Global copper greenfield investment falls short of demand outlook, experts say

Leading mining companies have recently expanded their exposure to copper via acquisitions rather than through greenfield investments, but new projects are needed to feed an expected rise in demand amid global energy transition trends, market experts have told Fastmarkets

Talk of an oncoming copper shortage has emerged in the market, with forecasts predicting a looming deficit and multiple producers saying that there will likely be a shortfall in the coming decade, with sources telling Fastmarkets of estimates of a 6 million-tonne deficit by 2030.

Copper prices

As the price of copper is predicted to increase in line with the shortfall of supply, large mining companies have taken to huge merger and acquisitions.

In December, BHP made a binding offer worth $6.4 billion to acquire Oz Minerals. That same month, Rio Tinto increased its share at the Oyo Tolgoi mine copper mine in Mongolia by buying out Turquoise Hill Resources for a consideration of approximately $3.1 billion.

A joint study between the Chilean Center for Copper and Mining Studies (Cesco) and consultancy group Vantaz called “Signs from Mining,” that polled experts and overall executives in the country, showed copper demand and prices are more likely to rise in the coming two years.

In the study, 34.6% of polled experts said prices will rise in 24 months, and 23.8% said they will be stable. Also, 44.6% of people polled said demand will grow in that same period, and 21.5% said it will be unchanged.

“This has to do with energy transition, and all new wind and solar plants to be built, among others,” Daniela Desormeaux, studies director at mining consultancy Vantaz Group, said. “If you measure the intensity of copper usage in renewables, compared with, for example, fossil fuels, it is significantly higher. The same in electromobility, since an electric car consumes five times more copper than combustion cars.”

The official copper cash price on the London Metal Exchange ended 2022 at $8,387 per tonne, up by 2.31% month on month from $8,198 per tonne, 9.68% higher than $7,647 per tonne at the end of the third quarter but falling by 13.46% during the year from $9,692 per tonne on December 31, 2021.

Chile’s copper commission Cochilco, a mining ministry body, estimated in December the copper price would average $3.70 per lb ($8,157 per tonne) in 2023, down from $3.95 per lb projected back in July.

M&A over new projects

The focus on acquiring existing mines has obvious benefits for the mining companies over investment in greenfield projects. Mergers and acquisitions provide tried-and-true copper production and come with significantly less risk than new projects entirely.

“Big [greenfield] projects often face issues,” Duncan Hobbs, the head of research at trader Concord Resources, said.

“Struggles on recent projects [are] a big advert for challenges new greenfield projects can face [and] few projects are coming online on time and on budget,” Hobbs added.

An analyst source noted that along with lead times of 8-10 years for greenfield investments, mines now are also facing more issues than previously. The analyst highlighted increased regulatory loopholes, environmental, social and governance (ESG) concerns, and increased exploration costs making greenfield investment less reliable.

Fastmarkets analyst Andrew Cole agreed with this, stating, “costs of new mines have gone up, including materials, labor and ESG consideration.”

Acquisitions and brownfield investments “are often less risky” than greenfield, according to Hobbs. Proven and functional resources, with completed infrastructure and regulatory approval, make purchasing existing mining companies a far safer investment than completely new ventures.

Analysts also told Fastmarkets, however, they disagreed as to whether mergers and acquisitions from major mining companies will be positive for the copper industry.

“M&A and brownfield investment doesn’t address industry needs. They don’t change the supply-demand balance, and don’t add new tonnes for the industry,” Fastmarkets’ Cole said, but added that the investment was positive for those companies and their shareholders.

Hobbs agreed in part, saying, “from the point of view of any individual company their primary aim is to earn the best return for their business and shareholders, it is not their first objective to resolve any prospective supply shortfall for the market as a whole.”

On the other hand, analysts noted that investment from junior mining companies is likely influenced by the prospect they may be taken on by larger companies. Although on the surface acquisitions are simply moving around existing supply, this possibility increases the likelihood of investment from junior mining companies.

“Financiers of junior miners often expect them to be taken on by bigger companies if they find and develop resources,” Hobbs said.

Greenfield investments

When asked whether investment in greenfield projects for copper was too low Hobbs responded, “no.”

Jorge Cantallopts, executive director at Cesco, said that it was natural that brownfield projects dominated through time, but also stated that greenfield investment needed to grow.

“Developing brownfield projects certainly helps to fill the gap [between projected supply and demand] but increasing greenfield projects will be key,” Cantallopts said. “Neither current existing projects, nor theoretically recycling will be able to meet the projected demand for the coming decade.”

The analyst source also stated that the “project pipeline is weak” and that more greenfield projects will be needed. Cole agreed, saying, “the industry needs a couple of big mines a year but it’s just not there.”

Large producing countries, such as Chile and Peru — the two largest in the world —, are seemingly falling behind amid tougher regulatory situations and recent discussions about royalties.

Chilean copper commission Cochilco, for example, said that brownfield investments still dominate over greenfield in the country, although that ratio has improved recently. And a recent study by Cesco and Vantaz showed that the industry in Chile mostly believes copper output will fall.

According to Cochilco, Chile’s investment backlog reached 53 projects at $73.66 billion for the 2022-2031 period, from 51 projects and $68.93 billion for 2021-2030. Greenfield projects jumped to $28.51 billion, from $19.20 billion, but still accounted for only 38.71% of that total.

“In the case of greenfield projects, we have a debt. It is necessary to rely on mechanisms that could encourage the effective use of our country’s geological resources,” Cesco’s Cantallopts said.

The “Signs from Mining” study showed that 36.9% of polled experts and market participants in Chile expected the country to reduce copper production in the coming two years. Another 22.3% said output would stay largely unchanged, while only 16.9% responded that it would increase.

Additionally, the poll had 36.2% responding that investments will fall in Chile and 22.3% saying it would be stable two years from now. Part of it is a result of pessimism over regulation, given 52.3% said the regulatory environment will be unfavorable and 37.7%, that it will be “normal”.

Vantaz’ Desormeaux said this negative view on regulation most likely stems from uncertainties that royalty and environmental licensing discussions have brought on new mining projects.

“Chile is indeed well-positioned from geological, business and professional points of view. However, there are a series of institutional and governance challenges that make carrying out projects more difficult,” Cantallopts said.

“We trust that the advances in the dialogue that have been identified could facilitate the realization of said projects, without neglecting the new criteria companies must incorporate into their core business [such as] the socio-environmental footprint,” he added.

Market deficit

It is also unclear how large potential shortages could be, with analysts telling Fastmarkets that in a deficit scenario, current resources could be stretched further with lower-grade ores becoming more economically viable. Along with increased recycling sources the analysts argued deficits maybe reduced.

“Production cut-off moves to lower grades as metal prices increase, meaning if there are shortfalls in market, mines extend their life, meaning existing mines may be able to extend operating life, helping to close out projected shortfalls in supply,” Hobbs said.

For now, falling grades in mined ore and a slow-paced replacement have been putting Chilean copper mine production under pressure. In the first eleven months of 2022, for example, Chile’s copper output was 4.83 million tonnes, a 5.84% decrease from 5.13 million tonnes in the corresponding period of 2021, according to Cochilco.

On the other hand, Cochilco expected Chilean production to rise to 5.7 million tonnes in 2023.

“Expansions and restarts could happen,” the analyst source said, but they said they still anticipated a shortfall of metal in this scenario.

Substitution is also likely to be seen in a scenario where production of copper does not meet demand. “Consumers can switch and substitute,” Fastmarkets’ Cole said.

The analyst source highlighted, however, that “substitution is not a short and easy change,” and likely to be less significant than some people predict.

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