Copper’s Challenges

Gruffudd Roberts, CRU, UK, explores the challenges copper miners must navigate to bring on new supply in order to meet the world’s increasing demand.

Growing demand for copper – partly from the electric vehicle and renewable sectors – will lead to a significant supply gap appearing in the copper market from the mid-2020s onwards. CRU estimates that the world will need to add 5.5 million tpy of copper mine supply by the end of the decade. With copper prices at approximately US$9000/t, far exceeding the US$6000/t level which has historically supported both project approvals and merger and acquisition (M&A) deal activity, there has been a renewed spotlight on project development.

It can take approximately 15 years to develop a new copper mine from exploration through to production, and this process is oft en beset by risks that can stall or even permanently block a project. Environmental, social, and governance (ESG) issues will be at the forefront when investment decisions are made.

Risks from political instability and social opposition in top copper mining countries

Chile and Peru produced 5.7 million t and 2.1 million t of mined copper, respectively, in 2020, 38% of the global total. They are also home to 33% (on a production basis) of the world’s undeveloped projects with >100 000 tpy of copper producing capacity. However, over the past couple of years, both countries have seen numerous scenes of civil unrest and social opposition to mining that have severely aff ected the industry and could reduce the viability of certain projects.

Chile’s economic and political stability was challenged by the social and political upheaval that started in October 2019 and led to a referendum on constitutional reform. The vote, carried out in October 2020, was overwhelmingly in favour of rewriting the country’s constitution, a process that is expected to culminate with a referendum on the final proposal in August 2021. It is uncertain what changes a new constitution will bring to the mining industry, but water rights, regulation of mining concessions, taxation and mining royalties, as well as labour rights and environmental protection, are all areas where changes are possible.

Peru’s mining industry has remained markedly resilient amidst the political instability the country has endured for years. However, the ousting of former President Martín Vizcarra, in November 2020, and the large protests that followed, have led to concerns among miners. Also of concern are the instances of social conflict between miners and communities, as has been the case repeatedly in recent years, most notably at MMG’s Las Bambas mine, which faced close to 100 days of community roadblocks and disrupted shipments last year. Protests against Southern Copper’s Tia Maria project in 2019 were also very disruptive and, as a

result, the project will only be allowed to proceed on the condition that it wins community support, which could take years. Other major projects located in this region – such as Quellaveco, Los Chancas, and Zafranal – could also face similar opposition from communities.

Other jurisdictions are arguably even more challenging for miners, such as Zambia and the Democratic Republic of the Congo (DRC). The Zambian government has changed its mining royalty and tax regime 10 times in the past two decades and has been embroiled in several disputes with mining companies, most recently with Glencore and Vedanta. Moreover, as the country’s economy has deteriorated, and its debt-to-GDP ratio has shot up towards 150% by some estimates, attempts by the state to take control of the country’s copper mines have not abated. Fiscal instability also presents significant challenges in the DRC, while resource nationalism also poses headaches for miners operating in Mongolia and Indonesia.

Environmental concerns and permitting challenges

Environmental compliance is a major hurdle for copper projects across the globe and miners are facing increasing levels of scrutiny at the permitting stage. On average, greenfield projects in Chile and Peru can take up to 4 or 5 years to secure the necessary operating permits. It can take almost double that in the US, a trend that is unlikely to recede given the Biden administration’s new plans to tackle environmental issues. The Pebble project in Alaska is the most significant project to be held back on environmental grounds. Progress on the controversial project has swung back and forth over the past few years, as its proximity to a significant wild salmon fishery has led to significant opposition from environmental and community groups. While the project is now able to apply for all the necessary state and federal permits, it has recently been refused a water licence. Other projects in the country that have faced significant opposition at the permitting stage include Twin Metals in Minnesota and Rosemont in Arizona.

Water use is also a contentious topic for miners, particularly in Chile, where the government has proposed that the use of desalinated water be mandatory for copper operations over a certain size. However, desalination plants come at a significant cost, both in terms of capital expenditure and operating costs, and thus have the potential to push some projects past the economic threshold. Tackling emissions is arguably the most important environmental issue facing copper miners today. CRU estimates that carbon dioxide (CO2) emissions for the copper mining industry average approximately 4.5 t of CO2/t of copper metal produced, though there is a large degree of variability on a mine-by-mine basis. Fuel consumption associated with material transport at the mining stage, in addition to electrical power use during mineral processing, are considered the most significant sources of CO2 emissions for copper. As a result, the focus of emission reduction measures has been on power generation and achieving incremental eff iciency improvements at the mining and processing stages. Increasing metal recoveries, electrification and automation of mining equipment, use of trolley assist, and applying conveyor systems for material handling can help generate eff iciency savings and reduce emissions overall. Miners have also been proactive on power generation, with several major producers opting for renewable power arrangements. Despite the adoption of these measures by many miners, they are by no means universally applied and will be a source of scrutiny for many copper projects in the future.

