• Goehring & Rozencwajg is ‘incredibly bullish’ on copper over short term, but new tech could supress prices longer term
  • Introduction of heap leaching & SX-EW in the 1990s depressed the copper market for most of the decade
  • G&R say two new technologies being developed could crush the dreams of copper bulls

 

While the short-term outlook for copper is strong, tech breakthroughs could hobble the long-term outlook, say noted contrarian investors Leigh Goehring and Adam Rozencwajg.

In 2023, copper has disappointed  pundits and punters waiting impatiently for an ‘all-but-locked-in’ multi-decade bull market to begin.

It’s still coming though, they say.

 

 

 

The world’s biggest copper mines are getting old and tired, and new tier 1 deposits aren’t being found fast enough to fill the gap.

Meanwhile, copper’s role as an industrial lynchpin is being supercharged by the green energy thematic.

EVs, for example, need up to five times more copper than an internal combustion passenger car and, like lithium to a lithium-ion battery, there are no viable substitutes.

Expansion of electricity grids to handle renewable energy will also see copper demand for power lines alone double by 2040, according to the International Energy Agency.

Less copper + parabolic demand = an extended period of higher prices. Or so the story goes.

But there is a seldom-mentioned bear case for copper.

Earlier this year Stockhead spoke with Goehring and Rozencwajg, who say they have been correctly predicting commodity trends for decades.

Contrarian investors purposefully go against prevailing market trends by selling when others are buying, and buying when other are selling.

The theory is that markets are subject to “herding behaviour” amplified by fear and greed, making markets regularly over-and under-priced.

“By looking for undervalued assets in areas other people think are uninvestable, we’ve been able to generate very strong returns over time,” Rozencwajg said.

“You don’t want to be a contrarian for contrarian’s sake; sometimes things are cheap for a reason.

“But we often find that at very market ‘tops’ and ‘bottoms’ people have a funny tendency to extrapolate the trends that are in place.

“They don’t see that second derivative – the change that is taking place.”

 

What do G&R think about copper?

In its Q1 2023 commentary G&R mentioned it was “uneasy” with the copper bull market consensus.

“As contrarians, should we maintain our bullish outlook despite most of the industry now agreeing with us? On a short-term basis, we are maintaining our stance,” it says.

But it contemplated that, longer term, the copper market may hit roadblocks due to a disappointing renewables buildout and booming production growth via a handful of technological breakthroughs.

G&R doubled down on this view in its Q3 commentary.

“Many investors remain bullish in the long-term but are pessimistic about copper’s prospects over the next several months, owing to fears about a recession and a Chinese slowdown,” it says.

“We disagree. We are incredibly bullish over the short term but are becoming more concerned over the long term as new technologies risk bringing on additional supplies.”

 

First, the good news

In the near term, G&R say copper fundamentals remain incredibly favourable.

“Despite worries about a slowdown, Chinese demand is up 12% year-on-year for the first nine months of 2023. Indian demand has accelerated sharply and is now up 36% over the same period,” they say.

“Mine supply, meanwhile, remains challenged. Disruptions in Chile have been complicated by Panama’s recent decision to revoke First Quantum’s operational contract for its massive Cobre Panama mine, representing 350,000 tonnes per annum or nearly 2% of world supply.

“Even with Kamoa-Kakula phase II and Olu Tolgoi underground set to come online, we expect global mine supply will be muted.

“Easily mobilized inventories are dangerously low. On a days-of-cover basis, inventories are now at 3 days – a level historically associated with sizeable near-term price spikes.”

This prediction is already beginning to come true, with copper inking a solid gain in November amid the threat of these supply disruptions from South and Central America.

 

But the long-term outlook could be dire for red metal heads

The solution for high prices is high prices, as the saying goes.

This is starkly apparent in metals markets, which has a history of finding solutions to unsustainably high prices.

Technology can be a huge disruptor. When the copper industry introduced heap leaching & SX-EW in the 1990s, it allowed producers to mine and extract copper from low-grade oxide deposits for the first time.

It grew to represent well over 20% of all copper production within 10 years, G&R says, and severely depressed copper for most of the decade.

This could happen again, G&R says.

“In recent weeks, we have spent time visiting and speaking with several new technology companies that could usher in vast new, unexpected sources of mine supply over the next several years,” it says.

“Given how little mining technologies have advanced in recent decades, such advancements would be most overdue.”

G&R focuses on a couple of technologies – Typhoon and Jetti – poised to crush the dreams of copper bulls.

Typhoon is the brainchild of Robert Friedland, the mining magnate behind three of the most important copper discoveries in the last century.

Developed over 25 years, Typhoon emits a massive ‘pulse’ which penetrates thousands of metres below the surface with extremely high resolution.

For the first time in history, exploration geologists can see to depths never before imagined, G&R says.

“Typhoon helped discover Arizona’s billion-tonne Santa Cruz deposit – an area that has been extensively prospected and mined for over a century,” it says.

“Typhoon also helped discover Tintic in Utah and expand Hog Heaven in Montana – two other historic mining areas long thought to have been thoroughly picked over.

“How many other porphyry deposits lay hidden just beyond the reach of conventional IP [induced polarisation]?”

There are new technologies that could change processing as well, just like SX-EW did in the 1990s.

US company Jetti Resources claims to have unlocked the “holy grail” of mineral processing — a cheap technique to leach copper from low-grade, currently subeconomic sulphide stockpiles.

“Although estimates vary, Jetti expects to produce 1 million tonnes annually by the decade’s end,” G&R says.

“BHP is testing Jetti at Escondida – the world’s largest copper mine in Chile.”

They aren’t the only ones.

No analyst has any of these disruptive technologies in their projections, G&R says.

“We think they would be wise to start paying attention,” they say.

“These technologies will likely not change copper balances soon, so we remain bullish. However, over the medium term, their potential must not be overlooked.”

 

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