Commodity spotlight series - copper

Copper is crucial for the global transition to a low-carbon economy because it is used in electric vehicles and the infrastructure needed for renewable energy. However, the inability of present-day copper production to meet future forecasts has led most commodity analysts to predict bullish medium- and long-term outlooks for the metal.

But here is the problem. When you scan the ASX for copper stocks, there are remarkably few on offer and success stories are rare. With Oz Minerals gone (in a takeover to BHP (ASX: BHP)), the only major copper producer left on the ASX is Sandfire (ASX: SFR). The next-biggest producers are 29metals (ASX: 29M) and Aeris (ASX: AIS) with market capitalizations of around $430m and $145m, respectively. Why is this the case? Australian investors are screaming out for copper stocks, but it appears the ASX isn’t responding. 

To understand what is causing this problem, and how best to exploit the limited offerings, we need to investigate a few technical features of the mineral systems that contain copper and the economic challenges of developing and operating a copper mine.

The great Australian copper bias

A key reason why the ASX has so few copper stocks is a geological bias in the composition of the Australian continent. It may be hard to believe, but our vast and metal-rich continent contains few of the rocks that have the potential for large copper mines, and those that are present are not easy to explore. This is best illustrated by a global compilation of copper resources, which shows most of the economically constrained copper on Earth is found in just two types of deposits: porphyry copper and sediment-hosted copper. Australia is poorly endowed in both types of deposit.

Porphyry copper deposits contain a massive 69% of global resources and are clearly the world’s premier source of copper. Porphyry deposits are formed several kilometers below the surface by metal-rich fluids that are driven off magmas in subduction-related volcanic belts, like the Rockies in North America and the Andes in South America. You’ll probably remember from High School science that subduction is the geological process that pushes old and heavy oceanic crust below lighter and more buoyant crust, such as a continental landmass. The heat and friction generated by the colliding tectonic plates creates magmas that sometimes make it to the surface (e.g., the eruption of Mount St Helens), but in other cases remain trapped at depth where they may form porphyry copper deposits. Subsequent uplift and erosion can deliver the porphyry copper deposits close to surface where they can be mined.

The close association between subduction-related volcanic belts and porphyry copper deposits explains why Chile, Peru and the western USA are among the largest copper producers on Earth today. However, porphyry copper deposits are also present in ancient rocks where evidence of active volcanism has long disappeared. A good example of this is Mongolia, where Rio Tinto’s Olu Tolgoi mine is located among the low rolling sand dunes of the Gobi Desert. Although both regions have great potential for future discoveries, new deposits will be very difficult to find because our geological knowledge is limited by the paucity of exposed rock. In Australia we suffer a similar problem to Mongolia. Cadia and North Parkes are examples of porphyry copper deposits. Both are great deposits, but our knowledge of the rocks containing porphyry deposits is limited by the sparse exposures that make it difficult to predict where new deposits occur. Therefore, porphyry exploration in Australia is akin to completing a jigsaw puzzle with no picture & half the pieces removed.

Sediment-hosted copper deposits contain about 12% of global copper resources. The deposits formed in large depression in Earth’s continental crust, which geologists call sedimentary basins. It is believed the saline groundwaters that slowly flow through the sedimentary basins over many tens of millions of years, scavenged copper from certain rock units and precipitate the metal in others. There are dozens of sedimentary basins (mainly ancient) on Earth that contain sediment-hosted copper deposits, but the intriguing feature of this deposit style is about 73% of the copper occurs in only 2 districts: the Central African Copperbelt (Zambia and the Democratic Republic of Congo) and the Kupferschiefer (Poland).

There are several geological reasons why the Central Africa Copperbelt and Kupferschiefer are so heavily endowed in copper compared to all other sedimentary basins. For Australia, it means that once again we do not have the best rocks for finding large sediment-hosted copper deposits. Discoveries are still possible, but exploration for sediment-hosted copper deposits in Australia is like completing a jigsaw puzzle with no picture, half the pieces removed and no edge pieces.

Of the 7 other major types of copper deposit, 3 contain about 5% each of global resources: magmatic sulfide (e.g., Chalice’s Julimar project), volcanogenic massive sulfide (VMS) (e.g., Sandfire’s MATSA and Aeris’ Tritton deposits) and iron oxide copper gold (IOCG) (e.g., BHP’s Olympic Dam and AIC Mines’ Eloise deposits). Interestingly, VMS deposits contain about 45% of all known copper deposits globally. Therefore, VMS deposits are common, but generally quite small. Large VMS deposits, such as MATSA, are present, but the abundance of small deposits means most are the equivalent of a child’s 24-piece jigsaw puzzle: unrewarding!

Financial and logistical challenges

Porphyry copper deposits are huge mineral systems, but they are generally low-grade and therefore, need very large operations to be viable. For instance, Newcrest’s Cadia operations in NSW is planning to increase production to about 35 million tonnes per annum, and Escondida in Chile (a joint venture between BHP, Rio Tinto and Mitsubishi) processes a staggering 140 million tonnes of rock per annum. The problem for junior and small-cap companies is huge operations have huge start-up costs, and commonly take decades to get through development studies and into production. As a result, development and operation of porphyry copper deposits is the domain of mega-miners, like BHP and Rio Tinto.

Smaller copper projects have smaller start-up costs and can get into production quicker, but they come with different problems. Most copper mines produce mineral concentrates that must be sent in bulk to a refinery. The smaller the mine the less frequent the shipments (sometimes many weeks or months apart), and thus less frequent the payments. This can put pressure on a company’s working capital. Furthermore, small parcels of concentrate can be a nuisance for refineries, so may attract higher Treatment Charges and Refining Charges (TCRCs). None of these issues are insurmountable, but combined they make it difficult for smallest copper mines to be profitable.

So, what are the key considerations for investing in copper? Australia has rocks that are highly prospective for large porphyry copper (e.g., NSW and western Victoria) and IOCG deposits (e.g., South Australia), but they are poorly exposed, poorly understood and very expensive to get into production. This means the largest projects are best suited to the mega-miners, with only the bravest and luckiest juniors succeeding in the space. 

Instead, it is better to focus on small- and mid-cap companies with deposits that are easier to find and can be developed by the discoverer. These include smaller IOCG in Queensland (e.g., Evolution’s (ASX: EVN) Ernest Henry and AIC Mines’ (ASX: A1M) Eloise/Jericho), larger VMS (e.g., Metals Acquisition Corp’s (NYSE: MTAL) CSA) and, at a stretch, magmatic sulfide (e.g., BHP’s West Musgrave). This approach should then be modified for projects outside Australia, where the geology may dictate a different set of opportunities, such as sediment-hosted copper deposits in southern-central Africa, or VMS in North America.