RBC says over US$200 billion needs to be spent on new copper mines in the next decade … but where?
Analysts for the Royal Bank of Canada say miners need to find over US$200 billion in the next decade to avoid a crippling copper deficit in the face of surging demand from the energy transition.
The investment bank sees a 10Mt deficit — equivalent to over a third of the current market — emerging by 2035 if this capital isn’t spent, saying incentive prices of over US$4 per pound will be needed to generate the 15% minimum IRR needed to justify miners taking the plunge.
Current copper prices tally just US$3.82/lb after China’s post-Covid economy failed to deliver the trampoline the market had been expecting at the start of 2023.
That could have the consequence of chilling investment in copper supply at a time demand is expected to grow at a rate well above historical norms.
Copper consumption has risen 2.5% pa on average for the past four decades. That will ramp up to 2.8% pa, RBC suggests, due to incremental demand from EVs, renewables and the expansion of the global electrical grid.
“You have probably heard by now that the energy transition will require a lot of copper. An additional 1%/year on our estimates which doesn’t sound like much but would be the equivalent of one large scale copper mine coming online every year,” analysts led by Sam Crittenden said in a note this week.
“We can debate demand projections, but it’s always been a supply story with an aging supply base, declining grades and quality projects becoming more scarce and harder to build for ESG reasons.”
RBC suggests this could drive prices higher, forecasting a lift to US$4.50/lb from 2025-2027.
“We think this potential supply deficit is filled partially by increased scrap and substitution/thrifting of copper but largely through a supply response from the copper mining industry which likely requires a period of high copper prices,” Crittenden and Co. said.
“We forecast copper prices of $4.50/lb from 2025-2027 for this reason which could be conservative if supply struggles to respond. However, there is also risk of further demand destruction if copper shortages persist.”
At current prices copper mines generate a free cash flow yield of under 4%, below the S&P 500 average. At US$3.50/lb that slips to less than 2%, beating only negative yielding utilities.
But at US$4.50/lb, that FCF pushes 8%, around double the S&P 500 and only behind the energy sector for yield.
The big issue is the number of quality projects that are actually around the place.
“Shovel ready, high quality projects are scarce after several years of limited exploration and development from the industry and the projects sanctioned in 2017/18 were the low-hanging fruit,” RBC says.
“The past two years of higher copper prices have spurred increased exploration spending and the eco-system is healthier, but more work is needed.
“Several projects face ESG challenges that won’t be easily solved with higher prices and may need government intervention or investment from new sources (i.e. automakers) to advance.”
With that in mind, M & A is likely to continue in the space. It’s something we’ve seen in recent times with BHP’s (ASX:BHP) $9.6 billion deal to acquire OZ Minerals, Rio Tinto’s (ASX:RIO) minority buyout of Turquoise Hill and its Oyu Tolgoi stake, Glencore’s hostile bidding for Canada’s Teck, and project level purchases like Sandfire’s (ASX:SFR) MATSA buy and South32’s (ASX:S32) purchase of a 45% stake in the Sierra Gorda mine in Chile.
“There are only a handful of companies with the type of scale that would be of interest to the large global miners; however, we could see more consolidation in the mid and small cap space,” RBC reckons.
“Exploration stage takeovers have been limited but a pickup in transactions could spur financing and exploration and improve the overall ecosystem noted above.”
At an large cap level, RBC sees First Quantum Minerals, Lundin Mining and Ivanhoe Mines as potential takeover targets.
It has outperforms on a number of international copper juniors, including respectively BHP and Rio backed Filo Mining and Arizona Sonoran, Ecuador focused Solaris Resources and oxide explorer Marimaca Copper.
Elon Musk has boldly claimed the world will have enough copper for Tesla’s EVs, despite warnings the metal intensive nature of the technology will require a massive lift in mining to satisfy the order books of the world’s big OEMs.
RBC does see a path where EV designs improve to be less copper intensive. They remain moreso than ICE vehicles though, with the 70kg of copper in first generation BEVs potentially falling to 19kg (2.3x ICEs on RBC estimates) by the third gen.
Still, RBC thinks copper demand from EVs will rise from 0.8% in 2020 to 12.4% by 2040, with total demand from cars lifting from 2Mt to over 5Mt in two decades.