Copper price in last ditch rally

Copper bounced on Tuesday after a rebound in Chinese manufacturing activity, but analysts cautioned that the market is far from returning to normal levels.

Copper trading in New York rose by more than 4% to $2.248 a pound ($4,955 a tonne) on course to contain its first quarter losses to below 20%. Two weeks ago the bellwether metal briefly traded below $2.00, levels last seen during the global financial crisis.

The official manufacturing PMI increased from a record low of 35.7 in February to 52.0 in March according to China’s National Bureau of Statistics This jump was driven by a rise in the output and new orders components with readings above 50 indicating expansion.

Capital Economics in a note points out that this does not mean that output is now back to its pre-virus trend but “simply suggests that economic activity improved modestly relative to February’s dismal showing, but remains well below pre-virus levels”:

The London-HQed research firm predict the price of copper will fall further in the second quarter, reaching a trough of around $4,000 per tonne ($1.80 a pound):

If anything, we suspect that the risks to this forecast are to the downside. 

Thereafter, if we are right in assuming a steady relaxation of virus containment measures, the price of copper should start to rise again from the second half of 2020.

China is responsible for more than 50% of the world’s copper consumption and after rapid expansion in recent years now also produces the bulk of the world’s refined copper.

Slipping supply

Top miners rallied on Tuesday in response to the stronger copper price led by Freeport-McMoRan up 8% and Anglo American with a 7.5% jump in New York. Glencore, which said it’s delaying a dividend decision, gained more than 4% in London.

Today’s rally won’t help much for the sector’s performance this quarter with Bloomberg reporting that listed copper mining companies are on track for the worst performance since 2008.

The miners “are being hit from two sides,” Daniel Briesemann, an analyst at Commerzbank, told he wire service, pointing to fears of a global recession and unprecedented disruptions to operations in South America where most of the world’s copper is mined.

At least 17% of global copper supply is at risk from closures, according to Bloomberg Intelligence analyst Andrew Cosgrove. 

Ero Copper’s Brazil operations not impacted by pandemic

Ero Copper (TSX: ERO) has not experienced any disruption to its operations, supply chains or sales channels as a result of the covid-19 pandemic, the Brazil-focused base metals miner stated in a corporate update on Tuesday.

To date, there are no known cases of covid-19 at any of the company’s operations, neighboring communities, or at its corporate offices in São Paulo and Vancouver, it added.

Ero Copper is currently focused on developing the Vale do Curaçá property in Bahia, Brazil, where it mines copper ore from the Pilar and Vermelhos underground mines. Operations are continuing at planned production rates and below-budget costs during the first quarter, aided by the depreciation of the Brazilian real.

Accordingly, the company is maintaining its full-year production, capital and operating cost guidance for 2020, but warns that the situation related to the covid-19 pandemic remains dynamic.

Shares of Ero Copper closed 2.4% higher on the TSX on Tuesday. The company’s market capitalization is C$906.45 million.

Pandemic may be final nail in US coal industry’s coffin

The fast-spreading coronavirus pandemic may too heavy of a burden for the already struggling coal miners in the United States, with three companies announcing operations halts due to measures to contain the spread of the disease.

Australia’s Coronado Global Resources (ASX: CRN) announced on Sunday it had idled its US thermal and metallurgical coal mines due to covid-19-induced global economic downturn.

The company, which operates the Buchanan, Logan and Greenbrier mine complexes in Virginia and West Virginia, will keep its Curragh mine in Australia open.

The operation, which accounts for 65% of Coronado’s output and earnings, will accommodate metallurgical coal export requirements of the miner’s key customers in India and the Asia Pacific, as well as to the Stanwell Power Station, a Queensland government owned entity

Given the significant stockpile of US inventories and continued production from Curragh, operating cash flows are expected to remain positive, Coronado said.

The miner also noted that its US operations will be maintained for immediate restart when market conditions improve and that shipments to Europe, Brazil and the US itself will continue.

Pennsylvania-based Consol Energy (NYSE: CEIX) said on Monday that it was it is temporarily curtailing production at its Bailey coal mine in Pennsylvania for two weeks after two employees tested positive for the coronavirus.

The miner said it’s keeping its Pennsylvania Complex, including the Enlow Fork and Harvey mines, in operations.

