IB Net Payout Yields Model

Copper Miners Underproduce Expectations by 6% a Year: BHP, RTP, FCX Struggle

Interesting report from Financial Times that magnifies some of the recent negative reports on copper mining activities. Stone Fox has been very bullish on copper for a while now because of the promise of high demand from China and a return of demand from the US. So far the demand from the US hasn't materialized but the production issues and lower grade ore deposits have more then offset any lagging demand.

As the report shows, the top 4 public miners produced 12% less copper then in 2009. Thats while prices have been above historical averages.

  • In the first half of the year, the world’s top four listed copper miners – Freeport McMoran, BHP Billiton, Xstrata and Rio Tinto – saw their collective output drop 12 per cent from 2009.
Freeport McMoran (FCX) remains our best pure copper play and operator. They also mine gold which happens to be very positive at this time. Lihua International (LIWA) could be a huge beneficiary of this trend towards lower mining output. LIWA is a Chinese recycler of copper and produces refined copper that utilizes a much lower portion of copper and hence cheaper. For now the market has ingored most small cap Chinese stocks so that negativity needs to play out.

The major negative is that just about all analysts are bullish on the copper market. On the flip side though, FCX only trades around $70 which is far below its 2008 high close to $120. So even if the commodity analysts are very bullish that hasn't parlayed into higher stock prices.

Article highlights:
  • The reason is supply: the superstar copper mines of the 1980s, such as Escondida in Chile, may have already seen their best days and few believe there is enough new production coming onstream in the next few years to meet even modest demand growth.
  • Richard Wilson, chairman of Brook Hunt, the metals consultancy, says the copper mining industry has undershot production expectations by an average of 6 per cent a year in the past five years. “One of the key issues surrounding copper supply has been the inability of copper mines to meet their production targets,” he says.
  • “Most mine projects will exploit the highest ore grades possible in their early years of production to facilitate rapid payback of capital. The trade-off then becomes sharply falling grades as mining progresses,” says Mr Wilson at Brook Hunt.
  • And, in spite of fears over the strength of the global economy, copper demand has been robust, industry executives say. Tom Albanese, chief executive of Rio Tinto, tells the Financial Times: “We could have sold more copper [in the first half of 2010] if we’d had it.”


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