of new mines, particularly sulphide

mines to produce copper concentrates


~3.0Mt

~4.0Mt

~12.0

Mt

~12.0

Mt

~12.0

Mt


Why are so few new copper mines coming on stream?

Geology versus geography

Is it the house that matters or the neighbourhood?

Capital costs versus operating costs

Pay now or pay later?

Delays

Why are so many copper mine projects late and over-budget?

Why are so few new copper mines coming on stream?

• Quantity : size of the resource• Quality : grade (metal content) of the resourceGeological Risk• Quality & scale: throughput & grade control; mining & processing type & recovery; waste

management• Operating cost: both initial estimate and difference between estimate and actual

Technical Risk• Commodity price: forecast & sensitivity to primary, by- & co-products• Contracts: intermediate market conditions, cost of getting product to market; counterparty

riskMarket Risk

• Fatal flaws: discovery of major geological, technical, political, financing or legal issue• Project management: cost overruns; delays; increased complexityCompletion Risk• Professional: management with operational experience; recruiting & retaining professionals

& ex-pats• Labour: recruiting, retaining & training labour; labour unions during construction & operation

Human Resource Risk

• Regulatory: difficulties, costs and delays associated with environmental compliance• Technical: fundamental technical problems in running an environmentally sound mineEnvironmental Risk

• Regulatory: changes in laws or problems complying with them• Corporate: legal issues associated with corporate partners, suppliers & other counterpartiesLegal Risk• Actual: problems with the government, legal & business environment of a country• Apparent: problems with external reputation of a country affecting financing, recruitment,

reputationPolitical Risk

• Spending: problems with initial estimate; capital cost overruns• Financing: problems raising the required capitalCapital Cost Risk

• Discretionary: deliberate decision to delay a project• Non-discretionary: unforeseen problem causing a delay to the projectDelay Risk• Location: political or natural problems in your location i.e. war or flooding• Technical: sudden catastrophic technical failure at the mine projectForce Majeure

Based on “The Share Buyers Guide to Investing in the Australian Mining Boom” by Dr. Allan Trench, 2011

Challenges facing copper mine development





riskMarket Risk



Human Resource Risk








Falling resource grades or...

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Ore (billions of tonnes)

Ore

Gra

de (

%)

Resource size and grade of recent large copper mine start-ups

Data from company websites: Antofagasta (Esperanza); Equinox Minerals (Lumwana); Freeport McMoRan (Tenke Fungurume); OZ Minerals (Prominent Hill)

Tenke Fungurume4.23 Mt Copper

Lumwana6.27 Mt Copper

Esperanza7.38 Mt Copper

Prominent Hill2.60 Mt Copper


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Ore

Gra

de (

%)



Current average global mined copper grade

Tenke Fungurume4.23 Mt Copper

Lumwana6.27 Mt Copper

Esperanza7.38 Mt Copper

Prominent Hill2.60 Mt Copper


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de (

%)



Current average global mined copper grade

Tenke Fungurume6.70 Mt Copper Eq.

Lumwana6.34 Mt Copper Eq.

Esperanza15.18 Mt Copper Eq.

Prominent Hill4.00 Mt Copper Eq.





riskMarket Risk



Human Resource Risk








...increasing political risk


Country Reserves Fraser Institute(out of 41)

Behre Dolbear(out of 25)

Resourcestocks

(out of 36)

Mexico ~165 years 9th 4th 17th

Australia ~89 years 5th 1st 26th

Peru ~70 years 18th 12th 19th

Poland ~60 years n/a n/a n/a

Kazakhstan ~45 years 24th 18th 8th

Russia ~40 years 22nd 23rd n/a

Indonesia ~36 years 32nd 22nd 31st

Other ~35 years n/a n/a n/a

USA ~31 years 11th 5th 7th

Chile ~27 years 2nd 3rd 3rd

China ~26 years 20th 11th 9th

Zambia ~26 years 25th 19th 12th

Canada ~17 years 7th 2nd 1st

Key copper mining countries in mining risk ranking surveys

...increasing political risk



Country Reserves Fraser Institute(out of 41)

Behre Dolbear(out of 25)

Resourcestocks

(out of 36)

Mexico ~165 years 9th 4th 17th

Australia ~89 years 5th 1st 26th

Peru ~70 years 18th 12th 19th

Poland ~60 years n/a n/a n/a

Kazakhstan ~45 years 24th 18th 8th

Russia ~40 years 22nd 23rd n/a

Indonesia ~36 years 32nd 22nd 31st

Other ~35 years n/a n/a n/a

USA ~31 years 11th 5th 7th

Chile ~27 years 2nd 3rd 3rd

China ~26 years 20th 11th 9th

Zambia ~26 years 25th 19th 12th

Canada ~17 years 7th 2nd 1st

Key copper mining countries in mining risk ranking surveys





riskMarket Risk



Human Resource Risk








Going underground...





