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Monday, 02/13/2017 12:10:17 PM

Monday, February 13, 2017 12:10:17 PM

Post# of 1317
From Stockhouse -

ursusbrumae

10,000 Copper

Paul Gait of Bernstein Research, with a Masters in Experimental and Theoretical Physics, published a hundred page document laying out the case for USD 10,000/t copper.  The essence of the case is that population growth, urbanisation and renewable energy will require much more copper production per annum, and the increase needed from now till 2030 is met only one-third by known projects.  Even if significant new discoveries are made, they will not close the gap because they take too long to develop.  And meanwhile, grades are declining and costs escalating everywhere as existing copper mines deplete.

One noteworthy point he makes is about the gargantuan Chilean porphyries in the high Atacama desert in the foothills of the Andes.  They currently produce 25% of the world's mined copper.  They were each discovered between 35 and 150 years ago.  But there have been no new major discoveries in that geography, despite a long period of foreign exploration with modern methods since Pinochet in the 1970s, the US-Chilean alliance, market liberalisation via the Chicago school, and opening up to foreign investment.  Not one major porphyry was found there since 1981, the year La Escondida was discovered.  The only major discoveries since then were Grasberg in Indonesia and Oyu Tolgoi in Mongolia.

The top ten copper mines in the world by production, La Escondida, Antamina, Los Pelambres, El Teniente, Chuquicamata, Grasberg, Los Bronces, Radomiro Tomic, Andina, and Collahuasi, eight of which are from Chile, one Peru and one Indonesia, account for 20% of the world's copper supply.  They all require very large sustaining capital budgets to maintain production, and with declining grades require more throughput just to keep production level.  The South American porphyries are challenged by water shortages in the driest desert in the world 2,000+ metres above sea level.

Of all known metals, copper has the highest ratio of consumption to crustal abundance, which means it is a special metal.  He calls it the most over-utilised metal.  One might say that it is the most precious metal relative to abundance.  In any case, it is essentially the porphyries of the United States, especially Bingham Canyon, which allowed large scale copper production, which was necessary for the electrification of the Western world.  And then the porphyries of Chile which ramped up production in the 1980s and 1990s which allowed electrification and modernisation of the Third World.  Both developments brought about secular declines in the real price of copper.

Today, China is still at a very low copper intensity (consumption per capita), a quarter or a third of that of developed countries, and needs much more to reach its urbanisation and development horizon.  India is at 5-10% copper intensity.  China is the world's second largest copper producer, but is not well endowed relative to land mass, or certainly population, and has low quality deposits, with now very short reserve lives.  They are vastly outproducing their geological endowment, and this cannot continue.  Essentially, the modern world as we know it was made possible by electricity, and this has depended upon giant copper porphyries, first in the United States and then in Chile.  But no new copper district can replace Chile.  It is a geological freak.  Along the full length of the west coast of South America, the world's greatest continental subduction zone has created these enormous volcanogenic copper deposits all through the Andes mountain chain.  Nothing like it has been found, nor is it likely to be found, to replace Chilean copper supply.

There is an important argument about production schedules.  Chile used to have a 100 year reserve life.  But production increased to bring reserve life down to 30 years.  This is natural, to increase net present value by receiving cash flows sooner.  However, there is a limit to this optimisation.  This is because increased production requires more installed capacity at the mine site, mill, flotation plant and smelter.  At a USD 10,000-15,000/tonne capital intensity, which is average for the Chilean porphyries, and at the low end for copper mines worldwide, with few exceptions, the optimum reserve life is 25-35 years, respectively.  So bringing forward production beyond 30 years is value-destroying because the accretion of the discount from earlier cash flows is more than offset by increased upfront capital cost.

So demand is set to increase significantly, while existing ore bodies decline.  New discoveries, which are not likely to be of the scale to replace Chile anyway, will take twenty years to develop.  The conclusion of the report is that over the next 15-20 years prices must rise significantly to make resources of known deposits economic, and therefore reserves.  Thus the USD 10,000/tonne copper price forecast.

Read more at http://www.stockhouse.com/companies/bullboard?symbol=ivn&postid=25837501#bI3ZFtXovkqRZecB.99