The looming copper shortage is an opportunity you should be paying attention to

Thursday, 6 April 2023 — Melbourne

[9 min read]

Dear Reader,

Turn your mind back to early 2023 and copper was a dominating theme in financial markets.

China’s reopening sparked a flurry of interest.

After a disappointing year, producers were setting up for a major surge as the global economy suddenly hit the panic button on supply.

Overnight, financial commentators had become expert copper analysts, giving their take on why the metal was set to hit new highs.

Headlines were suddenly hit with copper supply tightness and soaring demand outlooks.

But as rapidly as these stories emerged, just as quickly, they evaporated from the mainstream press.

The copper hype was short lived.

Revised growth forecasts in China to just 5% GDP, the lowest in a quarter of a century, meant copper interest faded to the background.

No doubt, a banking collapse in the US didn’t help either!

But lack of mainstream interest should not dissuade you from the potential opportunity.

In fact, it’s a key reason you should be looking at this critical metal.

As readers of my Diggers and Drillers publication would know, copper has been a longstanding theme.

We remain on the hunt for quality opportunities and rare buying opportunities.

The reason?

It all boils down to future SUPPLY.

As the Canadian billionaire mining magnate and CEO of the Ivanhoe Mines [TSE:IVN] puts it, the outlook for copper rests on one-third demand and two-thirds supply.

Supply (or lack of it) will be the primary driving force behind what I believe will be a new copper boom, one that could rival perhaps the largest ever recorded…

That was way back during the US Civil War, more than 160 years ago, when copper reached a staggering $8 a pound!

So, what could drive copper past its all-time high?

South America is the backbone for global production.

However, threats continue to emerge, which are dampening the production outlook for key mines across the region.

Neglect to invest in new projects, including exploration, means ageing mines are being pushed past their use-by date.

Large miners have focused more on shoving low grade marginal ore and waste material through processing plants, rather than spend capital on finding new high-grade deposits.

The effects of the last commodity cycle — from extreme peak to low — continue to play on the minds of mining executives who remain averse to risk.

But that will come at a major cost…mines are a depleting asset.

As commodity prices rise and decade old mines finally expire, mining giants will be forced into a fierce bidding war to secure the next generation of deposits.

Except these deposits are yet to be discovered.

Given there is a 15–20-year time lag from discovery to production, a critical supply gap looms.

The coming crisis has been fuelled by LACK of investment in new discovery.

This is a global problem.

Yet Chilean based producers are also being hit with another major issue…nationalisation.

The country’s left-wing government recently reformed its constitution, paving the way for its major copper mines to come under State control.

The constitutional groundwork has been put in place…major multinational miners fear what could come next.

It presents as a major problem for the world’s biggest copper miners…including Australia’s BHP Group [ASX:BHP].

The company co-owns the world’s largest copper mine Escondida.

With these threats looming large, future development projects will be shelved indefinitely.

That poses enormous challenges for future global copper supplies.

But Chile’s copper producing neighbour, Peru, has big problems of its own.

Following a controversial election late last year, riots and violent protests erupted across the world’s SECOND-largest copper producing nation.

It caused a shutdown of some of the world’s largest copper mines…including Glencore’s Antapaccay project and MMG’s Las Bambas mine.

Las Bambas alone accounts for around 2% of global supply.

While the geopolitical situation has faded from the headlines, riots continue to erupt.

On 6 March 2023, the UN issued a statement calling an end to the widespread violence.

But the situation here will have long lasting effects…mining giants are not nimble.

Operators are being forced to pull the pin on future development, including exploration.

Investment is trickling away from these important copper regions.

Together, Peru and Chile account for a staggering 40% of global supply.

There’s enormous, concentrated risk for this critically important metal…just as the world demands more of it as it attempts to build out the renewable energy infrastructure.

Finding alternative supplies won’t come quickly…new mine development takes anywhere from 15–20 years.

As an investor, the looming copper shortage is an opportunity you should be paying attention to

But there are very few quality ‘pure copper plays’ listed on the ASX.

Now, you could venture overseas and add a North American producer to your portfolio.

There’s Southern Copper [NYSE:SCCO], which is strongly leveraged to copper production.

However, its major operations are situated in Southern Peru…

With the prospect of mine closures amid heightened civil unrest, owning this stock means potentially missing out on the copper story altogether.

Another major North American copper player that has little in the way of commodity diversification (good if you want strong leverage to the metal) is First Quantum Minerals [TSE:FM].

But, again, big geopolitical challenges lie ahead for the company...

Panama shut down the company’s key copper operation known as ‘Cobre’ in December 2022 after First Quantum refused to accept the governments punitive tax demands.

While a deal has since been brokered between the government and the company, the threat of nationalisation looms large.

