copper mine monopoly - oct 2009 - cru analysis


2/17

Copper mine monopoly

• Why play the game?

• Whilst uncertainty remains in the short term…

• The worst is over…

• And there will be fundamentally higher long term prices

• How to play the game – picking your copper project

• Choose your:

• Region

• Budget

• Risk

• By-products

• Timeframe

• Now select your copper project (if you can)

• How to win the game

• Or how building a copper mine is like buying a house

Rules of the game

Monopoly image courtesy of Hasbro


3/17

Short term copper prices in context

Uncertainty remains in the short term…

Data: CRU Analysis

US$/t US$/lb

0%

100%

50%

Upside:

Demand recovery

Investor sentiment

Weak dollar

High energy prices

Downside:

Manufacturing stagnates

Market surplus builds

Chinese demand poor

Chinese imports weak

All prices are in real terms – 2009 $

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

0

2000

4000

6000

8000

10000

Historic copper price CRU Analysis Quarterly forecast (unpublished) CRU PRM 2010 Simulation


4/17

Medium term copper prices in context

The worst is over… (fingers crossed)

Data: CRU Analysis

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

0

2000

4000

6000

8000

10000

Historic copper price CRU Analysis Quarterly forecast (unpublished)

US$/t US¢/lb

Industrialisation

of China

+ Housing

boom

= credit

bubble

collapse

Chinese

stimulus &

scrap drought

- Period of

surplus run

down

= slow global

recovery



5/17

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

0

2000

4000

6000

8000

10000

19

00

19

04

19

08

19

12

19

16

19

20

19

24

19

28

19

32

19

36

19

40

19

44

19

48

19

52

19

56

19

60

19

64

19

68

19

72

19

76

19

80

19

84

19

88

19

92

19

96

20

00

20

04

20

08

20

12

20

16

20

20

20

24

20

28

Historical Copper Price CRU Analysis Quarterly Forecast (unpublished) CRU Analysis Long Term Marginal Cost (unpublished)

Long term copper prices in context

Fundamentally higher long term prices

Data: CRU Analysis

US$/t US¢/lb

Pre-war

build up

Post-war

collapse

Reconstruction

of Europe, Japan

& USA

Demand miniaturisation /

substitution & supply

efficiency improvements

Rise of China

& resource

scarcity

World War 1

Great

Depression

World War 2

Collapse

of Soviet

Union

Oil crisis

Iranian

Revolution

Vietnam War

Asian Flu

Korean

War

Dot.com

Rise of

China +

commodity

crisis?



6/17

Biggest deposits in Chile and Asia

Average project resource size vs resource grade vs contained copper

Data: CRU Copper Mine Project Profiles 2009

Africa

Asia

Australasia

Europe

North America

Chile

Peru

Other S&C America

10Mt contained

copper

5Mtcontained

copper

0.000

0.250

0.500

0.750

1.000

1.250

1.500

1.750

0 500 1000 1500 2000 2500 3000

Re

so

urc

e G

rad

e (

%)

Resource size (tonnes of ore)

Massive greenfield deposits

generally only found in Asia,

massive porphyries in Chile are

mostly now brownfields

Very high grade deposits typically

found in Africa, but overall do not

contain as much copper as porphyries

in Asia and the Americas.

Still some relatively large and

high grade greenfield discoveries

in Peru and some in Australasia

Europe, N. America and Australasia’s biggest deposits are brownfield,

whilst greenfield discoveries are increasingly small and low grade


7/17

Asia & Peru will be increasingly important

2009-12 (Economic Recovery)

Africa North America Chile Peru Other

Location of new production from 98 key projects during each period

2013-16 (Back to boom?) 2017+ (Into the future…)

Mainly Peruvian

greenfields

Mainly Asian

greenfields

Mainly Chilean

brownfields

Data: CRU Copper Mine Project Profiles 2009


8/17

Mines going deeper underground…

2009-12 (Economic Recovery)

Underground Combined Open Pit

Type of new production from 98 key projects during each period

2013-16 (Back to boom?) 2017+ (Into the future…)

Backlog of large open pits to

develop Increasing scarcity of good

surface deposits

Data: CRU Copper Mine Project Profiles


9/17

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Unit Capital Expenditure (US$/t/y)

Low capital cost versus low operating cost

Regional comparison of relative financial advantages


0

500

1,000

1,500

2,000

2,500

3,000

3,500

Business Operating Cost (US$/t/y)

Copper

Copper Eq.