The complex has the capacity to produce 28.5 million tonnes of coal a year, while the halted Bailey mine accounts for 11.5 million annual tonnes of the total capacity.

Alliance Resource Partners (NASDAQ: ARLP) said Monday it would temporarily stop producing coal at all its Illinois basin mines as global measures to combat the virus had crushed demand for energy. In addition, the price war initiated by Saudi Arabia and Russia had lowered oil prices even more, it noted.

The miner also said it was withdrawing its initial 2020 operating and financial guidance provided in January, which did not reflect the impact of the covid-19. 

“Although we are suspending formal guidance, we currently anticipate ARLP’s total sales tons for 2020 will be approximately 25% below our initial expectations,” president and chief executive, Joseph Craft, said in the statement.

The operations halt is scheduled to last through April 15, though the coal miner said resuming of production could be accelerated or extended, based on business needs of its customers.

“It is important to note that approximately 75% of our domestic sales are targeted to states that depend on coal, more than any other fuel, to generate electricity,” Craft said.

The announcements come as the pandemic has rapidly expanded across the US, where the death toll is now expected to reach at least 100,000 people this week.

Moody’s Investor Services said on Thursday it expected further closures and bankruptcies within the US coal industry as domestic demand for coal was set to drop in the near-term due to the country’s economy shut-down to try reducing the numbers of coronavirus patients.

A slower economic activity is also cutting down US electricity demand, which together with stronger environmental, social and governance concerns could represent “an unprecedented shock” to the coal industry.

“Before the intensification of the coronavirus pandemic in the US, we expected that coal production would fall by15%-20% in the US, to about 550 million st-600 million st,” Moody’s said. “We now expect that the industry conditions will worsen beyond this forecast,” the ratings agency said.

The volume of coal mined in the US has been declining for the past decade, although burning the fuel still accounts for almost one-quarter of all the country’s electricity generation.

Jobs in the sector also continue to shrink. While there are over 129 million people employed by businesses in the US, there are only about 50,000 coal miners, or 0.04% of the country’s total number of people working, employed by the industry.

The latest jobs report, published in early March, shows that there are fewer people employed by the coal sector now (50,600 as of February) than three years ago (50,900 in January 2017). This compares to over 6.4 million jobs being added in the past three years.

De Beers scraps diamond sales event due to coronavirus lockdowns

De Beers, the world’s largest diamond producer by value, has cancelled its third sales event as lockdowns to contain the spread of the novel coronavirus in Botswana, South Africa and India made it impossible for buyers to attend.

The Anglo American unit sells diamonds to a handpicked group of about 80 buyers 10 times a year at events called sights. The third one this year was scheduled to take place from March 30 to April 3.

In February, the diamond giant reported its worst set of earnings since Anglo American (LON:AAL) acquired it in 2012.

De Beers is enabling customers to defer 100% of their sight 3 allocations to later in the year, and said it would continue to seek innovative ways to meet its sightholders supply needs in the coming weeks.

Russia’s Alrosa, the world’s No.1 producer of rough diamonds by carats, said earlier this month that it was studying options for online trade as global travel restrictions make traditional physical inspection of gemstones almost impossible.

The pandemic has placed new worries on the diamond industry, which was finally beginning to show signs of recovery, following a disastrous 2019.

Global demand and prices for all types of diamonds has steadily fallen since last 2018, affecting small stones producers the most, due to an oversupply in that segment that dragged prices down.

The glut of rough and polished stones destroyed margins for the industry’s crucial middlemen who cut, polish and trade them.

Increasing demand for synthetic diamonds also weighed on the market. Man-made stones require less investment than mined ones and can offer more attractive margins.

Seabridge reports net loss for 2019

Seabridge Gold (TSX: SEA)(NYSE: SA) posted a net loss of $11.6 million ($0.19 per share) in 2019 compared to a loss of $19.9 million ($0.34 per share) in the previous year, the company stated in its year-end financial release on Friday.

During 2019, Seabridge invested $30 million in mineral interests, primarily at its KSM project, compared to $37 million in 2018. The company’s working capital as of December 31, 2019, was $12.5 million, down from $18 million at December 31, 2018.

Subsequent to year-end, the company issued 382,807 common shares under its at-the-market offering program (ATM) at an average price of $17.96 for net proceeds of $6.7 million.

