Copper executives forecast another windfall year

Santiago, Chile — The average copper price is expected to average over US$3 a lb. in 2007 due to continued strong demand from China and Asia and the inability of producers to quickly increase supply, said copper mine executives and industry analysts at the recent 6th World Copper Conference in Santiago, Chile.

Having run down strategic state copper inventories in 2006, China returned strongly to the market in the first quarter, recently sending the copper price up to US$3.11 a lb. However, Chinese buying behaviour appears to have become more sophisticated with purchases now being made within a pricing range.

“China has been hoovering up copper in 2007, but it has a new buying pattern and backed away when prices hit US$3 a pound,” said David Thurtell, metals analyst at BNP Paribus. “It has enough copper to get by for a few months and I think they will start buying again when the price drops to US$2.50 a pound.”

With China’s demand set to grow 8% to 4.2 million tonnes according to Shanghai-based Maike Group, copper supply and demand will remain evenly balanced through 2007 such that any supply disruption promises to spike the copper price as happened in 2006, when the price averaged US$3.05 per lb., compared with a long-term average of about US$1 a lb.

“We think market tightness will continue this year with growth in Asia and China,” said Jose Pablo Arellano, executive president of Chile’s state copper company, Codelco, the world’s largest copper producer. “China is in a growth stage that means it has intensive demand for copper in construction.”

Despite more disciplined buying from China, market observers still believe the market is susceptible to supply-side volatility.

“The volatility is still there, so we will continue to see short periods where copper hits US$3 a pound through to 2020,” said Allan Trench, copper manager at London-based research firm CRU.

“We are very optimistic and believe we are going to have a second quarter with prices above US$3 a pound,” said Marcelo Awad, CEO of Antofagasta Minerals, the mining division of London-listed Antofagasta (ANFGY-O, ANTO-L).

High copper prices means red metal miners are looking to repeat the bumper profits posted in 2006. Codelco saw pretax profits jump 88% in 2006 to US$9.2 billion, Antofagasta Minerals saw pretax profits rise 86.6% to US$2.86 billion, while diversified miner BHP Billiton (BHP-N, BLT-L) saw its profits jump 41% to US$6.2 billion and Southern Copper (PCU-N) generated US$2 billion in profit.

High prices should see marginally profitable mining projects become feasible as the investment models used by lenders factor in price increases.

“The price will be high for a long way out, which will help smaller companies lock in feasibility for their projects,” Thurtell added.

Aur Resources

Canadian copper producer Aur Resources (AUR-T, AURRF-O) is among those companies looking to benefit from high copper prices by doubling copper production by 2010 to over 213,000 fine tonnes, says CEO James Gill.

The company is undertaking a US$336-million expansion at its Andocollo mine in Chile’s Region IV, which currently produces 20,000 tonnes of copper cathodes per year. Aur is aiming for production of 81,000 fine tonnes copper per year contained in concentrates for 10 years, starting in the fourth quarter of 2009, and 66,000 oz. gold from the hypogene primary copper that lies under the supergene deposit currently being exploited. The mine life will be extended to 21 years with average production of 72,000 tonnes copper per year and 66,000 oz. gold.

The company sees expansion possibilities at its Quebrada Blanca mine, which produces 80,000 tonnes copper per year, in Region I.

“Quebrada Blanca also has a hypogene deposit underneath and we will spend US$2 million this year drilling it,” Gill said. “We think we may have one billion tonnes there.”

Aur Resources has factored in a US$1.50-per-lb. copper price for the Andacollo expansion, up from US$1.20 at the early planning stage to reflect the changing market situation.

“The original figure in the feasibility study was too low and did not reflect reality,” Gill explained. “Everyone is revising their figures up.”

Even Aur Resources’ revision is seen as low.

“US$1.50 a pound is a very conservative estimate for the copper price,” said Michael Jansen, vice-president at JPMorgan. “You can get a lot better than that.”

However, increasing capital costs, a shortage of speciality engineering services and a scarcity of mining professionals and technicians means that “it will be difficult to keep projects on schedule,” said Trench, while project costs grow dramatically.

“There has been a forty-per-cent capital cost escalation in the last two years and there is anecdotal evidence that labour costs have risen twenty or thirty per cent,” he added.

This is of concern to Southern Copper, which, having recently completed a US$520-million upgrade to its Ilo copper smelter in Peru, is preparing a three-phase expansion plan to increase copper concentrate treatment capacity to 1.33 million tonnes per year by 2012 from 1 million now. Southern Copper CEO Oscar Rocha said that would increase production to 380,000 tonnes per year of cathodes from 280,000.

The company intends to add 109,000 tonnes per year of mine production by 2009 through expansion of the Cananea mine in Mexico, another 283,000 tonnes per year by 2011 with projects in Peru and another 360,000 tonnes annually between 2012 and 2018, Rocha said. The company has increased reserves at its Toquepala mine in Tacna department by 83% to over 1 billion tonnes grading 0.66% copper, while reserves at Cuajone in Moquegua department have been increased 8% to 1.15 billion tonnes grading 0.61% copper.

Project pipeline

Further down the line, the company has greenfield projects such as the prefeasibility stage Los Chancas project, which contains an estimated 200 million tonnes of ore grading 1% copper, 0.07% molybdenum and 0.12 gram gold per tonne, and Tia Maria, which has estimated reserves of 200 million tonnes grading 0.4% copper.

Base metals demand and high prices mean mining companies are pulling out the stops to find and develop projects.

“We see significant growth in demand for resource products in the developing countries around the world,” said Chip Goodyear, CEO of BHP Billiton. “We cannot afford not to go where the resources are and provide the capacity to supply the market.”

Despite an interest in copper that is accounting for about half of its US$19-million exploration budget in 2007, Canada’s Teck Cominco (TCK.B, TCK-N) will continue to focus on zinc, said Peter Kukielski, executive vice-president and chief operating officer.

“We want to reduce volatility in our business but we like zinc a lot. Last year, Red Dog in Alaska made more money than all our other operations,” he said.

As the world’s thirst for copper continues unabated, projects in less attractive countries — such as a US$2-billion expansion planned by National Iranian Copper Industries Company (NICICO) in Iran — are being seriously considered.

“We have the feasibility study, are working on the conceptual engineering, and we will expand in stages,” said financial and economic director Mohammad Zouelm.

— The author is a freelance journalist based in Santiago, Chile.