stunted copper supply growth - july 2011 - greenfields research
DESCRIPTION
Stunted copper supply growth: How soaring copper demand is straining the supply chain and supporting the medium to long term price outlook.TRANSCRIPT
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Stunted copper supply growthHow soaring copper demand is straining the supply chain and supporting the medium to long term price outlook
The BIG Questions
How is soaring copper demand straining the supply chain and supporting the medium to long term price outlook?
The BIG Questions
• Where is all this copper demand growth coming from?
• What has all this copper demand meant for prices?
• Can copper supply keep up with demand?
• Why are so few new copper mines coming on stream?
• How will copper supply problems affect long term prices?
Where is all this demand coming from?
Copper – the industry bellwether
Feeding the bulls
Government stimulus, Rise of China, New demand sectors, Industrialisation V2.0
Feeding the bears
Asset bubbles, Western woes, Substitution, Chinese decline
The industry bellwether
Infrastructure3,266Kt (15%)
Manufacturing11,569Kt (52%)
Construction7,264Kt (33%)
ICSG The World Copper Factbook 2010 Presentation(Based on International Copper Association data)
Major Uses of Copper: Usage by End‐Use Sector, 2009
The industry bellwether
Construction7,264Kt (33%)• Electrical Power• 5,273Kt (24%)• Plumbing• 1,336Kt (6%)• Architecture• 327Kt (1.5%)• Communications• 193Kt (<1%)• Building Plant• 133Kt (<1%)
Infrastructure3,266Kt (15%)
Manufacturing11,569Kt (52%)
ICSG The World Copper Factbook 2010 Presentation(Based on International Copper Association data)
Major Uses of Copper: Usage by End‐Use Sector, 2009
The industry bellwether
Construction7,264Kt (33%)• Electrical Power• 5,273Kt (24%)• Plumbing• 1,336Kt (6%)• Architecture• 327Kt (1.5%)• Communications• 193Kt (<1%)• Building Plant• 133Kt (<1%)
Infrastructure3,266Kt (15%)• Power Utility• 2,541Kt (11.5%)• Telecoms• 725Kt (3.5%)
Manufacturing11,569Kt (52%)
ICSG The World Copper Factbook 2010 Presentation(Based on International Copper Association data)
Major Uses of Copper: Usage by End‐Use Sector, 2009
The industry bellwether
Construction7,264Kt (33%)• Electrical Power• 5,273Kt (24%)• Plumbing• 1,336Kt (6%)• Architecture• 327Kt (1.5%)• Communications• 193Kt (<1%)• Building Plant• 133Kt (<1%)
Infrastructure3,266Kt (15%)• Power Utility• 2,541Kt (11.5%)• Telecoms• 725Kt (3.5%)
Manufacturing11,569Kt (52%)• Industrial• 2,742Kt (12.5%)• Diverse• 2,359Kt (10.5%)• Consumer• 1,814Kt (8%)• Automotive• 1,590Kt (7%)• Cooling• 1,330Kt (6%)• Transport• 967Kt (4.5%)• Electronics• 768Kt (3.5%)
ICSG The World Copper Factbook 2010 Presentation(Based on International Copper Association data)
Major Uses of Copper: Usage by End‐Use Sector, 2009
Demand in summaryShort term Long term
Bears
Bulls
Demand in summaryShort term Long term
Bears
Bulls
Government stimulus
Rise of China
Demand in summaryShort term Long term
Bears
Bulls
Government stimulus
Rise of China Industrialisation V2.0
New demand sectors
Demand in summary
Asset bubbles
Western woes
Short term Long term
Bears
Bulls
Government stimulus
Rise of China Industrialisation V2.0
New demand sectors
Demand in summary
Asset bubbles
Western woes
Short term Long term
Bears
Bulls
Chinese declineSubstitution
Government stimulus
Rise of China Industrialisation V2.0
New demand sectors
Bulls versus bears
Government stimulusRise of China
New demand sectorsIndustrialisation V2.0
Asset bubblesWestern woesSubstitution
Chinese decline
Bulls versus bears
Government stimulusRise of China
New demand sectorsIndustrialisation V2.0
Asset bubblesWestern woesSubstitution
Chinese decline
In the short term?
Bulls versus bears
Government stimulus
Rise of ChinaNew demand sectors
Industrialisation V2.0
Asset bubblesWestern woesSubstitution
Chinese decline
In the long term?
What has all this copper demand meant for prices?
Prices are at historical highs
But strong demand doesn’t mean high prices
The example of the 1990s
Economics 101
Supercycles & supply chains
Prices are at historical highs
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000Nominal Price
Average monthly LME cash copper prices (US$/t): 1981-2011
Copper prices: www.indexmundi.com
Prices are at historical highs
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000Nominal Price Real Price
Average monthly LME cash copper prices (US$/t): 1981-2011
Copper prices: www.indexmundi.comInflation data: www.inflationdata.com
Strong demand doesn’t mean higher prices
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000Refined Usage (Kt) Real Copper Price (US$/t)
ICSG The World Copper Factbook 2010 Presentation (Based on ICSG data) Copper Prices: USGS; Inflation data: www.inflationdata.com
World Refined Copper Usage versus Copper Prices, 1960-1999
Strong demand doesn’t mean higher prices
0
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6,000
8,000
10,000
12,000
14,000
16,000
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000Refined Usage (Kt) Real Copper Price (US$/t)
World Refined Copper Usage versus Copper Prices, 1960-1999
More copper consumed than ever before...
...but historically low prices
ICSG The World Copper Factbook 2010 Presentation (Based on ICSG data) Copper Prices: USGS; Inflation data: www.inflationdata.com
Demand & prices in the 1990s
1990 1991 1992 1993 1994 1995 1996 1997 1998 19990
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
0
500
1,000
1,500
2,000
2,500
3,000
3,500
Refined Usage (Kt) Nominal Copper Price (US$/t)
ICSG The World Copper Factbook 2010 Presentation (Based on ICSG data) Copper Prices: USGS; Inflation data: www.inflationdata.com
World Refined Copper Usage versus Copper Prices, 1990-1999
Demand & prices in the 1990s
1990 1991 1992 1993 1994 1995 1996 1997 1998 19990
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
0
500
1,000
1,500
2,000
2,500
3,000
3,500
Refined Usage (Kt) Nominal Copper Price (US$/t)
ICSG The World Copper Factbook 2010 Presentation (Based on ICSG data) Copper Prices: USGS; Inflation data: www.inflationdata.com
World Refined Copper Usage versus Copper Prices, 1960-1999
Economics 101
Demand – Supply = Price
– =
Supercycles & supply chains
Supercycles Supply chains
Can copper supply keep up with demand?