0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.00

5001,0001,5002,0002,5003,0003,5004,0004,5005,000

f(x) = 290.7097 x + 934.2471R² = 0.999904448695273

Stripping Ratio

Min

ing

+ M

illi

ng

Co

st

(US

$/t

)



Effect of stripping ratio on operating costs



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5001,0001,5002,0002,5003,0003,5004,0004,5005,000

f(x) = 290.7097 x + 934.2471R² = 0.999904448695273

Stripping Ratio

Min

ing

+ M

illi

ng

Co

st

(US

$/t

)



0

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4,000

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ing

+ M

illi

ng

Co

st

(US

$/t

)

Effect of stripping ratio on operating costs

Different underground operating costs versus open pit mining

Mining costs on the rise


US Mine Cost Input Indices versus US Consumer Price Inflation

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25.0

CPI Industrial Chemicals

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12.0

CPI Electric Power Coal

0.0

10.0

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50.0

CPI Natural Gas

Mining costs on the rise


US Mine Cost Input Indices versus US Consumer Price Inflation

0.0

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CPI Industrial Chemicals

0.0

0.5

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2.5

CPI Deep Sea Freight

0.0

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CPI Electric Power Coal

0.0

10.0

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30.0

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50.0

CPI Natural Gas

2001 2002 2003 2004 2005 2006 2007 2008 2009 20100.90

0.95

1.00

1.05

1.10

1.15

1.20

1.25

1.30

1.35

1.40

CPI Surface Mining Underground Mining Milling





riskMarket Risk



Human Resource Risk








Capital costs soaring

Capital cost data based on Costmine (Infomine USA) Mining Cost Service 2010Prominent Hill Data: Prominent Hill Analyst Tour, 3 June 2009

US Capital Cost Input Indices versus US Consumer Price Inflation

2001 2002 2003 2004 2005 2006 2007 2008 2009 20101.001.201.401.601.802.002.202.40

CPI Iron & Steel

2001 2002 2003 2004 2005 2006 2007 2008 2009 20101.00

1.05

1.10

1.15

1.20

1.25

1.30

CPI Construction Labour

2001 2002 2003 2004 2005 2006 2007 2008 2009 20101.00

1.05

1.10

1.15

1.20

1.25

1.30

CPI Machinery/Equipment

Prominent Hill Construction StatsMan hours: 4.3 millionLitres of diesel/day: 2,400Concrete: 23,000 m3

Steel: 2,400 tCable: 252,000mPipe: 43,000m

Battling with grades & scale

Capital cost data based on Costmine (Infomine USA) Mining Cost Service 2010

US Capital Cost Indices versus US Consumer Price Inflation

2006 2007 2008 2009 20101.00

1.02

1.04

1.06

1.08

1.10

1.12

CPI Surface Mines Underground Mines

Battling with grades & scale

Capital cost data based on Costmine (Infomine USA) Mining Cost Service 2010

US Capital Cost Indices versus US Consumer Price Inflation

2006 2007 2008 2009 20101.00

1.02

1.04

1.06

1.08

1.10

1.12

CPI Surface Mines Underground Mines

Increase in mining + milling capital costs related to decreasing resource grade for a hypothetical open pit copper mine with a stripping ratio of 2:1, processing recovery of 95% and producing 100,000 tonnes of copper per year

0.4% 0.6% 0.8% 1.0% 1.2% 1.4% 1.6% 1.8% 2.0%0.0

200.0

400.0

600.0

800.0

1000.0Mining Milling

Ore Grade

Min

ing

+ M

illin

g C

ap

ex

(US

$M

)

0.0% 0.5% 1.0% 1.5% 2.0% 2.5%0.0

2.0

4.0

6.0

8.0

10.0

12.0f(x) = NaN x^NaN

Ore Grade

Min

ing +

Milling C

apex (

US$M

)

Delays and blow-outs!

