In my previous article, we covered the aluminium industry and some of the key driving forces behind its past and future performance. We will now take a closer look into a widely used base metal: copper.
What is Copper?
Copper is essential for modern living. After steel and aluminium, copper is the most widely used metal on the planet. It is used throughout a huge range of industries including electricity and electronics, manufacturing, construction and transport. This explains why it is often linked directly to the economic activity in those sectors and industries and linked indirectly with the health of the overall economy – hello Dr Copper.
Escondida, located in Chile (shown below), is the world's largest copper mine and proves that sometimes even enemies can become friends when the mineral deposit is worth enough. Rio Tinto Limited (ASX: RIO) and BHP Billiton Limited (ASX: BHP) own 30% and 57.5% respectively in an unlikely joint venture. The Escondida mine produced 850,000 tonnes (850kt) of copper in 2014.
The biggest copper mines around the world are usually mined in open pits. In contrast, the majority of Australia's copper production comes from underground mines which are the largest underground mines in the country and include the following world-class deposits:
BHP's Olympic Dam mine near Roxby Downs in South Australia produced 184kt of copper, 4kt of uranium, 121,000 ounces (121koz) of gold, and 972koz of silver in 2014.
Newcrest Mining Limited's (ASX: NCM) Cadia Valley underground mine located near Orange, New South Wales, produced 60kt of copper and 592koz of gold in 2014 (the high copper production is one reason why this mine has very low all-in sustaining costs).
Glencore owns and operates the Mt Isa and Ernest Henry mines in Queensland. In 2014, these mines produced 210kt of copper, 62koz of gold and 941koz of silver.
As you will have noticed from these examples, copper deposits are often found in conjunction with numerous other minerals including gold, silver, nickel and uranium, among others. This is because they are formed from magmatic and hydrothermal fluids from within the earth which can contain varying amounts of any or all of these minerals.
Apart from the mines already mentioned, you will find copper mines in almost every state and territory throughout Australia, excluding the Australian Capital Territory and Victoria.
The copper industry
Chile is the dominant global producer of copper and accounted for around 30% of global production in 2014. Australia sits in the next group of 6 countries which have a global share of between 5-10% each, as shown below.
As a widely-used industrial metal, demand for copper is largely linked to the output and growth of the global economy. China consumes around 40% of the world's copper supply and continues to be the main driver for the growth of copper (and most other commodities). The transition of China's economy from being driven by investment to that of domestic consumption has had a large impact on the copper price. China's consumption is expected to rise in the future, however, the growth rate will be much lower than the prior 10 years.
Slowing economic growth in China and reports that copper inventories monitored by the London Metal Exchange have ballooned 92% in 2015 have punished the copper price and it now sits at prices not seen since the global financial crisis in 2008.
The Australian copper industry
Glencore and BHP are the largest Australian copper producers. Newcrest comes in at #3 and although it is technically a gold miner, copper is also present in economic quantities at its Telfer and Cadia Valley gold mines and is a valuable by-product.
Some of the resources discovered recently in Australia including Sandfire Resources NL's (ASX: SFR) DeGrussa mine, Sirius Resources N.L.'s (ASX: SIR) Nova deposit, and OZ Minerals Limited's (ASX: OZL) Prominent Hill mine are low-cost operations and might be able to turn decent profits even in the current low price environment.
2014 production rates for the main miners operating in Australia are listed below.
Major players
Looking at the international producers the largest global copper mining companies are: Chilean State-owned Codelco (1,840kt); NYSE-listed Freeport-McMoRan (1,470kt); LSE-listed Glencore (1,300kt); and BHP (1,200kt). Below BHP, the production rates of the companies are significantly less, with Rio Tinto producing "only" 600kt or 50% that of BHP.
Summary
The copper industry is suffering from a long period of declining prices mainly brought about by increasing global supply and slowing Chinese growth.
Resource companies are exposed to the cyclical nature of commodity prices: When the price is high, companies are making money and additional projects are being approved and coming online. When the price falls, higher cost projects become unprofitable and companies begin to struggle financially. To make matter worse, the projects that were approved during the times of higher prices will take years to enter production which creates a supply glut, forcing prices even lower.
Some of the mid-sized Australian producers with low-cost assets may be able to profit during the current low price environment. It is always tempting for a profitable company to acquire additional assets from struggling companies during downturns. These need to be smart acquisitions that will enhance the company in the future, not hinder it. This is important for investors to assess in any companies being considered for investment.
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