In the copper industry, rising capital costs and declining ore grades at legacy mines are driving a sustained bull market. Analysts at Stifel Financial believe these factors have significantly influenced copper prices over the past decade.
Legacy Mines and High Costs
The cost of capital has been prohibitively high, limiting returns for mine investors. Cole McGill, Vice President at Stifel Financial, discussed this trend with Bloomberg. “For larger projects, the high capital cost is a significant factor in the copper space,” McGill stated.
Between 2009 and 2016, copper supply grew at an annual rate of 3.5-4%, fueled by China’s commodity boom in the early 2000s. However, since copper prices hit a low of $2.00-$2.20 per pound in 2016, the growth rate has slowed to about 1% annually. This slowdown is linked to the “legacy asset” phenomenon, which the market is increasingly recognizing.
The top 20 copper mines have seen a 15-20% decline in ore grades since 2000. Without higher-grade African projects, this decline is even more pronounced. As grades drop, mining companies must move more rock to extract the same amount of copper, increasing capital intensity.
McGill pointed out that major copper producers like BHP, Anglo-American, and Antofagasta are now focusing on their top three high-grade assets. “BHP is unique in that its production proportion from its top three mines has decreased over the past decade. They are now investing to support legacy assets for future growth,” McGill explained.
Supply Disruptions and Future Outlook
Despite higher prices, copper miners face supply disruptions, particularly in Latin America. These disruptions add another layer of complexity to an already challenging environment for copper production.
Analysts believe that the need to boost production from aging mines and develop new projects will keep capital costs high. This situation may continue to drive the copper market for the foreseeable future.
With copper demand expected to rise, particularly for electric vehicles and renewable energy infrastructure, the industry faces both challenges and opportunities. Navigating high capital costs and declining ore grades will be crucial for sustained growth.
Source: Mining.com