LumwanaEquinox Minerals (100%)

Zambia

Discovered: 1961 Exploration & development begins: 1999

Date Capex Estimate

Capacity Estimate

Capex Intensity

Start-up Estimate

Aug 2002 US$681M 106,000t/y Cu US$6,425/t/y Cu Mid-2006

May 2005 US$824M100-140,000t/y

CuUS$6,867/t/y Cu H2 2006

Jun 2006 US$762M100-140,000t/y

CuUS$6,350/t/y Cu Q1 2008

Aug 2006 US$1,227M ~118,000t/y CuUS$10,398/t/y

CuQ1 2008

Nov 2006 US$847M ~141,000t/y Cu US$6,007/t/y Cu Q1 2008

Start-up US$814M~141,000t/y

CuUS$5,773/t/y

CuDec 2008

Discovery-to-mine: ~10 years 2.5 years late US$130M+ over budget (20%)Data from company websites: Antofagasta (Esperanza); Equinox Minerals (Lumwana); Freeport McMoRan (Tenke Fungurume); OZ Minerals (Prominent Hill)


Prominent HillOZ Minerals (100%) Australia

Discovered: Nov 2001

Date Capex Estimate

Capacity Estimate

Capex Intensity

Start-up Estimate

Aug 2004 A$300-350M 90,000t/y Cu A$3,611/t/y Cu 2008

Aug 2005 A$530M90-100,000t/y

CuA$5,579/t/y Cu H2 2008

Aug 2006 A$775M71-104,000t/y

CuA$8,857/t/y Cu Sept 2008

Oct 2007 A$1,080M71-120,000t/y

CuA$11,309/t/y Cu Q3 2008

May 2008 A$1,080M71-120,000t/y

CuA$11,309/t/y Cu Q4 2008

Start-up A$1,170M85-100,000t/y

CuA$12,649/t/y

CuFeb 2009

Discovery-to-mine: 8 years3-6 months

lateA$800M+ over budget (265%)Data from company websites: Antofagasta (Esperanza); Equinox Minerals

(Lumwana); Freeport McMoRan (Tenke Fungurume); OZ Minerals (Prominent Hill)


Tenke FungurumeFreeport McMoRan (57.75%)

Lundin Mining (24.75%); Gecamines (17.5%)

DR Congo

Discovered: 1900s DR Congo civil war: 1998-2003

Date Capex Estimate

Capacity Estimate

Capex Intensity

Start-up Estimate

Dec 1998 US$843M 160,000t/y Cu US$5,269/t/y Cu Unknown

Nov 2006 US$824M 100,000t/y Cu US$8,240/t/y Cu End 2008

Feb 2007 US$650M 115,000t/y Cu US$5,652/t/y Cu Q1 2009

Oct 2007 US$1,000M 115,000t/y Cu US$8,696/t/y Cu Q1 2009

Apr 2008 US$1,900M 115,000t/y CuUS$16,522/t/y

CuH2 2009

Start-up US$1,750M 113,500t/y CuUS$15,419/t/y

CuMarch 2009

Discovery-to-mine: 110+ years 0.25 years late US$900M+ over budget (110%)Data from company websites: Antofagasta (Esperanza); Equinox Minerals

(Lumwana); Freeport McMoRan (Tenke Fungurume); OZ Minerals (Prominent Hill)


EsperanzaAntofagasta (70%) Marubeni Corp. (30%) Chile

Exploration begins: 1999

Date Capex Estimate

Capacity Estimate

Capex Intensity

Start-up Estimate

Jul 2007 US$1,500M 195,000t/y Cu US$7,692/t/y Cu End 2010

Apr 2008 US$1,900M 195,000t/y Cu US$9,744/t/y Cu End 2010

May 2009 US$2,300M 191,000t/y CuUS$12,042t/y

CuEnd 2010

Start-up US$2,600M 190,000t/y CuUS$13,684/t/y

CuNov 2010

Discovery-to-mine: 11 years On schedule!US$1,100M+ over budget

(75%)