Previously in Q4 2019, Seabridge entered into an agreement with two securities dealers for an ATM program that entitled the company, at its discretion and from time to time, to sell up to $40 million worth of common shares. The ATM came into effect in December 2019 and is effective until June 2021.

Seabridge is currently focused on developing several gold assets across North America. Its two principal assets KSM and Iskut are both located in British Columbia.

The KSM project is considered one of the world’s largest undeveloped gold projects in terms of reserves. A recent preliminary feasibility study (PFS) estimates proven and probable reserves total 38.8 million ounces of gold and 10.2 billion pounds of copper.

Shares of Seabridge Gold were down 7.8% at Friday’s market close. Its current market capitalization sits at C$865 million.

Mine closures pose risk to global copper supply – report

The collapse of the copper price and the containment measures taken for the coronavirus pandemic, are posing a significant risk to global copper mine supply and project development, Nick Pickens, research director at Wood Mackenzie said in a note this week.

Day-by-day, mining companies are announcing revised plans to comply with new restrictions.

“For now, temporary closures will be absorbed by our mine disruption allowance,” Pickens said. 

“In a scenario where there are wholesale closures of mines in Peru and Chile for 15 days, we would see 1.5% wiped from global annual supply. It would take 45 days to reach our full-year mine disruption allowance.”

“In a scenario where there are wholesale closures of mines in Peru and Chile for 15 days, we would see 1.5% wiped from global annual supply”

Nick Pickens, research director, Wood Mackenzie

“At this stage, we are not assuming mine supply from these countries will stop in its entirety. However, we believe there is a significant risk that disruptions will escalate, and breach 5% this year.”

Low prices could hamper mine restarts and new projects. The copper price is currently trading below the 90th centile of the industry cost curve (223 c/lb). Temporary closures and construction deferrals have accelerated due to virus containment. However, a sustained period of lower prices could make these more permanent.

Cost deflation will help to ease margins, Pickens said.

“Our mark-to market analysis suggests that at current market oil prices and exchange rates, the 90th centile of the C1 plus capex cost curve will fall by nearly 25 c/lb when compared to 2019. Furthermore, a prolonged period of lower average oil prices will have a more extensive deflationary influence for other raw material costs, and the impact could be more significant.”

Supply disruptions, directly relating to coronavirus

In recent days, the reach of coronavirus has rapidly expanded from key regions of copper demand – China and Europe, to key regions of supply – the Americas. Peru has enforced widespread quarantine, and some mines are now thought to be on temporary care and maintenance.

“In Chile, a state of catastrophe has been declared. We have also seen temporary cutbacks and risks to suspensions in Canada, the DR Congo and Australia,” Pickens said.

In Peru, the government has taken measures to prevent the spread of the pandemic throughout the mining industry. Mining companies have been asked to only mobilise critical employees to mine sites, to implement an emergency plan adapted to the circumstances, and to ensure health protection for a 15-day period, from 19 March.

Critical employees might comprise those who work in environmental or safety functions such as water treatment plants, ground stability, tailings monitoring, underground ventilation and security, Pickens said.

This would mean that mining operations would effectively go under care and maintenance for 15 days. Large operations that have followed this measure include Cerro Verde and Constancia.

Some mining companies, such as Buenaventura, have implemented these measures at all operations. However, other companies, due to their remote location and capabilities to ensure the health of their employee, have decided to just keep slow down production.

Chile has also stepped up its response. The government declared a “state of catastrophe” starting March 19, as the confirmed cases of coronavirus continued to rise.

“This measure gives the government the capability to control the food and medical supply chains and distribution, border protection, and to enforce curfews and restrict social gatherings,” Pickens said.

“Immediately after the announcement, Codelco said it would maintain “operational continuity” for 15 days in all is units. Meanwhile, we understand Spence and Escondida’s union has asked BHP to implement stricter measures to ensure the health of its employees or shutdown,” he added.

What does this mean for global supply?

The most noteworthy announcements to date, in terms of significance to the global copper market, have been from authorities in Chile and Peru, who are both pointing to a 15-day disruption. All out closures in Peru and Chile for 15 days, would see 1.5% wiped from global annual supply, Pickens asserted.

