|
-- Posted Wednesday, 7 October 2009 | | Source: GoldSeek.com
Consumption, speculation and growing demand by emerging economies add up to a rather rosy outlook for copper, says Steve Parsons, Senior Research Analyst for Wellington West Capital Markets. In this exclusive Gold Report interview, Steve explains how investors might capitalize on a theme that's picking up momentum on the copper concentrate side of the industry.
The Gold Report: Steve, it's often said that copper is a great way to play a period of economic growth. Do you agree with that?
Steve Parsons: I absolutely agree. Copper is an essential metal for developing nations. Generally speaking, an increase in GDP/person coincides with an increase in copper usage. The story here is that China and India are still coming from a low base. If you look at where copper usage is in developed nations, it is upwards of 9 kilograms of consumption per person annually. China's consumption currently weighs in at approximately 3.5 kilograms per person. So China is still at an early stage of development. The move to urbanization should keep upward pressure on copper usage. By 2025, it is projected that China will have 221 cities with a population of more than one million. At present, Europe only has 35.
TGR: Some are saying that $2 will be the new copper floor. What's your thinking on that?
SP: Deposits are getting deeper and they're getting lower grade. In certain cases in Chile, whether it's Escondida or Chuquicamata, the deposits are moving into ores with more impurities, such as arsenic. A general deterioration in the quality of deposits will almost certainly push operating costs higher, in turn helping to underpin a higher copper price.
Although $2 is not unreasonable, we use $1.85 long term—with long term starting in 2014. That $1.85 is actually very conservative, and it's really a function of currencies too. We're tying the $1.85 figure to an 85-cent Canadian dollar. To the extent we start using a 90-cent or current FX rates, we'd be closer to $2, if not higher.
If you believe in the Chinese story and if you believe there are going to be 221 cities with a population north of a million, $1.85 copper is likely too conservative.
TGR: Could you review for our readers the differences in terms of investment opportunities between copper concentrate and the actual metal?
SP: Sure. It is important to make the distinction. At the mine level, copper is produced either in concentrate form or as cathode. Concentrates require further upgrading via smelting and refining, whereas copper cathode can be LME grade at the mine gate.
The opportunity we see—and it's probably one of the most prominent themes in the copper space—is that in the copper concentrate market specifically, there is too much smelting capacity chasing too little concentrate. Smelting and refining capacity expansions in China, Korea and India have bred stiff competition for dwindling sources of Cu concentrate. We believe that China's mandate to protect employment requires the country to maintain smelter output, thereby exacerbating the situation. Their decision to keep those smelters open has forced treatment and refining charges—levied by the smelters to the miners—to all-time lows. We don't see this situation changing at least until 2013.
With TC/RC (treatment charges and refining charges)rates falling and the availability of concentrate and scrap copper limited, we believe smelter groups are likely intensifying their efforts to become fully integrated—that is to acquire interest in mines or development projects with copper concentrate production. Such a move not only keeps the smelter fed, but also supplants third-party concentrates that are currently being processed at low treatment and refining charges. Under the current economic environment, the tactic also has the potential to conveniently deliver assets at a discount to NAV while at the same time negating the adverse effect of low TC/RCs on smelter operating margins. This goes back to a model that was more typical of the 1970s and 1980s, when it wasn't such an adversarial relationship between the smelters and the miners.
TGR: Do you see this trend of foreign smelters buying copper mining companies continuing for the next year or two? Will it result in the whole industry being consolidated under the umbrellas of a few smelters?
SP: We initially saw the smelter integration theme emerge in late 2007/early 2008. The movement seemed to take a hiatus late last year as surplus conditions emerged bringing visibility for higher TC/RCs. Earlier this year the theme re-emerged in no uncertain terms with Japan's second-largest copper producer publicly stating plans to take a stake in at least one copper mine in a bid to gain more control over the source of ore feed, with the ultimate goal of increasing the proportion of internally supplied ore to 70% from the current 40%. The opportunity here as it relates to copper concentrate stories is that in an environment where development assets remain at depressed valuations due to a lack of conventional financing, we believe the emergence of smelter groups as motivated buyers should help alleviate these concerns and ultimately enable a re-rating of company shares.
TGR: Are smelters essentially taking on specific projects rather than ownership positions in the companies themselves?
SP: I think that's going to be the case in North America. That's true in Australia, too, where there is also, in effect, more resource nationalism and the Chinese have come to realize that it actually might be hard to acquire such companies outright. They're better off approaching it at a project level.
However, the situation in South America is a little different. Various Chinese groups were involved in taking over outright some very large strategic copper assets in Peru. I think that possibility still exists in Peru and maybe some other South American countries.
TGR: If the trends you're seeing continue, with Chinese smelters acquiring either projects or entire companies, won't the smelters end up dictating copper prices?
SP: I don't think this will have much impact on the copper price. Certainly the mining companies will have less ability to negotiate cheaper refining charges. Right now they have the smelters over the barrel. They can dictate very, very low terms for treatment and refining—to the point where they run the risk of putting the smelters out of business. These integrations will put the ball back in the smelters' court to a certain extent, and give them a better chance to negotiate on higher TC/RCs.
TGR: How should individual investors take advantage of this trend?
SP: I think you want to get in on copper development plays, particularly ones that produce copper concentrates, as the offtake contract can be a source of financing. Ideally, you want something that will produce a high-quality copper concentrate and have a mine life of 15-plus years.
I just can't see this thing stopping. The reason I say you want to play copper development stories is, one, because you've got the opportunity to get a bid from a smelter and help you finance a project or they take you outright. Larger cashed-up companies are talking about rolling up the mid-cap copper space. But the reality is that there's very little to roll up, so they're going to have to look at near-term copper development stories. That means they're competing with the smelters for the same assets.
There is a logical argument to be made that copper development is the place to be.
TGR: Thanks, Steve, for all of your insights.
Steve Parsons, P.Eng., a member of Wellington West Capital Markets' equity research team since April of 2008, is a Senior Research Analyst focused on the mining sector. Wellington West is an institutional equities firm that specializes primarily in the mining, energy and technology sectors. After earning his bachelor's of engineering degree in mining at Queen's University, Steve worked as a metallurgical engineer for Placer Dome, and then moved on to a metallurgical consulting firm. Shifting to the investment side of the business after that, he signed up as a Research Associate with GMP Securities, concentrating on base metals initially and later joined MGI Securities as a Research Analyst.
Streetwise - The Gold Report is Copyright © 2009 by Streetwise Inc. All rights are reserved. Streetwise Inc. hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part. The GOLD Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report. From time to time, Streetwise Inc. and its directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise. Streetwise Inc. does not guarantee the accuracy or thoroughness of the information reported. Streetwise Inc. receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734. Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.
-- Posted Wednesday, 7 October 2009 | Digg This Article | Source: GoldSeek.com
Previous Articles
|
