Copper supply outlook puts Xanadu in box seat
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Special Report: If ever there was a reminder about the supply challenge facing the copper market in coming years, BHP’s recently released annual production report provided it.
BHP is the operator of the world’s biggest copper mine, Escondida in Chile, which produces twice as much copper than the world’s next biggest copper mine, Collahuasi, also in Chile.
But in financial year 2019, copper production at Escondida slid six per cent (to 1,135,000 tonnes) due to a 12 per cent decline in grade at the mine. Grade is expected to drop a further five per cent in financial year 2020.
This kind of depletion is occurring at many of the world’s major copper mines and is a key reason analysts see a supply gap emerging and a higher price for the red metal in coming years.
Leading industry forecaster CRU Group is predicting a small surplus in the copper market this year and next, but after that, it sees the market shifting into deficit. In 2023, CRU anticipates a supply shortfall of 270,000 tonnes.
Another well-regarded forecaster, Wood Mackenzie has a 10 million tonne supply gap opening up by 2027 based on forecast annual demand reaching 24 million tonnes by that time.
While established mines are ageing, strikes, community opposition, unplanned shutdowns and extreme weather events also pose a threat to supply.
Recently in Peru, for example, locals have mounted a fresh bid to stop the construction of Southern Copper’s Tia Maria mine over fears the development will damage crops and affect water supplies.
If their efforts are successful, another 120,000 tonnes of annual supply will be prevented from reaching the market.
All this suggests that companies with copper projects that offer scale like Xanadu Mines (ASX: XAM) are sitting in a sweet spot.
Following the recent takeovers of MOD Resources and Nzuri Copper, Xanadu is one of only a handful of stocks remaining on the ASX that offer exposure to significant copper development stories.
The Company’s Kharmagtai project in Mongolia’s southern Gobi region contains an open-pit resource of 1.9 million tonnes of copper and 4.3 million ounces of gold.
Not contained in that resource estimate is the recent Zaraa discovery, a fourth porphyry deposit identified at Kharmagtai, while there are multiple other porphyry targets within the company’s tenements that could yet add to copper-gold resources.
In the near-term, Xanadu is focusing on proving up shallow oxide gold resources that might support a heap leach start-up operation, potentially providing early cashflow and presenting alternative financing options for the development of the larger copper-gold project.
Eight oxide gold targets across the Kharmagtai lease have been reviewed, including above the existing Stockwork Hill and Copper Hill deposits, and exploration targets have been established for each.
The largest of these exploration targets is at Golden Eagle, where Xanadu believes there could be 1-1.32 million ounces of recoverable gold.
The company expects to be able to quickly and cheaply test the concept through a drilling program that began in July and metallurgical testwork.
Results from the program will inform the next steps taken.