The containment of coronavirus is also affecting construction of new projects, with several major producers announcing they are slowing or temporarily stopping development

“While this is significant, it would be absorbed by our disruption allowance. It is also not likely to be long enough to trigger force majeure on shipments.”

“In our opinion, the restrictions will need to be in place longer than 15 days. It would take 45 days to disrupt 5% of supply from these countries, equivalent to our full-year disruption allowance of just over 1.0 Mt,” Pickens said.

“At this stage, we are not assuming mine supply from these countries will stop in its entirety. The early indications are that some major companies in Peru and Chile are managing to produce under the restrictions.” 

“However, there is a worse-case scenario to consider. If the need for containment leads to wholesale lockdown of mine sites, and this Latin America disruption is replicated in Africa, North America and Australia, this would have catastrophic consequences for global copper mine supply,” Pickens said.  

“This is not currently, our base case assumption, but as we publish this Insight, there are clear signs that measures to contain the virus are likely to intensify over the coming days and weeks.”

Mine supply beyond 2020: Project delays put future supply growth at risk 

The containment of coronavirus is also affecting construction of new projects, with several major producers announcing they are slowing or temporarily stopping development.

A third of mine supply growth over the next three years will be from Peru (Quellaveco and Mina Justa) and Chile (Quebrada Blanca Phase 2 “QB2” and Spence). Elsewhere, greenfield and brownfield projects in Indonesia (Grasberg Block Cave), Mongolia (Oyu Tolgoi underground) and DR Congo (Kamoa-Kakula) will also contribute significant volumes. 

“However, within the last week, at least three of these projects have either stopped or slowed construction. Anglo American has announced that Quellaveco construction has slowed, under the 15-day national quarantine measures taken in Peru,” Pickens said.

Teck has suspended construction activities at QB2 project in Chile for an initial two-week period. In Mongolia, there are reports that work has slowed at Oyu Tolgoi, due to the restrictions placed by the government. Combined, these projects account for a third of the total net growth expected over the next three years. 

“The current supply-side outlook is analogous to the market in 2008/09. At the start of 2008, there was healthy pipeline of near-term projects, in our probable and highly probable (now included in our base case) categories. But a severe demand shock, brought about by the GFC, triggered project delays. During the 12 months between Q3

2008 and Q3 2009, we estimate the mining industry deferred up to 2.2 Mt/a of new copper supply. While projects eventually hit the market, they were later than expected. This undoubtedly contributed to the tighter market and high prices experienced in 2010 and 2011, once the market recovered,” Pickens said.

Highly probable & probable project deferrals: Q3 2008 project pipeline versus Q3 2009 project pipeline:

 Supply-side response to price:

The LME cash price closed at $4,855/t (220 c/lb) on March 20, falling 15 % in just a week, and 25% since the start of the year. The price decline began on 13 March, just after the World Health Organisation (WHO) declared a global pandemic.

“Since then, hopes that containment in China, followed by government stimulus could be the catalyst for a V-shaped recovery, have faded fast,” Pickens said.

“With demand contracting and prices plummeting, an economic supply response now seems likely. The disruption caused by virus containment has been the catalyst for a quicker reaction than is typical by the mining industry in a downturn,” Pickens said.

“So far, the covid-19 closures are temporary. However, with prices low, the decision to restart will become difficult for some producers. Furthermore, the longer prices stay depressed, marginal mining operations, not currently disrupted by coronavirus, may be forced to cut production regardless. History tells us, these cuts take a little longer to occur, as operators first cut back on non-essential capex.”

“Over the last decade, there have been two periods of price-related mine closures. The first was in 2008/09 demand shock during the GFC. The second was in 2015/16, when strong mine supply growth and weaker demand prompted a significant price decline”

Nick Pickens, Research Director, wood mackenzie

“Over the last decade, there have been two periods of price-related mine closures. The first was in 2008/09 demand shock during the GFC. The second was in 2015/16, when strong mine supply growth and weaker demand prompted a significant price decline,” Pickens said.

In 2008/09 prices crashed below the 90th centile for a period of six months, reaching well into the third quartile for short periods. This resulted in around and 2.2% of price related closures. In 2015/16, the copper price decline was supply driven and longer lasting. Prices were below the 90th centile for 18 months, with 4.2% of annual global supply removed from the market.