Where does copper come from?
Are we running out of copper?
Brownfields - current mine expansions
Can the industry’s ageing mines increase capacity or is the opposite likely?
Greyfields - the scrap market
The collar on copper prices and can it contain them in the future?
Where does copper come from?
Simplified copper production supply chain
MineMines sulphide ore
to produce concentrates
SmelterSmelts
concentrates to produce anodes
RefineryRefines anodes to produce cathodes
~12.0Mt ~12.0Mt ~12.0Mt
Copper cathode image: http://en.wikipedia.org/wiki/Whim_Creek_Copper_MineProduction estimates based on ICSG June 2011 Press Release
Are we running out of copper?
Mine Production (Mt)
Economic Reserves (Mt)
Depletion
16.2 630 ~39 years
2010 estimatesU.S. Geological Survey Mineral Commodity Summaries, January 2011
Are we running out of copper?
Mine Production (Mt)
Economic Reserves (Mt)
Depletion
16.2 630 ~39 yearsCommodity Mine Production
(Mt)Economic
Reserves (Mt)Depletion
Platinum Group Metals 380 tonnes 66,000 tonnes ~174 years
Bauxite (Aluminium) 211 28,000 ~132 years
Coal (2008 data) 7,500 948,000 ~126 years
Cobalt 0.088 7.3 ~83 years
Iron Ore 2,400 180,000 ~75 years
Nickel 1.55 76 ~49 years
Oil (2009 data) 30.79 billion barrels 1,341 billion barrels ~44 years
Molybdenum 0.234 9.8 ~42 years
Silver 22,200 tonnes 510,000 tonnes ~23 years
Zinc 12 250 ~21 years
Gold 2,500 tonnes 51,000 tonnes ~20 years
Lead 4.1 80 ~20 years
Tin 0.261 5.2 ~20 years2010 estimates (unless stated)
U.S. Geological Survey Mineral Commodity Summaries, January 2011Except coal & oil: U.S. Energy Information Administration, International Energy Statistics (online)
Are we running out of copper?
Mine Production (Mt)
Economic Reserves (Mt)
Depletion
16.2 630 ~39 yearsCommodity Mine Production
(Kt)Economic
Reserves (Kt)Depletion
Mexico 230 38,000 ~165 years
Australia 900 80,000 ~89 years
Peru 1,285 90,000 ~70 years
Poland 430 26,000 ~60 years
Kazakhstan 400 18,000 ~45 years
Russia 750 30,000 ~40 years
Indonesia 840 30,000 ~36 years
Other 2,300 80,000 ~35 years
USA 1,120 35,000 ~31 years
Chile 5,520 150,000 ~27 years
China 1150 30,000 ~26 years
Zambia 770 20,000 ~26 years
Canada 480 8,000 ~17 years
U.S. Geological Survey Mineral Commodity Summaries, January 2011
2010 estimates
So what’s the problem?
Left chart: Robin Bahr, Credit Agricole, Global Copper Market Trends 2011-12 for the ICSG Environmental & Economic Committee Meeting, 14th April 2011
Escondida & Grasberg data from Rio Tinto Operation Reviews Q4 2002-10
Global average copper mine head grade, 1978-2018
2001 2002 2003 2004 2005 2006 2007 2008 2009 20101.00%
1.20%
1.40%
1.60%
1.80%
2.00% Escondida (Concs)
2001 2002 2003 2004 2005 2006 2007 2008 2009 20100.75%
1.00%
1.25% Grasberg
Average global grade decline:
~0.015% /year~0.15%/decade
Average decline: ~0.05% /year
Average decline:
~0.017% /year
Grade is King!
Chart: Robin Bahr, Credit Agricole, Global Copper Market Trends 2011-12 for the ICSG Environmental & Economic Committee Meeting, 14th April 2011
Operating cost data based on Costmine (Infomine USA) Mining Cost Service 2010
Global average copper mine head grade, 1978-2018
1.4% 1.2% 1.0%0
500
1,000
1,500
2,000
Mining + Milling Cost (US$/t)
Milling
Mining
Increase in mining + milling costs related to grade decline for a hypothetical open pit copper mine with a stripping ratio of 2:1, processing recovery of 95% and producing 100,000 tonnes of copper per year
Grade is King!
Chart: Robin Bahr, Credit Agricole, Global Copper Market Trends 2011-12 for the ICSG Environmental & Economic Committee Meeting, 14th April 2011
Operating cost data based on Costmine (Infomine USA) Mining Cost Service 2010
Global average copper mine head grade, 1978-2018
1.4% 1.2% 1.0%0
500
1,000
1,500
2,000
Mining + Milling Cost (US$/t)
Milling
Mining
0.0% 0.5% 1.0% 1.5% 2.0% 2.5%0
500
1,000
1,500
2,000
2,500
3,000
3,500
f(x) = 60.823740881 x^-0.701015752R² = 0.999997291041528
Mining + Milling Cost (US$/t)
Increase in mining + milling costs related to grade decline for a hypothetical open pit copper mine with a stripping ratio of 2:1, processing recovery of 95% and producing 100,000 tonnes of copper per year
Can mine production keep pace with demand?Simplified copper production supply chain
MineMines sulphide ore
to produce concentrates
SmelterSmelts
concentrates to produce anodes
RefineryRefines anodes to produce cathodes
~12.0Mt ~12.0Mt ~12.0Mt
Copper cathode image: http://en.wikipedia.org/wiki/Whim_Creek_Copper_MineProduction estimates based on ICSG June 2011 Press Release
Can mine production keep pace with demand?Simplified copper production supply chain
Sulphide Mine
Mines sulphide ore to produce concentrates
SmelterSmelts
concentrates to produce anodes
RefineryRefines anodes
to produce cathodes
SXEW Mine
Mines oxide ore to
produce cathodes
~12.0Mt
~12.0Mt
~12.0Mt
~4.0Mt
Copper cathode image: http://en.wikipedia.org/wiki/Whim_Creek_Copper_MineProduction estimates based on ICSG June 2011 Press Release
The miracle of SXEWTypical oxide capped
copper sulphide deposit
The miracle of SXEWTypical oxide capped
copper sulphide depositConventional mining of sulphides (pre-1970s)
The miracle of SXEWTypical oxide capped
copper sulphide depositConventional mining
of sulphides (pre-1970s)
Modern mining of sulphides & oxides (post-1970s)
Can mine production keep pace with demand?World Copper Mine Production, SXEW versus Concs, 1900-2009
ICSG The World Copper Factbook 2010 Presentation (Based on ICSG data)Copper cathode image: http://en.wikipedia.org/wiki/Whim_Creek_Copper_Mine
Can SXEW supply continue to grow?
