The New Copper Story

Podcast Transcript

Ed Coyne: Hello and welcome to Sprott Radio. I'm your host, Ed Coyne, Senior Managing Partner at Sprott Asset Management. I'm pleased to welcome a new and special guest to our podcast today, Stefan Ioannou. He joins us today with his PhD in economic geology from the University of Toronto and is a mining analyst at Cormark Securities. Stefan, thank you for joining Sprott Radio.

Stefan Ioannou: Thanks for having me.

Ed Coyne: Before discussing today's topic, copper, please tell us a bit about yourself and your background.

Stefan Ioannou: I've been a mining analyst for about 20 years, originally with Haywood Securities, and then moved to Cormark about seven years ago. I earned an undergraduate degree in mining engineering. Then, I stuck around in the university world to do a PhD in geology during that time. Shortly after, I worked in Nevada for about four field seasons as an exploration geologist before moving to Bay Street and entering the analyst world.

Ed Coyne: It must be much nicer to be inside with the AC in the summer and heat in the winter.

Stefan Ioannou: Definitely, yes.

Ed Coyne: Let's dive right into it then because we've seen a nice positive bounce here more recently in copper. Let's talk a bit about copper's pricing in general and what's driving the most recent bounce we've experienced.

Stefan Ioannou: As you know, they say copper is the PhD of the base metals, and really, the primary reason for that is that it's just the most widely used. You can find copper in almost anything that has anything to do with electronics or motors. We saw copper hanging around the mid-threes to upper-threes for the better part of last year. Even the year before, it would have averaged $385 a pound last year, and even though Q1, it was $383 a pound. Then suddenly, over the last several weeks, it has had quite a jump.

What kick-started that was what I would consider the middleman in the copper space, which is the smelters. What happened was that there were a lot of copper smelters, and we have been going through a lot of big expansions in anticipation of increased copper demand in the future, largely driven by the electrification of the world. Smelters are big, huge beasts of a machine, and they only operate well and optimally when they're full. These expansions, namely in China, have been completed recently, and now these smelters are even hungrier than they ever were for what we call concentrates or mine production.

The smelter takes mine production, smelts it, and turns it into refined copper, which an end user or a fabricator would use to make anything from iPhones to Teslas. Because these smelters have suddenly become hungrier, they've been fighting to secure mine supply to feed their smelters. In doing so, they've been undercutting each other to the point where the smelting business has become much less profitable, maybe even unprofitable.

It caused many of the Chinese group of smelters to step back and talk to each other and say, "Hey guys, we got to pump the brakes here and slow down our hunger to bring up our profitability." Again, when a mine sells its concentrate to a smelter, they get paid for it, obviously, but in the process, the mine is charged what we call a treatment charge. That's the margin the smelter will make to turn that copper into finished, refined copper, which it then sells in the open market.

To put it in context, historically, copper treatment charges, usually represented in dollars per ton of concentrate, were anywhere between $60 and $80 a ton. Over the better part of this year, we've seen them drop to around $10, $11 a ton. There are even some cases down as low as $3 a ton. You can see suddenly how a smelter, which is usually probably the most profitable part of the food chain of copper, is now struggling.

Ed Coyne: Wow.

Stefan Ioannou: Yes. That's a lot to digest there, but that's it.

Ed Coyne: I don't think anyone would've pointed it to the smelters. It sounds like they're smartening up and becoming more the OPEC of the copper industry as far as how they're approaching this, becoming more sophisticated effectively.

Stefan Ioannou: For sure.

Ed Coyne: That's fascinating. How sustainable is that, then? Given what you mentioned about iPhones and Teslas, everything in between is the demand for copper. Is this the new normal for these smelters? Will this be the ecosystem they will have to operate in going forward?

Stefan Ioannou: It's the Chinese group right now that's trying to curtail their buying and hopes that it brings up treatment charges, but what that's done has caused a whole ripple effect in the space. The fact that the smelters are now producing less refined copper means there's less refined copper in the world, and that, to the end users, implies some scarcity. That's really what's driving the price here. That's why we've seen it jump up to $450 a pound today. That's the one side of the equation, but it goes upstream and to the mines.