“The impact on supply could be less than previous downturns, owing to a lower starting point,” Pickens said. “We expect total refined production to decline this year. This in part due to a decline in mine supply, but also due to the fall in production from scrap and blister units. As a result, we estimate a supply cut of only 200 kt, beyond the normal 5% disruption, would be enough to bring the refined market back to our long-term equilibrium.”

Previous supply-side responses to lower prices:

 “We expect average annual prices will be supported at around $4,850/t (220 c/lb) over  the remainder of the year. This assumes that prices will average out at the 90th centile of the cost curve, which is now significantly lower than the 2019 level on account of a lower oil price and weaker producer currencies,” Pickens said. “However, history also tells us that in a demand shock, prices could drop hit lows as 60-70th centile, below <200 c/lb for short periods.” 

In 2008/09, prices fell below the 90th centile for a period of six months, reaching well into the third quartile for short periods. Meanwhile, in 2015/16 prices were lower for longer (18 months), but did not cut quite as deep, reaching closer to the 80th centile. 

Historic copper price and copper mine cost centiles, C1 plus sustaining capex (2020$)

Fuel prices and exchange rates have reduced costs, and the price floor:

The oil price crashed in early March, driven by weak demand and rapidly increasing supply from Saudi Arabia. The result has been a 50% decrease in Brent oil price to less than US$30/bbl, Pickens reported.

On average, fuel represents 7% of overall mine-site costs. A 50% decline in oil prices, from US$64/bbl (Brent) in 2019 to US$30/bbl in the current market is expected to reduce average minesite costs by around 5 c/lb.

“However, we expect a prolonged period of lower average oil prices will have a more extensive deflationary influence for other raw material costs,” Pickens said.

“Analysis of historical performance between the price of oil and the cost of energy, services and consumables, suggests that these components could impact average costs by a further 5 c/lb. The combined direct and indirect sensitivity is therefore 3 c/lb per $10/bbl of oil.”

But it’s not just the oil price that is reducing costs, he asserted. In most major copper-producing countries, local currency has depreciated against the US dollar, when compared to 2019 averages. The top ten producing countries (along with US output) account for 75% of global copper mine production in 2019 and, on average, currencies in these regions have depreciated by over 10%.

“Our mark-to-market analysis suggests at current market prices, the 90th centile of the C1 plus capex cost curve will fall by nearly 25 c/lb to 223 c/lb. Furthermore, a prolonged period of lower average oil prices will have a more extensive deflationary influence for other raw material costs, and the impact could be more significant,” Pickens said.

Mine closures pose risk to global copper supply – report

The collapse of the copper price and the containment measures taken for the coronavirus pandemic, are posing a significant risk to global copper mine supply and project development, Nick Pickens, research director at Wood Mackenzie said in a note this week.

Day-by-day, mining companies are announcing revised plans to comply with new restrictions.

“For now, temporary closures will be absorbed by our mine disruption allowance,” Pickens said. 

“In a scenario where there are wholesale closures of mines in Peru and Chile for 15 days, we would see 1.5% wiped from global annual supply. It would take 45 days to reach our full-year mine disruption allowance.”

“In a scenario where there are wholesale closures of mines in Peru and Chile for 15 days, we would see 1.5% wiped from global annual supply”

Nick Pickens, research director, Wood Mackenzie

“At this stage, we are not assuming mine supply from these countries will stop in its entirety. However, we believe there is a significant risk that disruptions will escalate, and breach 5% this year.”

Low prices could hamper mine restarts and new projects. The copper price is currently trading below the 90th centile of the industry cost curve (223 c/lb). Temporary closures and construction deferrals have accelerated due to virus containment. However, a sustained period of lower prices could make these more permanent.

Cost deflation will help to ease margins, Pickens said.

“Our mark-to market analysis suggests that at current market oil prices and exchange rates, the 90th centile of the C1 plus capex cost curve will fall by nearly 25 c/lb when compared to 2019. Furthermore, a prolonged period of lower average oil prices will have a more extensive deflationary influence for other raw material costs, and the impact could be more significant.”

Supply disruptions, directly relating to coronavirus

In recent days, the reach of coronavirus has rapidly expanded from key regions of copper demand – China and Europe, to key regions of supply – the Americas. Peru has enforced widespread quarantine, and some mines are now thought to be on temporary care and maintenance.