Depth chart: Robin Bahr, Credit Agricole, Global Copper Market Trends 2011-12 for the ICSG Environmental & Economic Committee Meeting, 14th April 2011
Indicative depth of discoveries, 1980s, 1990s & 2000s
Can SXEW supply continue to grow?
Depth chart: Robin Bahr, Credit Agricole, Global Copper Market Trends 2011-12 for the ICSG Environmental & Economic Committee Meeting, 14th April 2011
Sulphuric Acid chart: Cochilco, The Chilean Sulfuric Acid market Estimations Through 2015, Aprll 2009
Indicative depth of discoveries, 1980s, 1990s & 2000s
Sulphuric Acid Import Prices, CIF Meijillones,
Chile, 2001-2008
Mine production growth stalling
2006 2007 2008 2009 20100
5,000
10,000
15,000
20,000
25,000 Mine Production (Kt) Mine Capacity (Kt)
2005-2010 Data: ICSG Press Release 23rd May 2011
World Copper Mine Capacity versus Production, 2005-2010
+6.5%
+5.5%
+3.5%
+4.2% +1.9%
+0.9%+2.6%+0.4%+3.3%+0.5%
Can mine production keep pace with demand?Simplified copper production supply chain
Sulphide Mine
Mines sulphide ore to produce concentrates
SmelterSmelts
concentrates to produce anodes
RefineryRefines anodes
to produce cathodes
SXEW Mine
Mines oxide ore to
produce cathodes
~12.0Mt
~12.0Mt
~12.0Mt
~4.0Mt
Copper cathode image: http://en.wikipedia.org/wiki/Whim_Creek_Copper_MineProduction estimates based on ICSG June 2011 Press Release
What about non-mine production?
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000 Mine Production (Kt) Refined Usage (Kt)
World Copper Mine Production versus Copper Usage, 1960-2010
2000-2009 Data: ICSG The World Copper Factbook 2010 Presentation 2010 Data: ICSG Press Release 23rd May 2011
What about non-mine production?
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000 Mine Production (Kt) Refined Usage (Kt)
World Copper Mine Production versus Copper Usage, 1960-2010
0.8Mt shortfall (~17%)
3.2Mt shortfall (~16.7%)
2000-2009 Data: ICSG The World Copper Factbook 2010 Presentation 2010 Data: ICSG Press Release 23rd May 2011
Can copper supply keep pace with demand?
Simplified copper production supply chain
Sulphide MineMines sulphide ore to produce concentrates
SmelterSmelts concentrates to produce anodes
RefineryRefines anodes to produce cathodes
SXEW MineMines
oxide ore to produce cathodes
ScrapLow grade “old
scrap” for smelting into anodes and high grade “new
scrap” for refining into cathodes
~4.0Mt
~12.0Mt ~15.0Mt ~15.0Mt
~3.0Mt
Copper cathode image: http://en.wikipedia.org/wiki/Whim_Creek_Copper_MineProduction estimates based on ICSG June 2011 Press Release
Can copper supply keep pace with demand?
World Refined Copper Production, Primary, Secondary & SXEW, 1960-2009
ICSG The World Copper Factbook 2010 Presentation (Based on ICSG data) Copper cathode image: http://en.wikipedia.org/wiki/Whim_Creek_Copper_Mine
Can scrap supply continue to grow?
“New scrap”
“Old scrap”
Generated during manufacturing
Usually high grade
Production linked to industrial
production (IP)
Production is price sensitive
Generated from disused end-use
products
Usually lower grade
Production linked to construction
Production is price sensitive
Scrap acts as marginal supply
2005 2006 2007 2008 2009 20100
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000Secondary Production (Kt) Copper Price (US$/t)
2005-2010 Data: ICSG Press Release 23rd May 2011
World Secondary Copper Production, 2006-2010
Scrap supply tight
2005 2006 2007 2008 2009 20100
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000Secondary Production (Kt) Copper Price (US$/t)
Scrap chart: Robin Bahr, Credit Agricole, Global Copper Market Trends 2011-12 for the ICSG Environmental & Economic Committee Meeting, 14th April 2011
2005-2010 Data: ICSG Press Release 23rd May 2011
World Secondary Copper Production, 2006-2010
Can copper supply keep pace with demand?
Simplified copper production supply chain
Sulphide MineMines sulphide ore to produce concentrates
SmelterSmelts concentrates to produce anodes
RefineryRefines anodes to produce cathodes
SXEW MineMines
oxide ore to produce cathodes
ScrapLow grade “old
scrap” for smelting into anodes and high grade “new
scrap” for refining into cathodes
~12.0Mt ~15.0Mt ~15.0Mt
~4.0Mt
~3.0Mt
Copper cathode image: http://en.wikipedia.org/wiki/Whim_Creek_Copper_MineProduction estimates based on ICSG June 2011 Press Release
New mines required!Simplified copper production supply chain
Sulphide MineMines sulphide ore
to produce concentrates
SmelterSmelts concentrates to produce anodes
RefineryRefines anodes to produce cathodes
SXEW MineMines
oxide ore to produce cathodes
ScrapLow grade “old
scrap” for smelting into anodes and high grade “new
scrap” for refining into cathodes
Exploration & Development
Of new mines, particularly sulphide
mines to produce copper concentrates
Copper cathode image: http://en.wikipedia.org/wiki/Whim_Creek_Copper_MineProduction estimates based on ICSG June 2011 Press Release
~3.0Mt
~4.0Mt
~12.0
Mt
~12.0
Mt
~12.0
Mt
Why are so few new copper mines coming on stream?