But analysts have raised a possible solution to the geopolitical challenges in South and Central America…

A new copper frontier that holds some of the most exciting high-grade deposits in the world…the Democratic Republic of the Congo (DRC).

The DRC is seen as the solution that will pick up the slack from falling production in South America.

But having worked in Central Africa as a geologist…I can only say those predictions are based on false hopes.

The DRC is one of the poorest nations on the planet and riskiest locations to invest.

The nation has been plagued by decades of war, political dictatorship, corruption, and civil unrest.

For miners looking to sustain their ESG obligations, the DRC is virtually uninvestable.

The risk of mine nationalisation is also disturbingly high…

Back in 2010, while I was working in the region, the Congolese Government nationalised one of the country’s largest copper deposits.

So, who owned it?

First Quantum!

After FM spent upward of $600 million developing the project, the government stepped in (via military intervention) and took full control of the mine.

Workers were escorted offsite under military guard.

It had an enormous impact on the company and its shareholders.

It’s why nationalisation is a dirty word among FM ranks!

But before all this went down, FM was hailed as a pioneer. It looked set to benefit from its high-risk bet being amongst the first big multinational to tap into this mineral rich frontier.

It ended in disaster.

Nationalisation remains an ever-present danger for all international mining companies operating in the DRC.

As an investor looking to capitalise on copper’s supply bottleneck, you can’t afford to have precious capital tied up in a project that watches the boom pass by thanks to these types of risks.

But the options for investors looking to gain ‘pure’ exposure to copper is exceedingly difficult.

Paradoxically, that’s exactly why you should be investing in copper.

But ONLY if you can tap into the right opportunity.

Positioning your portfolio for higher copper prices

Now, there is ONE quality company in Australia that offers ‘pure’ exposure to copper production…Oz Minerals [ASX:OZL].

This producer holds a world class asset in a geological terrain called the Gawler Craton of South Australia.

The area hosts major high grade deposits including BHP’s Olympic Dam and OZL’s Prominent Hill and Carrapateena projects.

Yet, as I’m sure you are aware, OZL is now off the table for investors now that BHP’s offer to purchase the company looks destined to take place.

But this is not a done deal yet!

OZL is incredibly attractive for investors looking to gain maximum upside from rising copper prices without taking on geopolitical risk.

If you’re on the hunt for quality pure play copper producers, you’ll understand how rare that opportunity is.

As one of the world’s lowest cost copper producers, operating in a tier one jurisdiction there is perhaps no other producer set to gain as much as OZL in the coming years.

Yet the OZL board has unanimously accepted BHP’s offer.

So now the decision rests with shareholders…will they sell-out just before a boom in copper emerges?

In my mind, that would be an enormous mistake.

But even if investors lose the opportunity to invest in OZL, there could be another strategy…

Focusing on company’s developing the next generation of high-quality copper deposits.

This is a key focus at my publication Diggers and Drillers.

But understanding what makes an asset stand out comes through years of working as an exploration geologist, focused on copper specifically.

For around three years I worked in and around the copper belt of Zambia with one of the darlings in the industry at the time…Equinox Minerals.

The company held the flagship Lumwana deposit, that was eventually acquired by the giant Canadian miner Barrick in 2011.

I’ve drawn on these experiences to select high quality copper plays within Australia. You can access those stocks here.

I believe this will be the ultimate strategy for playing the coming boom in copper.

Regards,

James Cooper,
Editor, The Daily Reckoning Australia

PS: Due to the Easter weekend, there will be a modified publishing schedule for The Daily Reckoning Australia. We will return to our usual publishing schedule on Tuesday, 11 April.

Dear Reader,

The point we were making yesterday was that no matter how much life insurance you buy…you will still die.

And no matter how much money the Fed ‘prints’, it will still go broke.

When it does, someone will pay. In an honest economy, as in life itself, people usually pay for their own errors. But the whole idea of politics is to shift the costs from those who deserve it…to those who don’t.

And so…in the spirit of mischief, which is all it merits, we turn to the latest news from the BBC. In preamble, this is something we can get behind.

‘San Francisco reparations plan proposes $5m for black residents’:

‘San Francisco could become the first major US city to fund reparations, under a plan that would award $5m (£4m) to each eligible black resident.

‘A city-appointed panel also suggests guaranteed annual incomes of $97,000 for qualifying recipients and homes in San Francisco for $1 a family.’

Hey, why not? Why shouldn’t the ‘city-appointed panel’ give away US$5 million to everyone with the favoured DNA? It’s not their money. They didn’t earn it. They didn’t save it. It’s not real anyway. And they were careful to say that they didn’t concern themselves with the practicality of the program.

Numbskull programs

That’s right, they didn’t worry about where the money would come from…just so long as it wasn’t from them.