“In Chile, a state of catastrophe has been declared. We have also seen temporary cutbacks and risks to suspensions in Canada, the DR Congo and Australia,” Pickens said.

In Peru, the government has taken measures to prevent the spread of the pandemic throughout the mining industry. Mining companies have been asked to only mobilise critical employees to mine sites, to implement an emergency plan adapted to the circumstances, and to ensure health protection for a 15-day period, from 19 March.

Critical employees might comprise those who work in environmental or safety functions such as water treatment plants, ground stability, tailings monitoring, underground ventilation and security, Pickens said.

This would mean that mining operations would effectively go under care and maintenance for 15 days. Large operations that have followed this measure include Cerro Verde and Constancia.

Some mining companies, such as Buenaventura, have implemented these measures at all operations. However, other companies, due to their remote location and capabilities to ensure the health of their employee, have decided to just keep slow down production.

Chile has also stepped up its response. The government declared a “state of catastrophe” starting March 19, as the confirmed cases of coronavirus continued to rise.

“This measure gives the government the capability to control the food and medical supply chains and distribution, border protection, and to enforce curfews and restrict social gatherings,” Pickens said.

“Immediately after the announcement, Codelco said it would maintain “operational continuity” for 15 days in all is units. Meanwhile, we understand Spence and Escondida’s union has asked BHP to implement stricter measures to ensure the health of its employees or shutdown,” he added.

What does this mean for global supply?

The most noteworthy announcements to date, in terms of significance to the global copper market, have been from authorities in Chile and Peru, who are both pointing to a 15-day disruption. All out closures in Peru and Chile for 15 days, would see 1.5% wiped from global annual supply, Pickens asserted.

The containment of coronavirus is also affecting construction of new projects, with several major producers announcing they are slowing or temporarily stopping development

“While this is significant, it would be absorbed by our disruption allowance. It is also not likely to be long enough to trigger force majeure on shipments.”

“In our opinion, the restrictions will need to be in place longer than 15 days. It would take 45 days to disrupt 5% of supply from these countries, equivalent to our full-year disruption allowance of just over 1.0 Mt,” Pickens said.

“At this stage, we are not assuming mine supply from these countries will stop in its entirety. The early indications are that some major companies in Peru and Chile are managing to produce under the restrictions.” 

“However, there is a worse-case scenario to consider. If the need for containment leads to wholesale lockdown of mine sites, and this Latin America disruption is replicated in Africa, North America and Australia, this would have catastrophic consequences for global copper mine supply,” Pickens said.  

“This is not currently, our base case assumption, but as we publish this Insight, there are clear signs that measures to contain the virus are likely to intensify over the coming days and weeks.”

Mine supply beyond 2020: Project delays put future supply growth at risk 

The containment of coronavirus is also affecting construction of new projects, with several major producers announcing they are slowing or temporarily stopping development.

A third of mine supply growth over the next three years will be from Peru (Quellaveco and Mina Justa) and Chile (Quebrada Blanca Phase 2 “QB2” and Spence). Elsewhere, greenfield and brownfield projects in Indonesia (Grasberg Block Cave), Mongolia (Oyu Tolgoi underground) and DR Congo (Kamoa-Kakula) will also contribute significant volumes. 

“However, within the last week, at least three of these projects have either stopped or slowed construction. Anglo American has announced that Quellaveco construction has slowed, under the 15-day national quarantine measures taken in Peru,” Pickens said.

Teck has suspended construction activities at QB2 project in Chile for an initial two-week period. In Mongolia, there are reports that work has slowed at Oyu Tolgoi, due to the restrictions placed by the government. Combined, these projects account for a third of the total net growth expected over the next three years. 

“The current supply-side outlook is analogous to the market in 2008/09. At the start of 2008, there was healthy pipeline of near-term projects, in our probable and highly probable (now included in our base case) categories. But a severe demand shock, brought about by the GFC, triggered project delays. During the 12 months between Q3

2008 and Q3 2009, we estimate the mining industry deferred up to 2.2 Mt/a of new copper supply. While projects eventually hit the market, they were later than expected. This undoubtedly contributed to the tighter market and high prices experienced in 2010 and 2011, once the market recovered,” Pickens said.