Geology versus geography
Is it the house that matters or the neighbourhood?
Capital costs versus operating costs
Pay now or pay later?
Delays
Why are so many copper mine projects late and over-budget?
Why are so few new copper mines coming on stream?
• Quantity : size of the resource• Quality : grade (metal content) of the resourceGeological Risk• Quality & scale: throughput & grade control; mining & processing type & recovery; waste
management• Operating cost: both initial estimate and difference between estimate and actual
Technical Risk• Commodity price: forecast & sensitivity to primary, by- & co-products• Contracts: intermediate market conditions, cost of getting product to market; counterparty
riskMarket Risk
• Fatal flaws: discovery of major geological, technical, political, financing or legal issue• Project management: cost overruns; delays; increased complexityCompletion Risk• Professional: management with operational experience; recruiting & retaining professionals
& ex-pats• Labour: recruiting, retaining & training labour; labour unions during construction & operation
Human Resource Risk
• Regulatory: difficulties, costs and delays associated with environmental compliance• Technical: fundamental technical problems in running an environmentally sound mineEnvironmental Risk
• Regulatory: changes in laws or problems complying with them• Corporate: legal issues associated with corporate partners, suppliers & other counterpartiesLegal Risk• Actual: problems with the government, legal & business environment of a country• Apparent: problems with external reputation of a country affecting financing, recruitment,
reputationPolitical Risk
• Spending: problems with initial estimate; capital cost overruns• Financing: problems raising the required capitalCapital Cost Risk
• Discretionary: deliberate decision to delay a project• Non-discretionary: unforeseen problem causing a delay to the projectDelay Risk• Location: political or natural problems in your location i.e. war or flooding• Technical: sudden catastrophic technical failure at the mine projectForce Majeure
Based on “The Share Buyers Guide to Investing in the Australian Mining Boom” by Dr. Allan Trench, 2011
Challenges facing copper mine development
Geology versus geography
• Quantity : size of the resource• Quality : grade (metal content) of the resourceGeological Risk• Quality & scale: throughput & grade control; mining & processing type & recovery; waste
management• Operating cost: both initial estimate and difference between estimate and actual
Technical Risk• Commodity price: forecast & sensitivity to primary, by- & co-products• Contracts: intermediate market conditions, cost of getting product to market; counterparty
riskMarket Risk
• Fatal flaws: discovery of major geological, technical, political, financing or legal issue• Project management: cost overruns; delays; increased complexityCompletion Risk• Professional: management with operational experience; recruiting & retaining professionals
& ex-pats• Labour: recruiting, retaining & training labour; labour unions during construction & operation
Human Resource Risk
• Regulatory: difficulties, costs and delays associated with environmental compliance• Technical: fundamental technical problems in running an environmentally sound mineEnvironmental Risk
• Regulatory: changes in laws or problems complying with them• Corporate: legal issues associated with corporate partners, suppliers & other counterpartiesLegal Risk• Actual: problems with the government, legal & business environment of a country• Apparent: problems with external reputation of a country affecting financing, recruitment,
reputationPolitical Risk
• Spending: problems with initial estimate; capital cost overruns• Financing: problems raising the required capitalCapital Cost Risk
• Discretionary: deliberate decision to delay a project• Non-discretionary: unforeseen problem causing a delay to the projectDelay Risk• Location: political or natural problems in your location i.e. war or flooding• Technical: sudden catastrophic technical failure at the mine projectForce Majeure
Based on “The Share Buyers Guide to Investing in the Australian Mining Boom” by Dr. Allan Trench, 2011
Challenges facing copper mine development
Falling resource grades or...
0.0 0.5 1.0 1.5 2.0 2.50.0
1.0
2.0
3.0
4.0
5.0
6.0
Ore (billions of tonnes)
Ore
Gra
de (
%)
Resource size and grade of recent large copper mine start-ups
Data from company websites: Antofagasta (Esperanza); Equinox Minerals (Lumwana); Freeport McMoRan (Tenke Fungurume); OZ Minerals (Prominent Hill)
Tenke Fungurume4.23 Mt Copper
Lumwana6.27 Mt Copper
Esperanza7.38 Mt Copper
Prominent Hill2.60 Mt Copper
Falling resource grades or...
0.0 0.5 1.0 1.5 2.0 2.50.0
1.0
2.0
3.0
4.0
5.0
6.0
Ore (billions of tonnes)
Ore
Gra
de (
%)
Resource size and grade of recent large copper mine start-ups
Data from company websites: Antofagasta (Esperanza); Equinox Minerals (Lumwana); Freeport McMoRan (Tenke Fungurume); OZ Minerals (Prominent Hill)
Current average global mined copper grade
Tenke Fungurume4.23 Mt Copper
Lumwana6.27 Mt Copper
Esperanza7.38 Mt Copper
Prominent Hill2.60 Mt Copper
Falling resource grades or...
0.0 0.5 1.0 1.5 2.0 2.50.0
1.0
2.0
3.0
4.0
5.0
6.0
Ore (billions of tonnes)
Ore
Gra
de (
%)
Resource size and grade of recent large copper mine start-ups
Data from company websites: Antofagasta (Esperanza); Equinox Minerals (Lumwana); Freeport McMoRan (Tenke Fungurume); OZ Minerals (Prominent Hill)
Current average global mined copper grade
Tenke Fungurume6.70 Mt Copper Eq.
Lumwana6.34 Mt Copper Eq.
Esperanza15.18 Mt Copper Eq.
Prominent Hill4.00 Mt Copper Eq.