Unit capital expenditure =

total capital expenditure /

average annual production


10/17

Performance of key copper by-products

By-products move in different cycles

0

20

40

60

80

100

120

140

160

180

200

Ja

n-0

7

Apr

Ju

l

Oct

Jan-0

8

Apr

Ju

l

Oct

Ja

n-0

9

Apr

Ju

l

Ind

ex

ed

pri

ce

(J

an

20

07

=1

00

)

Gold Silver Molybdenum Cobalt Copper

Based on nominal prices

Data: CRU Analysis

copper price = LME 3mth; gold & silver price = LBMA; cobalt price = Metal Bulletin; molybdenum price = CRU


11/17

Key copper regions offer differing risk profiles

Indication of risk balance of copper mine project development regions

Source: CRU Analysis

Chile

N. America

Australia

Europe

AfricaAsia

Peru

Higher capital

costs

Higher operating

costs

Greater

technical

risk

Greater

political

riskFuture

development?


12/17

Junior-owned projects the most affected

Average cumulative delay to projects over 2005-2009 (in years)

Data: CRU Analysis

0 1 2 3 4 5

Peru

Australia/Europe/N.Ameri…

Africa/Asia/PNG

Other S&C America

Chile

Diversified Major

Copper Major

Mid-tier

Junior

Greenfield

Brownfield

Concentrates

EW Cathodes


13/17

Future production dominated by majors

11%

9%

9%

7%

7%

18%

39%

Codelco

Anglo American

Xstrata

Rio Tinto †

BHP Billiton

Other Majors *

Others

Share of production of 98 key copper mine projects

* Other majors refers to Vale,

Freeport-McMoRan,

Southern Copper,

Antofagasta, Teck, Vedanta

Resources & Kazakhmys


† Assumes the post-2021

ownership structure of Grasberg


14/17

Executive Summary & Analysis section

Data: CRU Analysis

Escondida

Andina

MorenciCananea Pebble

Grasberg

Oyu Tolgoi

UdokanOlympic

Dam

Mount Isa

Cloncurry

ToromochoAntamina Quellaveco

Vale

Copper

Colombia

Bolivia

LumwanaZambiaDR

CongoKGHM Boliden

Com

munity

Chest

Com

munity

Chest

$7

5 B

$50 B$3.0B$2.5B $40 B

$1.5

B$

1.0

B$

75

0M

$5.0B $5.0B $2.5B

$1

00

B

$30 B

$500M $250M

$9

0 B

$5

.0

B

$5.0B

$5

.0

B

$1

0 B

$1

5B

$2

5 B

$5

00

M

$250M

$100M

$100M

$1

00

M$100M


15/17

Potential tactics in copper mine monopoly

Rich hostages

• Get the prime properties, charge enormous

rent

• Near impossible to be bought out of this

position

• Can lead to high internal standards becoming

an obstacle to investment

Poor man’s row

• Buy the cheap properties and aggressively

develop them

• One of the few ways of successfully entering

the industry

• Quite high risk for potentially not great returns

Medium is the message

• Buy the “middle” properties and seek to add

value

• Can offer greater returns for lower risk

• Can also offer lower returns for greater risk

(or how building a copper mine is like buying a house)

The middle man

• Buy the utilties and transport infrastructure to get a

competitive advantage

• Security of supply and logistics reduces project

risk

• Can be expensive and not add the same value as

investing in mine development

Scattergun

• Buy a bit of everything

• Stops industry consolidation and makes you a

strategic key

• Can be expensive, unwieldy and not provide

sufficient value

“They’re not making it anymore”

• Borrow heavily, but whatever becomes available

• There’s only a limited supply of mines so value in

the long term is always upwards

• Very high risk…


16/17

…but remember when choosing your strategy

• World class copper deposits are increasingly rare

• New greenfield resources are not as good as the older brownfield resources

• There is an increasing trade off between political and geological risk

• There is also an increasing trade off between capital costs and operating costs

• By-product revenues are becoming increasingly important to project planning

• The difficulties in developing projects mean increasing delays and longer

development timeframes

• The industry is potentially organically consolidating

Conclusions


Thank you for listening

Today’s information source:

CRU Copper Mine Project Profiles

(2009 Edition)

Today’s speaker:

John Sykes

Consultant – Copper Production

[email protected]

+44 (0) 20 7903 2082

mailto:[email protected]

copper mine monopoly - oct 2009 - cru analysis

Documents

cru copper

copper project

long term copper prices

short term copper prices

medium term copper prices

performance of key copper

project profiles

nominal prices data