There's also a fundamental issue there, which I think may dictate to the smelters that they have no choice, that they will have to lower treatment charges over the longer term and be less profitable. That's just because there's a fundamental lack of supply today. Even more so in the future as the electrification narrative takes off. The industry is currently in supply-demand balance, but there have been some notable disruptions in the last several months. First Quantum's Cobre Panama is probably the most notable one that people point to.

The government shut down its flagship mine in Panama, so it no longer produces copper as we speak. That was 1.5% of global production. That's just one of several examples of supply disruptions for geopolitical reasons. Las Bambas in Peru would be another example. We've seen much African copper curtailed lately due to weather constraints, drought conditions, and the like. There are a lot of factors impacting the current supply right now. Then, you layer on top of a compelling demand increase outlook, setting the stage for a perfect storm for higher copper pricing over the next 5 to 10 years.

Ed Coyne: You mentioned China a couple of times. How important is China to the overall environment of copper?

Stefan Ioannou: It's the most significant player, and that equation has two sides. China consumes well over half of the world's copper production. Again, many things are made in China, and many of those things require copper. When you're looking at the tail end of the business, refined copper, a lot of the world's smelting capacity is in China, and a lot of the end-use copper consumption is in China: over 50% in both cases. Unfortunately for China, though, they aren't as geologically endowed with copper as some other countries.

In terms of mine production, Chile is the biggest producer of copper from the ground. That copper gets turned into concentrate, and much of it finds its way to China for refining, but again, they have the geology. China doesn't necessarily. The way to think of it is that Chile's number one, Peru and the DRC are fighting for number two, China comes in around three, four, five in line with the U.S. and a few other jurisdictions for mine supply. China is the biggest user or consumer of finished copper but not the biggest miner of copper.

Ed Coyne: Interesting. When you talk about mines in general, what is the current health of the mining industry? How are these ore grades looking today versus ten years ago? Can you talk a bit about the health of the mining industry today?

Stefan Ioannou: When you have that discussion, the thing to focus on is the big projects because those are the ones that move the needle in terms of supply-demand fundamentals. As we look at the enormous copper projects, you'll hear the word porphyry used a lot. These are a classic example of a large-style copper deposit that lends itself to huge economies of scale. Over the last 10, 20, and 30 years, we've seen a steady decline in grades of discoveries.

That's just a function of the lowest-hanging fruit being picked first. We have to look deeper and deeper in more challenging jurisdictions to find the next big deposit because the easy ones have been found. Intrinsically, as we look deeper, costs go up as we mine out the high-grade deposits and revert to lower-grade deposits. The intrinsic cost per pound increases because it's just a lower grade.

As we need to find more copper to feed the growing demand, we have to turn to lower, more problematic, more challenging deposits, which entail higher costs and higher incentive pricing to justify building them in the first place. I think it's the next generation of big mines and their break-even copper price. That copper price is always going up, and they're going to dictate the copper price in the future.

Ed Coyne: As we go into those more challenged geographical locations, as you mentioned, I suspect that would also probably mean more disruptions. How should we look at that aspect as we go into these parts of the world looking for more copper?

Stefan Ioannou: Every jurisdiction is different. When we talk about “challenging,” it can be for a whole plethora of reasons, whether it's actual physical geography in terms of depth or grade of the deposit, but it can also be political. It can come in two general forms. The way I think of it is that you can be in a tier-one jurisdiction, like even Canada or the U.S. However, you can still run into a lot of political issues, usually in the form of permitting or very long permitting windows, which can delay projects. Or you can be in arguably not tier-one jurisdictions where the political risk comes in the form of potential violence or the country taking the deposit back after you've built it. That kind of volatility as well. Nowhere is perfect from a political risk point of view. Some places are better, but they all have their form for sure.

Ed Coyne: How about projects or discoveries? Are there any on the horizon right now that you are plugged into this industry that are worth talking about today? Are there any new discoveries out there or projects that are up and running that look very promising from a supply standpoint?