Geology versus geography
• Quantity : size of the resource• Quality : grade (metal content) of the resourceGeological Risk• Quality & scale: throughput & grade control; mining & processing type & recovery; waste
management• Operating cost: both initial estimate and difference between estimate and actual
Technical Risk• Commodity price: forecast & sensitivity to primary, by- & co-products• Contracts: intermediate market conditions, cost of getting product to market; counterparty
riskMarket Risk
• Fatal flaws: discovery of major geological, technical, political, financing or legal issue• Project management: cost overruns; delays; increased complexityCompletion Risk• Professional: management with operational experience; recruiting & retaining professionals
& ex-pats• Labour: recruiting, retaining & training labour; labour unions during construction & operation
Human Resource Risk
• Regulatory: difficulties, costs and delays associated with environmental compliance• Technical: fundamental technical problems in running an environmentally sound mineEnvironmental Risk
• Regulatory: changes in laws or problems complying with them• Corporate: legal issues associated with corporate partners, suppliers & other counterpartiesLegal Risk• Actual: problems with the government, legal & business environment of a country• Apparent: problems with external reputation of a country affecting financing, recruitment,
reputationPolitical Risk
• Spending: problems with initial estimate; capital cost overruns• Financing: problems raising the required capitalCapital Cost Risk
• Discretionary: deliberate decision to delay a project• Non-discretionary: unforeseen problem causing a delay to the projectDelay Risk• Location: political or natural problems in your location i.e. war or flooding• Technical: sudden catastrophic technical failure at the mine projectForce Majeure
Based on “The Share Buyers Guide to Investing in the Australian Mining Boom” by Dr. Allan Trench, 2011
Challenges facing copper mine development
...increasing political risk
U.S. Geological Survey Mineral Commodity Summaries, January 2011
Country Reserves Fraser Institute(out of 41)
Behre Dolbear(out of 25)
Resourcestocks
(out of 36)
Mexico ~165 years 9th 4th 17th
Australia ~89 years 5th 1st 26th
Peru ~70 years 18th 12th 19th
Poland ~60 years n/a n/a n/a
Kazakhstan ~45 years 24th 18th 8th
Russia ~40 years 22nd 23rd n/a
Indonesia ~36 years 32nd 22nd 31st
Other ~35 years n/a n/a n/a
USA ~31 years 11th 5th 7th
Chile ~27 years 2nd 3rd 3rd
China ~26 years 20th 11th 9th
Zambia ~26 years 25th 19th 12th
Canada ~17 years 7th 2nd 1st
Key copper mining countries in mining risk ranking surveys
...increasing political risk
Chart: Robin Bahr, Credit Agricole, Global Copper Market Trends 2011-12 for the ICSG Environmental & Economic Committee Meeting, 14th April 2011
U.S. Geological Survey Mineral Commodity Summaries, January 2011
Country Reserves Fraser Institute(out of 41)
Behre Dolbear(out of 25)
Resourcestocks
(out of 36)
Mexico ~165 years 9th 4th 17th
Australia ~89 years 5th 1st 26th
Peru ~70 years 18th 12th 19th
Poland ~60 years n/a n/a n/a
Kazakhstan ~45 years 24th 18th 8th
Russia ~40 years 22nd 23rd n/a
Indonesia ~36 years 32nd 22nd 31st
Other ~35 years n/a n/a n/a
USA ~31 years 11th 5th 7th
Chile ~27 years 2nd 3rd 3rd
China ~26 years 20th 11th 9th
Zambia ~26 years 25th 19th 12th
Canada ~17 years 7th 2nd 1st
Key copper mining countries in mining risk ranking surveys
Pay now or pay later?
• Quantity : size of the resource• Quality : grade (metal content) of the resourceGeological Risk• Quality & scale: throughput & grade control; mining & processing type & recovery; waste
management• Operating cost: both initial estimate and difference between estimate and actual
Technical Risk• Commodity price: forecast & sensitivity to primary, by- & co-products• Contracts: intermediate market conditions, cost of getting product to market; counterparty
riskMarket Risk
• Fatal flaws: discovery of major geological, technical, political, financing or legal issue• Project management: cost overruns; delays; increased complexityCompletion Risk• Professional: management with operational experience; recruiting & retaining professionals
& ex-pats• Labour: recruiting, retaining & training labour; labour unions during construction & operation
Human Resource Risk
• Regulatory: difficulties, costs and delays associated with environmental compliance• Technical: fundamental technical problems in running an environmentally sound mineEnvironmental Risk
• Regulatory: changes in laws or problems complying with them• Corporate: legal issues associated with corporate partners, suppliers & other counterpartiesLegal Risk• Actual: problems with the government, legal & business environment of a country• Apparent: problems with external reputation of a country affecting financing, recruitment,
reputationPolitical Risk
• Spending: problems with initial estimate; capital cost overruns• Financing: problems raising the required capitalCapital Cost Risk
• Discretionary: deliberate decision to delay a project• Non-discretionary: unforeseen problem causing a delay to the projectDelay Risk• Location: political or natural problems in your location i.e. war or flooding• Technical: sudden catastrophic technical failure at the mine projectForce Majeure
Based on “The Share Buyers Guide to Investing in the Australian Mining Boom” by Dr. Allan Trench, 2011
Challenges facing copper mine development
Going underground...
Indicative depth of discoveries, 1980s, 1990s & 2000s
Chart: Robin Bahr, Credit Agricole, Global Copper Market Trends 2011-12 for the ICSG Environmental & Economic Committee Meeting, 14th April 2011
Going underground...
Indicative depth of discoveries, 1980s, 1990s & 2000s
0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.00
5001,0001,5002,0002,5003,0003,5004,0004,5005,000
f(x) = 290.7097 x + 934.2471R² = 0.999904448695273
Stripping Ratio
Min
ing
+ M
illi
ng
Co
st
(US
$/t
)
Chart: Robin Bahr, Credit Agricole, Global Copper Market Trends 2011-12 for the ICSG Environmental & Economic Committee Meeting, 14th April 2011
Operating cost data based on Costmine (Infomine USA) Mining Cost Service 2010
Effect of stripping ratio on operating costs
Going underground...