Weighing up the challenges

The BCG Box for mine projects

Politi

cally c

hallen

gin

g

(Cap

ex R

isk)

Technically challenging (Opex Risk)

Stars

Challenges

Marginals

Black Holes

Weighing up the challenges

The BCG Box for mine projects

Politi

cally c

hallen

gin

g

(Cap

ex R

isk)


Stars

Challenges

Marginals

Black Holes

Chile

S. AmericaAsia

Africa

N. America

Europe

Australia

Where are we heading?The BCG Box for mine projects (into the future)

Politi

cally c

hallen

gin

g

(Cap

ex R

isk)


Stars

Challenges

Marginals

Black Holes

Chile

S. America

Asia

Africa

N. America

Europe

Australia

How will copper supply problems affect long term prices?

The mining (super)cycle

Where are we in the mining cycle and where are we going?

The economist’s view

0

2,000

4,000

6,000

8,000

10,000

12,000


Average annual LME cash copper prices (US$/t): 1914-2010

Copper prices: USGS & www.metalpages.comInflation data: www.inflationdata.com

War productio

n

Post-war collapse

Reconstruction of Europe & Japan

Demand miniaturisation / substitution

Rise of

China

World War 1

Great Depressio

n World War 2

Collapse of

Soviet Union

Oil crisisIranian

Revolution

Vietnam War

Asian Flu

Korean War

Dot.com

Housing

boom

GFC

War production


Mineral economics 101

Sticky supply Dynamic demand

“The mining cycle”

Price:

Demand:

Supply:

1 2 3 4 5 6 7 8 1

1. Balanced market, steady demand, steady supply.

2. Demand increases, but supply cannot respond as quickly, prices rise and spike.

3. Supply begins to respond to demand, prices stabilise at a high level.

4. Lagging supply continues to come on stream even though demand has stabilised, prices fall from high levels.

5. Lower prices and demand, discourages

investment in new supply, prices stabilise at a lower level.

6. Falling demand or falling costs lead to low prices.

7. Falling prices and demand eventually leads to falling supply which steadies prices.

8. Slowly responding supply reductions may lag and lead to a small bounce from the lowest prices.

Idealised mining cycle

The mining investment cycle

2. DEMAND SPIKE

Historically low prices encourage new demand

Underinvested supply size not ready

Sharp rise in prices as supply doesn’t respond

3. MARGINAL RESPONSE

Investment in marginal supply to meet new

demandPrices stabilise at high levels as high prices discourage increased

demand

4. & 5. NEW LONG TERM

SUPPLYHigh profits for low cost

miners encourages investment in major mines

Prices begin to fall

6. EXPANSION OF LOW COST

SUPPLYNew low cost supply

pushes marginal supply off the curve

Marginal costs fall, allowing prices to fall

7. DEMAND DESTRUCTION

Effects of demand destruction begin to take

holdMine supply focuses on cost cutting to preserve

marginPrices fall steeply

8. & 1. LOW PROFIT MALAISE

Low prices create unprofitable mining industry stopping

investmentDemand stabilises as low prices discourage demand

destruction

Where are we in the mining cycle?

Price:

Demand:

Supply:

1 2 3 4 5 6 7 8 1

1. Balanced market, steady demand, steady supply.

2. Demand increases, but supply cannot respond as quickly, prices rise and spike.

3. Supply begins to respond to demand, prices stabilise at a high level.

4. Lagging supply continues to come on stream even though demand has stabilised, prices fall from high levels.

5. Lower prices and demand, discourages

investment in new supply, prices stabilise at a lower level.

6. Falling demand or falling costs lead to low prices.

7. Falling prices and demand eventually leads to falling supply which steadies prices.

8. Slowly responding supply reductions may lag and lead to a small bounce from the lowest prices.

Idealised mining cycleCopper is here

Lack of copper mine investment

1880 1900 1920 1940 1960 1980 2000 20200

200

400

600

800

1,000

1,200

1,400

1,600

Escondida

Codelco NorteGrasberg

CollahuasiEl Teniente

Taimyr Peninsular AntaminaLos Pelambres

Morenci

Bingham Canyon

Batu Hijau

Andina

Kansanshi

Los Bronces

Zhezkazgan

Olympic Dam

Rudna

SarcheshmehSpence

La Caridad

Start-up Year

Pro

du

cti

on

Ca

pa

cit

y (

Kt)