And the recipients? Would they be harmed by free money…including almost US$100,000 per year forever…without having to work another day…for 250 years!? Why bother to study? Why bother to save? Why bother to learn a skill? We’ve seen what small welfare payments can do to people — so let’s try big welfare payments. The panel must not have worried about that either.

What is astonishing is that the panel’s report — which is one of the most numbskull and unworkable programs ever devised by public officials — was approved unanimously. Apparently, there was not a single doubt or misgiving on the panel. Instead, the committee vouchsafed that people with African blood had suffered greatly — and uniquely — 158 years ago…and that the people of San Francisco (the city hardly existed at the time…and had no slaves)…should make amends.

Our heart leaps…thrills…at the thought of blithely correcting injustice, without a care in the world for the real-world costs.

People who did no harm will pay fortunes to other people, who suffered no harm. Taxpayers (a third of whom are Asian) will pay — an estimated US$600,000 per family — so that people with a slightly different DNA will get a US$20 million payday per family of four.

We hope they follow through. We’d love the reality show rights: ‘SanFran Reparations! A real-life cluster!’

How will it turn out? Let’s take a guess. The non-Black population will leave…they’re no fools. The city will borrow the money and then, its tax base undermined, it will default. City services will collapse. And the city residents will be reduced to a remnant of big-spending, shiftless freeloaders.

The Victim Olympics

But what a jolly blabber fest that ‘panel’ must have enjoyed. Perhaps ‘Uncle Tom’s Cabin’ was required reading…or ‘White Fragility’ for a more contemporary spin. Everywhere they looked they saw ‘racism’. They saw people who thought Blacks should take care of themselves — obviously, white supremacists. And other people who thought Blacks were a victim class that needed special help and special rules granted to them by white do-gooders — obviously, racists too. Then, they looked into their own hearts, and like looking into an empty safe…they saw the solution — a big wad of cash was needed.

But what cheapskates. If you’re going to compensate people for the wrongs they never suffered…committed elsewhere…by people who may or may not be in any way related to the current taxpayers, why not toss a penny to the descendants of European Jews? They were systematically exterminated by the Third Reich. And that was during the lifetimes of people still alive in the Bay Area, not a century and a half ago!

Or how about the many Irish…who were slaughtered in their homeland…who died in droves in the Famine…and then who arrived in the US so destitute that they were put to work doing the jobs considered too dangerous for slaves? On the docks of Mobile, Alabama, slaves tossed the bales of cotton into the ships. Down in the hold, Irish deckhands caught the bales and died from breathing the dust. Or, how about the many thousands of indentured White slaves? Black slaves were valuable property and had to be protected. But the White slaves were dispensable…their overseers worked them hard as they could until their indentures expired.

What about survivors of the Armenian genocide? Of gypsy persecutions? Of Bolshevik murders? Of the Wounded Knee Massacre? Of homosexual prejudice? And what about all those with stutters, limps, Downs syndrome? What about people who are too short, too tall, too fat, too thin…too dumb…too ugly…too timid…too lonely…too depressed…too irascible…too sick…too insane…?

Other people’s money

But what fun it must be to hand out other peoples’ money and think you are doing good.

The theory is ridiculous. But it is the implementation that is likely to trip them up. The wrong being righted in SF happened so long ago that the DNA evidence has long since been contaminated. Almost all Black Americans have some white DNA. They may wear the halos of descendants of slaves…but they also bear the stain of enslavers. Should they get only partial payments from the Great White Fathers of San Francisco?

The panel’s recommendation was to give the money to anyone who ‘identified’ as African American…and met some other fishy requirements. But this is the slippery slope that all racist projects eventually slide down. Ultimately, you have to decide who is and who isn’t a member of the favoured group. In other words, you actually have to act like a racist.

A 19th century stage play, which appeared at the same time as Uncle Tom’s Cabin, called The Octaroon. It highlighted the race laws of the Deep South, in which a person with only 1/8th African blood was nevertheless considered ‘Black’ and was put up for auction. Her lily-white lover tried to buy her, but he was outbid by someone who wanted her as his mistress. In her case, having African blood, even a little of it, was a serious problem; the poor girl committed suicide. Now, it is the whole city of San Francisco with a gun to its head. And now, there’s a US$5 million advantage to having African blood!

But how much do you need? How are they going to decide? We think of our own grandchildren. They are marvellous mixtures of Irish, Asian, African, and ‘native American’ DNA; would they qualify? Should we move them to SF forthwith, so they are fixed for life?

Oops. Too late. The panel decided that you had to be resident in the city in 1996…if you moved there afterwards, either you didn’t suffer from slavery or you are just out of luck.

Regards,

Bill Bonner,
For The Daily Reckoning Australia