Indicative depth of discoveries, 1980s, 1990s & 2000s
0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.00
5001,0001,5002,0002,5003,0003,5004,0004,5005,000
f(x) = 290.7097 x + 934.2471R² = 0.999904448695273
Stripping Ratio
Min
ing
+ M
illi
ng
Co
st
(US
$/t
)
Chart: Robin Bahr, Credit Agricole, Global Copper Market Trends 2011-12 for the ICSG Environmental & Economic Committee Meeting, 14th April 2011
Operating cost data based on Costmine (Infomine USA) Mining Cost Service 2010
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
Min
ing
+ M
illi
ng
Co
st
(US
$/t
)
Effect of stripping ratio on operating costs
Different underground operating costs versus open pit mining
Mining costs on the rise
Operating cost data based on Costmine (Infomine USA) Mining Cost Service 2010
US Mine Cost Input Indices versus US Consumer Price Inflation
0.0
5.0
10.0
15.0
20.0
25.0
CPI Industrial Chemicals
0.0
0.5
1.0
1.5
2.0
2.5
CPI Deep Sea Freight
0.0
2.0
4.0
6.0
8.0
10.0
12.0
CPI Electric Power Coal
0.0
10.0
20.0
30.0
40.0
50.0
CPI Natural Gas
Mining costs on the rise
Operating cost data based on Costmine (Infomine USA) Mining Cost Service 2010
US Mine Cost Input Indices versus US Consumer Price Inflation
0.0
5.0
10.0
15.0
20.0
25.0
CPI Industrial Chemicals
0.0
0.5
1.0
1.5
2.0
2.5
CPI Deep Sea Freight
0.0
2.0
4.0
6.0
8.0
10.0
12.0
CPI Electric Power Coal
0.0
10.0
20.0
30.0
40.0
50.0
CPI Natural Gas
2001 2002 2003 2004 2005 2006 2007 2008 2009 20100.90
0.95
1.00
1.05
1.10
1.15
1.20
1.25
1.30
1.35
1.40
CPI Surface Mining Underground Mining Milling
Pay now or pay later?
• Quantity : size of the resource• Quality : grade (metal content) of the resourceGeological Risk• Quality & scale: throughput & grade control; mining & processing type & recovery; waste
management• Operating cost: both initial estimate and difference between estimate and actual
Technical Risk• Commodity price: forecast & sensitivity to primary, by- & co-products• Contracts: intermediate market conditions, cost of getting product to market; counterparty
riskMarket Risk
• Fatal flaws: discovery of major geological, technical, political, financing or legal issue• Project management: cost overruns; delays; increased complexityCompletion Risk• Professional: management with operational experience; recruiting & retaining professionals
& ex-pats• Labour: recruiting, retaining & training labour; labour unions during construction & operation
Human Resource Risk
• Regulatory: difficulties, costs and delays associated with environmental compliance• Technical: fundamental technical problems in running an environmentally sound mineEnvironmental Risk
• Regulatory: changes in laws or problems complying with them• Corporate: legal issues associated with corporate partners, suppliers & other counterpartiesLegal Risk• Actual: problems with the government, legal & business environment of a country• Apparent: problems with external reputation of a country affecting financing, recruitment,
reputationPolitical Risk
• Spending: problems with initial estimate; capital cost overruns• Financing: problems raising the required capitalCapital Cost Risk
• Discretionary: deliberate decision to delay a project• Non-discretionary: unforeseen problem causing a delay to the projectDelay Risk• Location: political or natural problems in your location i.e. war or flooding• Technical: sudden catastrophic technical failure at the mine projectForce Majeure
Based on “The Share Buyers Guide to Investing in the Australian Mining Boom” by Dr. Allan Trench, 2011
Challenges facing copper mine development
Capital costs soaring
Capital cost data based on Costmine (Infomine USA) Mining Cost Service 2010Prominent Hill Data: Prominent Hill Analyst Tour, 3 June 2009
US Capital Cost Input Indices versus US Consumer Price Inflation
2001 2002 2003 2004 2005 2006 2007 2008 2009 20101.001.201.401.601.802.002.202.40
CPI Iron & Steel
2001 2002 2003 2004 2005 2006 2007 2008 2009 20101.00
1.05
1.10
1.15
1.20
1.25
1.30
CPI Construction Labour
2001 2002 2003 2004 2005 2006 2007 2008 2009 20101.00
1.05
1.10
1.15
1.20
1.25
1.30
CPI Machinery/Equipment
Prominent Hill Construction StatsMan hours: 4.3 millionLitres of diesel/day: 2,400Concrete: 23,000 m3
Steel: 2,400 tCable: 252,000mPipe: 43,000m
Battling with grades & scale
Capital cost data based on Costmine (Infomine USA) Mining Cost Service 2010
US Capital Cost Indices versus US Consumer Price Inflation
2006 2007 2008 2009 20101.00
1.02
1.04
1.06
1.08
1.10
1.12
CPI Surface Mines Underground Mines
Battling with grades & scale
Capital cost data based on Costmine (Infomine USA) Mining Cost Service 2010
US Capital Cost Indices versus US Consumer Price Inflation
2006 2007 2008 2009 20101.00
1.02
1.04
1.06
1.08
1.10
1.12
CPI Surface Mines Underground Mines
Increase in mining + milling capital costs related to decreasing resource grade for a hypothetical open pit copper mine with a stripping ratio of 2:1, processing recovery of 95% and producing 100,000 tonnes of copper per year
0.4% 0.6% 0.8% 1.0% 1.2% 1.4% 1.6% 1.8% 2.0%0.0
200.0
400.0
600.0
800.0
1000.0Mining Milling
Ore Grade
Min
ing
+ M
illin
g C
ap
ex
(US
$M
)
0.0% 0.5% 1.0% 1.5% 2.0% 2.5%0.0
2.0
4.0
6.0
8.0
10.0
12.0f(x) = NaN x^NaN
Ore Grade
Min
ing +
Milling C
apex (
US$M
)
Delays and blow-outs!
LumwanaEquinox Minerals (100%)
Zambia
Discovered: 1961 Exploration & development begins: 1999
Date Capex Estimate
Capacity Estimate
Capex Intensity
Start-up Estimate
Aug 2002 US$681M 106,000t/y Cu US$6,425/t/y Cu Mid-2006
May 2005 US$824M100-140,000t/y
CuUS$6,867/t/y Cu H2 2006
Jun 2006 US$762M100-140,000t/y
CuUS$6,350/t/y Cu Q1 2008
Aug 2006 US$1,227M ~118,000t/y CuUS$10,398/t/y
CuQ1 2008
Nov 2006 US$847M ~141,000t/y Cu US$6,007/t/y Cu Q1 2008
Start-up US$814M~141,000t/y
CuUS$5,773/t/y
CuDec 2008
Discovery-to-mine: ~10 years 2.5 years late US$130M+ over budget (20%)Data from company websites: Antofagasta (Esperanza); Equinox Minerals (Lumwana); Freeport McMoRan (Tenke Fungurume); OZ Minerals (Prominent Hill)
Delays and blow-outs!