Highly probable & probable project deferrals: Q3 2008 project pipeline versus Q3 2009 project pipeline:

 Supply-side response to price:

The LME cash price closed at $4,855/t (220 c/lb) on March 20, falling 15 % in just a week, and 25% since the start of the year. The price decline began on 13 March, just after the World Health Organisation (WHO) declared a global pandemic.

“Since then, hopes that containment in China, followed by government stimulus could be the catalyst for a V-shaped recovery, have faded fast,” Pickens said.

“With demand contracting and prices plummeting, an economic supply response now seems likely. The disruption caused by virus containment has been the catalyst for a quicker reaction than is typical by the mining industry in a downturn,” Pickens said.

“So far, the covid-19 closures are temporary. However, with prices low, the decision to restart will become difficult for some producers. Furthermore, the longer prices stay depressed, marginal mining operations, not currently disrupted by coronavirus, may be forced to cut production regardless. History tells us, these cuts take a little longer to occur, as operators first cut back on non-essential capex.”

“Over the last decade, there have been two periods of price-related mine closures. The first was in 2008/09 demand shock during the GFC. The second was in 2015/16, when strong mine supply growth and weaker demand prompted a significant price decline”

Nick Pickens, Research Director, wood mackenzie

“Over the last decade, there have been two periods of price-related mine closures. The first was in 2008/09 demand shock during the GFC. The second was in 2015/16, when strong mine supply growth and weaker demand prompted a significant price decline,” Pickens said.

In 2008/09 prices crashed below the 90th centile for a period of six months, reaching well into the third quartile for short periods. This resulted in around and 2.2% of price related closures. In 2015/16, the copper price decline was supply driven and longer lasting. Prices were below the 90th centile for 18 months, with 4.2% of annual global supply removed from the market.

“The impact on supply could be less than previous downturns, owing to a lower starting point,” Pickens said. “We expect total refined production to decline this year. This in part due to a decline in mine supply, but also due to the fall in production from scrap and blister units. As a result, we estimate a supply cut of only 200 kt, beyond the normal 5% disruption, would be enough to bring the refined market back to our long-term equilibrium.”

Previous supply-side responses to lower prices:

 “We expect average annual prices will be supported at around $4,850/t (220 c/lb) over  the remainder of the year. This assumes that prices will average out at the 90th centile of the cost curve, which is now significantly lower than the 2019 level on account of a lower oil price and weaker producer currencies,” Pickens said. “However, history also tells us that in a demand shock, prices could drop hit lows as 60-70th centile, below <200 c/lb for short periods.” 

In 2008/09, prices fell below the 90th centile for a period of six months, reaching well into the third quartile for short periods. Meanwhile, in 2015/16 prices were lower for longer (18 months), but did not cut quite as deep, reaching closer to the 80th centile. 

Historic copper price and copper mine cost centiles, C1 plus sustaining capex (2020$)

Fuel prices and exchange rates have reduced costs, and the price floor:

The oil price crashed in early March, driven by weak demand and rapidly increasing supply from Saudi Arabia. The result has been a 50% decrease in Brent oil price to less than US$30/bbl, Pickens reported.

On average, fuel represents 7% of overall mine-site costs. A 50% decline in oil prices, from US$64/bbl (Brent) in 2019 to US$30/bbl in the current market is expected to reduce average minesite costs by around 5 c/lb.

“However, we expect a prolonged period of lower average oil prices will have a more extensive deflationary influence for other raw material costs,” Pickens said.

“Analysis of historical performance between the price of oil and the cost of energy, services and consumables, suggests that these components could impact average costs by a further 5 c/lb. The combined direct and indirect sensitivity is therefore 3 c/lb per $10/bbl of oil.”

But it’s not just the oil price that is reducing costs, he asserted. In most major copper-producing countries, local currency has depreciated against the US dollar, when compared to 2019 averages. The top ten producing countries (along with US output) account for 75% of global copper mine production in 2019 and, on average, currencies in these regions have depreciated by over 10%.

“Our mark-to-market analysis suggests at current market prices, the 90th centile of the C1 plus capex cost curve will fall by nearly 25 c/lb to 223 c/lb. Furthermore, a prolonged period of lower average oil prices will have a more extensive deflationary influence for other raw material costs, and the impact could be more significant,” Pickens said.

