Yukonomist: Too far up the supply curve

Some copper mines come in and out of production as global demand for the metal surges and ebbs.

It was bad news for the Yukon on Oct. 11 when Capstone announced it was shutting down operations at its Minto mine. Around 200 workers will lose their jobs.

Capstone had planned to sell the mine to Pembridge Resources, but that deal fell through. The mine will be put on a care and maintenance regime so it can be restarted when copper prices — and the interest of investors in copper mines — improve.

Copper prices have fallen more than 10 per cent in the last few months, and closed last week around US$2.80 per pound. Mid-December prices weren’t very encouraging, with a price around US$2.75 (all figures on a per pound basis unless noted).

Capstone has two other mines. Its latest investor presentation says that its Pinto Valley mine in Arizona has cash costs of under US$2, and an “All-in Sustaining Cost” of US$2.50-2.60. Capstone’s Cozamin mine in Mexico reports cash costs under US$1 and “All-in Sustaining Cost” of under US$2.

The difference between these two measures is that the “All-in Sustaining Cost” includes not just direct mine costs but also things such as maintenance capital, overheads, reclamation and other costs. It can make sense to run a mine in the short run if you are covering your cash costs, but to make money in the long run you must cover all your costs.

If you rank all the copper mines in the world by their cost per pound, you get something called the supply curve. The mines with the lowest costs will operate continuously. The ones with very high costs will only operate during periods of high prices. And the mines in the middle—the so-called marginal mines—may come in and out of production as global demand for copper surges and ebbs.

Capstone’s latest investor presentation doesn’t give figures for Minto, but previous editions said the cash cost in the third quarter of 2017 was US$2.87. The all-in cost was US$3.01. Neither of these figures looks promising when the current copper price is US$2.80.

Interestingly, Minto’s costs per pound were lower previously. In the first quarter of 2017, for example, cash costs were US$2.05. The exchange rate between the loonie and U.S. dollar plays a role in these fluctuations, but differences in the richness and cost of extraction of different deposits on the Minto property would also be a big factor.

In any case, Minto seems to be a higher-cost property than Capstone’s Arizona or Mexico properties, and hence one of those marginal mines on the supply curve.

A marginal mine can move itself down the cost curve if something dramatic happens to change its cost structure, such as a new mining technology, cheaper energy or lower-cost transportation infrastructure. If this doesn’t happen for Minto, then we will have to wait for copper prices to rise.

It’s tough, verging on impossible, to predict where copper prices are going. You often meet people with strong opinions, but it’s always worth asking why — if they are right — they are telling you about their copper theories in the Kopper King tavern rather than on their personal helicopter taking you to the private island they bought with their commodity trading profits.

Nonetheless, let’s have a look at the key supply-and-demand factors and see if it sheds any light on when those 200 Minto workers might get called back to work.

On the demand side, copper is a key industrial metal. Since it is used in everything from electronics to condo wiring to industrial goods, many consider it a bellwether for the global economy. Worries about the Chinese economy and global trade disputes have traders worried about lower future demand for the metal. This explains at least some of that recent 10 per cent fall in copper prices.

As for supply, there has been a lack of bad news from copper mines around the world. Although a few of the planet’s biggest producers in Australia and Mongolia have suffered well-publicized hiccups recently, the Financial Times reports that there have actually been fewer supply disruptions than usual. This means a steady supply has been reaching markets, which doesn’t help mines hoping for higher prices.

It’s worth thinking about how recent price fluctuations fit in with historical trends. The metal never traded above US$2 until late 2005. Amidst excitement about Chinese growth and a global “super cycle,” it peaked at over US$4.50 in 2011 (after a brief but vertiginous dip during the financial crisis). It then drifted down to a bit over US$3 in 2014. It dipped as low as US$2 in January 2016, and rebounded to a four-year high in June 2018 at over US$3.20. That was then followed by the 10 per cent drop noted above to last week’s close at US$2.80.

If you look at copper’s five-year price chart, its current value is in the middle of the range.

What would you have to believe in order for copper to go higher? Some major supply disruptions in one of the big copper-producing countries would have an effect. So would a dramatic fall in the Canadian dollar or another big round of stimulus spending by China, if the slowdown in that country’s economy prompts its government to launch yet another infrastructure program. In the longer run, big increases in electric vehicles and renewable energy generation could suck up tons of copper.

Some of these things might happen, and Pembridge or other investors may make a fresh deal for Minto. Or they might not. In the latter case, Minto could be stuck on the wrong place on the supply curve for years.

Keith Halliday is a Yukon economist and author of the MacBride Museum’s Aurore of the Yukon series of historical children’s adventure novels. He is a Ma Murray award-winner for best columnist.

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