Prominent HillOZ Minerals (100%) Australia
Discovered: Nov 2001
Date Capex Estimate
Capacity Estimate
Capex Intensity
Start-up Estimate
Aug 2004 A$300-350M 90,000t/y Cu A$3,611/t/y Cu 2008
Aug 2005 A$530M90-100,000t/y
CuA$5,579/t/y Cu H2 2008
Aug 2006 A$775M71-104,000t/y
CuA$8,857/t/y Cu Sept 2008
Oct 2007 A$1,080M71-120,000t/y
CuA$11,309/t/y Cu Q3 2008
May 2008 A$1,080M71-120,000t/y
CuA$11,309/t/y Cu Q4 2008
Start-up A$1,170M85-100,000t/y
CuA$12,649/t/y
CuFeb 2009
Discovery-to-mine: 8 years3-6 months
lateA$800M+ over budget (265%)Data from company websites: Antofagasta (Esperanza); Equinox Minerals
(Lumwana); Freeport McMoRan (Tenke Fungurume); OZ Minerals (Prominent Hill)
Delays and blow-outs!
Tenke FungurumeFreeport McMoRan (57.75%)
Lundin Mining (24.75%); Gecamines (17.5%)
DR Congo
Discovered: 1900s DR Congo civil war: 1998-2003
Date Capex Estimate
Capacity Estimate
Capex Intensity
Start-up Estimate
Dec 1998 US$843M 160,000t/y Cu US$5,269/t/y Cu Unknown
Nov 2006 US$824M 100,000t/y Cu US$8,240/t/y Cu End 2008
Feb 2007 US$650M 115,000t/y Cu US$5,652/t/y Cu Q1 2009
Oct 2007 US$1,000M 115,000t/y Cu US$8,696/t/y Cu Q1 2009
Apr 2008 US$1,900M 115,000t/y CuUS$16,522/t/y
CuH2 2009
Start-up US$1,750M 113,500t/y CuUS$15,419/t/y
CuMarch 2009
Discovery-to-mine: 110+ years 0.25 years late US$900M+ over budget (110%)Data from company websites: Antofagasta (Esperanza); Equinox Minerals
(Lumwana); Freeport McMoRan (Tenke Fungurume); OZ Minerals (Prominent Hill)
Delays and blow-outs!
EsperanzaAntofagasta (70%) Marubeni Corp. (30%) Chile
Exploration begins: 1999
Date Capex Estimate
Capacity Estimate
Capex Intensity
Start-up Estimate
Jul 2007 US$1,500M 195,000t/y Cu US$7,692/t/y Cu End 2010
Apr 2008 US$1,900M 195,000t/y Cu US$9,744/t/y Cu End 2010
May 2009 US$2,300M 191,000t/y CuUS$12,042t/y
CuEnd 2010
Start-up US$2,600M 190,000t/y CuUS$13,684/t/y
CuNov 2010
Discovery-to-mine: 11 years On schedule!US$1,100M+ over budget
(75%)
Data from company websites: Antofagasta (Esperanza); Equinox Minerals (Lumwana); Freeport McMoRan (Tenke Fungurume); OZ Minerals (Prominent Hill)
Weighing up the challenges
The BCG Box for mine projects
Politi
cally c
hallen
gin
g
(Cap
ex R
isk)
Technically challenging (Opex Risk)
Stars
Challenges
Marginals
Black Holes
Weighing up the challenges
The BCG Box for mine projects
Politi
cally c
hallen
gin
g
(Cap
ex R
isk)
Technically challenging (Opex Risk)
Stars
Challenges
Marginals
Black Holes
Chile
S. AmericaAsia
Africa
N. America
Europe
Australia
Where are we heading?The BCG Box for mine projects (into the future)
Politi
cally c
hallen
gin
g
(Cap
ex R
isk)
Technically challenging (Opex Risk)
Stars
Challenges
Marginals
Black Holes
Chile
S. America
Asia
Africa
N. America
Europe
Australia
How will copper supply problems affect long term prices?
The mining (super)cycle
Where are we in the mining cycle and where are we going?
The economist’s view
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000Nominal Price Real Price
Average annual LME cash copper prices (US$/t): 1914-2010
Copper prices: USGS & www.metalpages.comInflation data: www.inflationdata.com
War productio
n
Post-war collapse
Reconstruction of Europe & Japan
Demand miniaturisation / substitution
Rise of
China
World War 1
Great Depressio
n World War 2
Collapse of
Soviet Union
Oil crisisIranian
Revolution
Vietnam War
Asian Flu
Korean War
Dot.com
Housing
boom
GFC
War production
Mineral economics 101
Sticky supply Dynamic demand
“The mining cycle”
Price:
Demand:
Supply:
1 2 3 4 5 6 7 8 1
1. Balanced market, steady demand, steady supply.
2. Demand increases, but supply cannot respond as quickly, prices rise and spike.
3. Supply begins to respond to demand, prices stabilise at a high level.
4. Lagging supply continues to come on stream even though demand has stabilised, prices fall from high levels.
5. Lower prices and demand, discourages
investment in new supply, prices stabilise at a lower level.