Sprott increases stake in Orefinders

Orefinders Resources (TSXV: ORX) has closed the flow-through portion of its previously announced private placement for aggregate proceeds of approximately C$619,000.

Upon closing of the offering, the company issued around 8.84 million units at a price of C$0.07 per unit, where each unit consists of one common share and one-half of one common share purchase warrant. Each whole warrant will entitle the holder to purchase one additional common share of the company at a price of C$0.08 for a period of 24 months from the date of issuance.

Mining investor Eric Sprott acquired 7.14 million of those units, increasing his ownership in the company’s capital to just over 20 million common shares and 10 million warrants, representing approximately 11.89% of those outstanding on a non-diluted basis and 16.84% on a partially diluted basis.

Sprott recently became a shareholder of Orefinders when he participated in the company’s C$1.49 million private placement in February, acquiring 8.07% of the company’s outstanding stock on a non-diluted basis and 11.64% on a partially diluted basis.

Orefinders is currently developing gold assets in Ontario’s Abitibi Greenstone Belt, including the McGarry, Knight and Mirado projects.

Giyani obtains final approval for Lobatse environmental plan

Giyani Metals (TSXV:EMM) has received final approval from the Department of Environmental Affairs (DEA) in Botswana for its Lobatse manganese project’s environmental management plan (EMP).

The environmental framework required to proceed with exploration activities at Lobatse is now in place, the company says.

The final approval was granted after the customary one-month public review process during which the company was required to advertise the details of the EMP in the Government Gazette and local newspapers. During the period of review, there were no concerns raised by any stakeholders, and as a result, the DEA issued an official acceptance letter last week.

“This is another great example of Botswana’s dedication to supporting its mining industry, especially as the country has introduced its own in-country restrictions following the covid-19 global pandemic,” CEO Robin Birchall stated in a media release.

This approval was the last of the three that the company has received across its K.Hill, Lobatse and Otse project sites.

Shares of Giyani Metals rose more than 9% at Friday’s open. The Oakville, Ontario-based manganese explorer has a market capitalization of C$10.25 million.

Gap between No. 1 and 2 copper miners widens as Codelco output drops 5.3%

Chile’s Codelco, the world’s second largest copper miner, has fallen further behind BHP (ASX: BHP) in the top producers of the metal’s rank, after reporting that its output for 2019 had fallen by 5.3% to 1.588 million tonnes.

BHP, the world’s biggest mining company, churned out last year 1.749 million tonnes of copper and expects to produce between 1.705 million and 1.820 million tonnes in 2020.

The Chilean miner, which hands all its revenue over to the state, attributed the drop in production to unusual bad weather in the first half of the year, strikes at its Chuquicamata mine and operational issues.

Profit for the year fell 17% compared to 2018 to $1.34 billion, while direct cash costs increased 1.8%.

Codelco said the poor financial results were a combination lower gross margins, the downward tendency of copper prices, a reduction in physical sales of the metal and molybdenum and weak results obtained from associated investments,

Colin Hamilton, managing director of commodities research at BMO Capital Markets, had anticipated earlier this week that the copper company would soon have to sell non-core assets.

“Any thoughts of shutting unprofitable operations, however, are off the agenda for now given the need to ensure employment,” he wrote in a note to investors.

Hamilton also noted that Codelco was looking increasingly unlikely to be the world’s largest copper miner from this year forward, as depletion and restrictions prove to be headwinds that are too strong.

The escalating number of Chileans infected with the novel coronavirus forced the company on Wednesday to suspend some key projects, including work being carried out to finish transforming Chuquicamata into an underground mine, and early stage projects at Rajo Inca and Traspaso Andina.

The halted projects are part of a 10-year, $40 billion ongoing plan to upgrade its aging mines and keep up production rates. The scheme, however, could further jeopardized by the effects of the measures taken to deal with the global pandemic crisis.

“Although the country’s government has taken proactive measures to contain the economic and health impacts of the covid-19, the ripple effects of a copper supply shock remain to be seen,” Mariano Pablo Machado, senior Americas analyst at global risk consultancy Verisk Maplecroft, said this week.

Codelco operates seven mines and four smelters, all in Chile. Its assets account for 10% of the world’s known proven and probable reserves and about 11% of the global annual copper output.