Start-up, capacity & current resource of top 20 copper mines

Resource & Start-up Data: InfomineProduction Capacity Data: ICSG World Copper Factbook 2010


1980 1985 1990 1995 2000 2005 2010 2015 20200

200

400

600

800

1,000

1,200

1,400

1,600

Escondida

Grasberg

Los Pelambres

Antamina

Collahuasi

Batu Hijau

KansanshiOlympic Dam

Spence

Start-up Year

Pro

du

cti

on

Ca

pa

cit

y (

Kt)

Start-up, capacity & resource of top 20 copper mines 1980>



1980 1985 1990 1995 2000 2005 2010 2015 20200

200

400

600

800

1,000

1,200

1,400

1,600

Escondida

Grasberg

Los Pelambres

Antamina

Collahuasi

Batu Hijau


SpenceLumwanaTenke Fungurume

Esperanza

Prominent Hill

Start-up Year

Pro

du

cti

on

Ca

pa

cit

y (

Kt)

Start-up, capacity & resource of large copper mines vs recent start-ups


New capacity on its way?

1985 1990 1995 2000 2005 2010 2015 2020 20250

200

400

600

800

1,000

1,200

1,400

1,600

Escondida

Grasberg

Los Pelambres

Antamina

Collahuasi

Batu Hijau


SpenceLumwanaTenke Fungurume

Esperanza

Prominent Hill

Toromocho Tampakan

Petaquilla

PebbleOyu Tolgoi

Frieda RiverLas Bambas

Start-up Year

Pro

du

cti

on

Ca

pa

cit

y (

Kt)

Start-up, capacity & resource of large copper mines vs large projects

Mine Resource & Start-up Data: Infomine; Mine Production Capacity Data: ICSG World Copper Factbook 2010

Production and start-up for projects are estimates by Greenfields Research

The geologist’s view

0

2,000

4,000

6,000

8,000

10,000

12,000


Average annual LME cash copper prices (US$/t): 1914-2010

Copper prices: USGS & www.metalpages.comInflation data: www.inflationdata.com

War productio

n

Post-war collapse

Reconstruction of Europe & Japan

Demand miniaturisation / substitution

Rise of

China

World War 1

Great Depressio

n World War 2

Collapse of

Soviet Union

Oil crisisIranian

Revolution

Vietnam War

Asian Flu

Korean War

Dot.com

Housing

boom

GFC

War production

21642 3 5 76 7 8 1 8Post-war

overcapacitySurplus

building

No investment

in new supply

Marginal supply

response

New low cost

supplySurplus building

No investment

in new supply

Marginal

supply respon

se


The BIG Answers

• Where is all this copper demand growth coming from?

– Developing world industrialisation & increased copper use intensity.

• What has all this copper demand meant for prices?

– Prices are at historically high levels partially due to strong demand but also supply

side issues are required to create the spikes we have seen.

• Can copper supply keep up with demand?

– Copper supply has relied on a large expansion of SXEW capacity and scrap recycling, to

keep up with demand in the medium to long term more new mines (particularly

concentrates mines) will have to be built.

• Where will new copper supply come from?

– Mine developers will have to choose between high risk, logistically challenging, high

capital cost but potentially very profitable projects in the developing world or lower

risk, but technically challenging, high operating cost projects in mature mining regions.

– Asian and South American countries seem increasingly well positioned.

The BIG Answers

• Why are so few new copper mines coming on stream?

– Mine project developers face a multitude of challenges based on poorer geological

quality, increased technical challenges, volatile commodity markets, financing

problems, equipment and recruitment issues, political and governmental problems.

– The most significant challenges are in controlling capital costs and project timelines.

• How will copper supply problems affect long term prices?

– Although there is softer demand sentiment in the short term, fundamental supply

problems will support medium to long prices, creating a period of high but volatile

prices (which may be exaggerated by increased investor influence in the physical

copper market).

– This is a normal part of the mining cycle with the higher prices encouraging

investment. Ultimately either new supply will come on stream or demand

destruction will occur and prices will stabilise at historically typical levels.

Thank youQuestions?

Economy & Finance

Stunted Copper Supply Growth - July 2011 - Greenfields Research