6. Falling demand or falling costs lead to low prices.
7. Falling prices and demand eventually leads to falling supply which steadies prices.
8. Slowly responding supply reductions may lag and lead to a small bounce from the lowest prices.
Idealised mining cycle
The mining investment cycle
2. DEMAND SPIKE
Historically low prices encourage new demand
Underinvested supply size not ready
Sharp rise in prices as supply doesn’t respond
3. MARGINAL RESPONSE
Investment in marginal supply to meet new
demandPrices stabilise at high levels as high prices discourage increased
demand
4. & 5. NEW LONG TERM
SUPPLYHigh profits for low cost
miners encourages investment in major mines
Prices begin to fall
6. EXPANSION OF LOW COST
SUPPLYNew low cost supply
pushes marginal supply off the curve
Marginal costs fall, allowing prices to fall
7. DEMAND DESTRUCTION
Effects of demand destruction begin to take
holdMine supply focuses on cost cutting to preserve
marginPrices fall steeply
8. & 1. LOW PROFIT MALAISE
Low prices create unprofitable mining industry stopping
investmentDemand stabilises as low prices discourage demand
destruction
Where are we in the mining cycle?
Price:
Demand:
Supply:
1 2 3 4 5 6 7 8 1
1. Balanced market, steady demand, steady supply.
2. Demand increases, but supply cannot respond as quickly, prices rise and spike.
3. Supply begins to respond to demand, prices stabilise at a high level.
4. Lagging supply continues to come on stream even though demand has stabilised, prices fall from high levels.
5. Lower prices and demand, discourages
investment in new supply, prices stabilise at a lower level.
6. Falling demand or falling costs lead to low prices.
7. Falling prices and demand eventually leads to falling supply which steadies prices.
8. Slowly responding supply reductions may lag and lead to a small bounce from the lowest prices.
Idealised mining cycleCopper is here
Lack of copper mine investment
1880 1900 1920 1940 1960 1980 2000 20200
200
400
600
800
1,000
1,200
1,400
1,600
Escondida
Codelco NorteGrasberg
CollahuasiEl Teniente
Taimyr Peninsular AntaminaLos Pelambres
Morenci
Bingham Canyon
Batu Hijau
Andina
Kansanshi
Los Bronces
Zhezkazgan
Olympic Dam
Rudna
SarcheshmehSpence
La Caridad
Start-up Year
Pro
du
cti
on
Ca
pa
cit
y (
Kt)
Start-up, capacity & current resource of top 20 copper mines
Resource & Start-up Data: InfomineProduction Capacity Data: ICSG World Copper Factbook 2010
Lack of copper mine investment
1980 1985 1990 1995 2000 2005 2010 2015 20200
200
400
600
800
1,000
1,200
1,400
1,600
Escondida
Grasberg
Los Pelambres
Antamina
Collahuasi
Batu Hijau
KansanshiOlympic Dam
Spence
Start-up Year
Pro
du
cti
on
Ca
pa
cit
y (
Kt)
Start-up, capacity & resource of top 20 copper mines 1980>
Resource & Start-up Data: InfomineProduction Capacity Data: ICSG World Copper Factbook 2010
Lack of copper mine investment
1980 1985 1990 1995 2000 2005 2010 2015 20200
200
400
600
800
1,000
1,200
1,400
1,600
Escondida
Grasberg
Los Pelambres
Antamina
Collahuasi
Batu Hijau
KansanshiOlympic Dam
SpenceLumwanaTenke Fungurume
Esperanza
Prominent Hill
Start-up Year
Pro
du
cti
on
Ca
pa
cit
y (
Kt)
Start-up, capacity & resource of large copper mines vs recent start-ups
Resource & Start-up Data: InfomineProduction Capacity Data: ICSG World Copper Factbook 2010
New capacity on its way?
1985 1990 1995 2000 2005 2010 2015 2020 20250
200
400
600
800
1,000
1,200
1,400
1,600
Escondida
Grasberg
Los Pelambres
Antamina
Collahuasi
Batu Hijau
KansanshiOlympic Dam
SpenceLumwanaTenke Fungurume
Esperanza
Prominent Hill
Toromocho Tampakan
Petaquilla
PebbleOyu Tolgoi
Frieda RiverLas Bambas
Start-up Year
Pro
du
cti
on
Ca
pa
cit
y (
Kt)
Start-up, capacity & resource of large copper mines vs large projects
Mine Resource & Start-up Data: Infomine; Mine Production Capacity Data: ICSG World Copper Factbook 2010
Production and start-up for projects are estimates by Greenfields Research
The geologist’s view
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000Nominal Price Real Price
Average annual LME cash copper prices (US$/t): 1914-2010
Copper prices: USGS & www.metalpages.comInflation data: www.inflationdata.com
War productio
n
Post-war collapse
Reconstruction of Europe & Japan
Demand miniaturisation / substitution
Rise of
China
World War 1
Great Depressio
n World War 2
Collapse of
Soviet Union
Oil crisisIranian
Revolution
Vietnam War
Asian Flu
Korean War
Dot.com
Housing
boom
GFC
War production
21642 3 5 76 7 8 1 8Post-war
overcapacitySurplus
building
No investment
in new supply
Marginal supply
response
New low cost
supplySurplus building
No investment
in new supply
Marginal
supply respon
se
The BIG Answers
• Where is all this copper demand growth coming from?
– Developing world industrialisation & increased copper use intensity.
• What has all this copper demand meant for prices?
– Prices are at historically high levels partially due to strong demand but also supply
side issues are required to create the spikes we have seen.
• Can copper supply keep up with demand?
– Copper supply has relied on a large expansion of SXEW capacity and scrap recycling, to
keep up with demand in the medium to long term more new mines (particularly
concentrates mines) will have to be built.
• Where will new copper supply come from?
– Mine developers will have to choose between high risk, logistically challenging, high
capital cost but potentially very profitable projects in the developing world or lower
risk, but technically challenging, high operating cost projects in mature mining regions.
– Asian and South American countries seem increasingly well positioned.
The BIG Answers
• Why are so few new copper mines coming on stream?
– Mine project developers face a multitude of challenges based on poorer geological
quality, increased technical challenges, volatile commodity markets, financing
problems, equipment and recruitment issues, political and governmental problems.
– The most significant challenges are in controlling capital costs and project timelines.
• How will copper supply problems affect long term prices?
– Although there is softer demand sentiment in the short term, fundamental supply
problems will support medium to long prices, creating a period of high but volatile
prices (which may be exaggerated by increased investor influence in the physical
copper market).
– This is a normal part of the mining cycle with the higher prices encouraging
investment. Ultimately either new supply will come on stream or demand
destruction will occur and prices will stabilise at historically typical levels.
Thank youQuestions?