Figure 1. Long term copper market balance depicting production required from uncommited projects to meet rising demand.

Figure 2. Estimated number of years required to permit a greenfield project – politically and socially.

Technical challenges

Ore grades at existing operations are expected to decline gradually over the next decade. For concentrate operations, CRU expects to see a decline from 0.61% this year, down to 0.56% by 2030, while the decline will be more pronounced at existing hydrometallurgical mines. Miners in the past have compensated by increasing ore throughput to maintain production levels, which incurs higher capital and operating costs.

Impurities in copper concentrates are another technical challenge that miners must navigate.

As cleaner, simpler copper deposits are depleted, new sources of copper (some of them entailing metallurgically complex ores) need to be brought into production to satisfy growing demand. Arsenic is the most significant deleterious element; in addition to being highly toxic, it also reduces the conductivity of copper metal. Despite this, it is a comparatively common impurity in copper concentrates, with arsenic content varying over a wide range – from less than 100 ppm, to as high as 8 – 9%. Elevated fluorine levels at some key mines also captured the attention of the market in recent months.

The presence of deleterious elements in copper concentrates increases the cost of downstream processing for smelters, which in turn passes on this cost to miners by applying penalties, thus reducing the overall value of the mine’s product.

As easy to mine, near-surface copper deposits are becoming scarcer, copper mining is moving deeper underground. Where ore grades are lower, this necessitates the use of technically challenging bulk underground mining methods such as block caving. The initial capital costs for block caves are very high, typically in excess of US$5 billion. The large block caves that have commenced production over the past 2 years have made encouraging starts. However, with the copper market reliant on these large block cave operations to meet future demand, any shortfalls could see a tighter than expected market over the medium term.

Ignoring ESG issues could see investment dry up

Figure 3. CO2 emissions curve for the copper mining industry.

Figure 4. Existing copper mines are expected to experience further declines in ore grades. While CRU believes that the long-term outlook for copper is positive, prices are unlikely to remain at their current high levels beyond the short term, and higher-cost projects that have an attractive NPV at US$9000/t copper will struggle to receive a go-ahead if the copper price falls. Social, political, environmental, and technical challenges will have knock-on eff ects on project economics due to the costs involved with mitigating those issues.

The investment community has become increasingly committed to promoting and delivering on ESG issues. Securing project financing has never been a simple task for mining companies, but the increasing focus on ESG compliance as a key criterion used to inform investment decisions has made the process more challenging. Failure to deliver on sustainability aims makes projects less attractive to investors, and the mining industry has already been impacted. This is especially true in the case of thermal coal, which has seen some miners and investors divest from the major CO2 emitter in recent years. Chinese state-owned mining companies follow a diff erent playbook and are sometimes able to navigate or sidestep some hurdles others face. Expanding Chinese miner, Zijin, is set to almost double its mined copper output by 2022, following a spending spree that saw the company acquire majority stakes in Serbian project Timok, RTB Bor, Eritrea’s Bisha mine, and Qulong, one of China’s largest copper deposits. The company also has a 40% stake in Kamoa-Kakula, Africa’s largest copper project, in the DRC. In the post-COVID world, there will be more Chinese capital on the lookout to acquire assets from struggling or indebted rest-of-the-world companies and governments.

Conclusion

Despite copper being heralded as a green metal due to its role in electrification and renewable energy initiatives, ESG issues will command an ever-greater presence at all stages of the copper supply chain over the course of the next decade, and will be particularly critical for the investment community. There is suff icient supply potential to fill copper’s long-term supply gap, in the form of uncommitted mine projects. However, miners will need to navigate several challenges – political and fiscal instability, resource nationalism, community and social conflict, environmental opposition and permitting delays, as well as technical and financial risks – over the medium to long-term if they are to grow or even just maintain their current production levels.