Stefan Ioannou: I think the big one is on many people's radar, and it's not just one project; it's a district. It's called the Vicuña district. It straddles the Argentina and Chile border lending mining controls, which are probably the key assets in that emerging district. Then, a few other "junior lending group companies" with deposits also feed into that eventual development strategy. At the end of the day, it's a very large proposition in terms of potential copper output for decades and decades and decades. You could argue that this is the next world-class Collahuasi in time.

Geologically, it's extremely exciting for a lot of reasons, but why hasn't it been mined yet or found before? Well, it's at the top of the end. It's straddling a border. Infrastructure is very limited at the moment. Getting into the risk aspects of it: project financing, political stability, and just timing to get this thing up into production in a timely fashion. Stay tuned on it, but it is probably the next great copper district in the world if they can get it off the ground, which they're advancing on quite well right now.

Ed Coyne: To give our listeners a sense of reality from when something's discovered until it goes into production or state of extraction, what is a typical timeframe that people should expect? I know it's probably all over the place, depending on a lot of variables, but what is a realistic number that people should have in their heads?

Stefan Ioannou: The time from grassroots discovery through to first production? I've seen the numbers in the high teens to upwards of 25, 26, and 27 years.

Ed Coyne: Wow.

Stefan Ioannou: It's a very long window. Again, it takes time not only to find a deposit in the first place. Most exploration stories, unfortunately, are failures. You're almost trying to figure out Mother Nature, which is not easy. Even once you find something, it usually requires multiple seasons or years of drilling to take it to a resource. Then, it would be best if you did all the technical work to create a mine plan around that resource. Then you have to permit that mine plan. Then you can think about financing it, and then you have to build it, which is usually probably at least two years plus in its own right. Then you're finally in production. People put out these numbers as if it takes 25 years. You think, "That's crazy. How can it be?" When you start doing the math, it adds up pretty quickly.

Ed Coyne: It sounds like the supply-demand equation is not going away anytime soon, based on fewer discoveries and more exotic areas in the world and taking that long time. I suspect this will be an ongoing theme as we talk about copper.

Stefan Ioannou: Definitely. One thing that strikes me is I look at the existing supply-demand curve for copper and think of them in projects. I put them in baskets. If you look at what I'd call the most recent generation of new copper projects, they've all come online more or less now and have helped keep that supply-demand curve in balance. Projects like Cobre Panama are offline now, but just, for example, Cobre Panama, QB2, and Kamoa. Big projects that have helped to keep supply up with demand.

When I look to the next generation of big projects, we need to keep things in check, especially with the whole EV narrative coming down the pipeline. When I look at that next generation, a lot of them are still in the hands of juniors, the writings on the wall; they aren't at an advanced enough stage to come into production in time to keep that supply demand in check. Many of them are, at best, at a technical study level. They still face years of permitting, financing, and construction. They will need partnerships because these projects are too big for the juniors to build. There is just a lot of heavy lifting still to be done. That sets us up for a very interesting copper market because demand is coming, and the supply doesn't look like it will be able to keep up.

Ed Coyne: Speaking of juniors and partnerships, are you starting to see more M&A activity in this space?

Stefan Ioannou: Yes, I think so. I anticipate we'll see even more. Part of it is just the timeliness of getting something in production. If you're a mid-tier or a major established producer, you can go out and spend lots of money exploring. Some of them do, and some of them are quite successful, but they know that even if they do that, it's going to be 10 to 15 or, like we said, 25 years before they can get that project into production. Producers are especially in the cash flow business today, not 15 or 20 years from now. It's a lot more advantageous to maybe pay up for something that is way further down the pipeline of potential production or even in production to bolster near-term cash flow as opposed to something that's going to be 15 years down the road and by the time you do a nav or discounted cashflow analysis of it, it's worth zero today.

Ed Coyne: We're talking a lot about the supply side. Does recycling play a big role in this from a pricing standpoint? How should we look at recycling in relation to copper?

Stefan Ioannou: The copper scrap markets are a big piece of the equation. It's millions of tons a year. Just to put it in perspective, the current copper market is calling it 25 to 27 million tons a year right now supply demand, and I'd say a few million tons of that two, three-ish are coming from scrap, and the rest is coming from mines. The scrap market has an ultimate cap. It's a finite number that's out there. You see more of it show its face when copper prices are higher. People take a bit more time to think about recycling their scrap when they can get paid more for it. It's human nature. Even so, there's not enough scrap out there to fill the deficit that mines aren't going to be able to make.

Ed Coyne: We talked a lot about electric vehicles. How does tech play a role in copper demand overall? If you could talk about that a little bit. Many people think about copper, maybe in wiring and plumbing, but the words tech and copper are being spoken in the same sentence more and more today. Can you spend a little time talking about that?

Stefan Ioannou: If you think about the current demand, 25 to 27 million tons a year. When you start to think about the next car you or I buy, it will probably be an EV or the car after that, but at some point, we'll all be driving EVs. In the EV itself, the big focus is on the batteries. Copper is not the sexier key component in those batteries itself. That's usually nickel, cobalt, lithium, and all that stuff. When we talk about EVs in the context of copper, we're talking about the charging networks to keep those EVs running. That requires a heck of a lot of copper.

There's also the green energy revolution, whether windmills or solar panels. If we go down that road for power, a lot of copper goes into that infrastructure. Please put it in context again: 25 to 27 million tons a year are currently in demand. When you start to layer in that everyone will eventually drive an EV, we will have to charge them all. I think the writings on the wall show that you could see upwards of 25 to even upwards of 50% increase in demand for copper over the next five to 10 years.

Ed Coyne: And all the while, is the supply shrinking?

Stefan Ioannou: Yes, exactly. There is the investment thesis, right?

Ed Coyne: Yes. Right.

Stefan Ioannou: This is just to your point on technology, though; that's all EV and wiring and stuff like that. The other even more up-and-coming area that we're hearing more about is AI. That's becoming an interesting thing to wrap your head around with regard to copper demand. A lot of computing power will be used in AI in the future. This morning, I just saw a number that in the next five years, there could be a million tons of incremental new copper demand just from AI requirements. That's another requirement we're not seeing from the mines.

Ed Coyne: Given all this demand and the limited supply, is there anything out there that can replace or complement copper, and what is it currently doing in the environment from a tech standpoint?

Stefan Ioannou: Bottom line, we love the copper industry because of its ability to conduct electricity. There are very few metals that can do it better. Silver is one of them, but as I'm sure you can appreciate, wiring your house with silver wiring would be very cost-prohibitive. The next best thing is basically copper. There are a few but very limited substitutes for copper that could make sense. Aluminum is probably one of the most known or talked about examples. You can wire your house with aluminum. It's illegal in Canada or North America because those wires get very hot, and you have fires. There are certain jurisdictions where they do it, but there is a safety hazard around it, so you don't see it very much.

Ed Coyne: I've got a few other questions, but maybe I'll throw it back to you. Is there anything that I haven't asked yet that you would like to make a point on or any concepts or themes that you would like to leave the listeners with?

Stefan Ioannou: Remembering that the mining cycle from discovery to production, as we've already touched on, is a very long-winded process. It's getting longer and longer every day, given issues around political risk and permitting and just access to capital. Turning on a copper mine is something you can't do overnight. Meanwhile, in the background, a lot of the people that are going to be relying on copper, i.e., the world's electrification, I don't think quite understand that. The industry outside the mining world is in for a bit of a rude awakening, not only with regard to copper but also with things like nickel and other critical metals. A very interesting sweet spot is emerging where demand won't keep up with supply, which will be reflected in pricing.

Ed Coyne: Stefan, this was great. You brought a lot of stuff to light on copper, and I appreciate you taking the time today. Hopefully, you'll be open to another conversation later on down the road and checking in on what's going on with copper and copper equities.

Stefan Ioannou: Definitely. Thanks for having me.

Ed Coyne: Thanks for taking part. Once again, I'm Ed Coyne, and you're listening to Sprott Radio.