Copper and nickel are two metals modern society cannot get enough of, but there is not enough to go around, says Rick Mills, publisher of Ahead of the Herd. Add in mounting production costs and you have a supply-and-demand disaster in the making. But when it comes to making fiberglass and aluminum, Mills says in this interview with The Metals Report that he sees a revolution in the making, and its name is anorthosite.
The Metals Report: Rick, you have concerns about supply problems for many industrial metals. Let’s start with the importance of copper and nickel to global growth.
Rick Mills: Modern society would grind to a halt without copper and nickel. Nickel has more than 100,000 applications. Copper is everywhere as well. But growing structural imbalances in the supply-and-demand equation do not bode well for future resource extraction. Mining is extremely capital intensive. The initial capital expense (capex) of building and developing a mine is high.
Company-built infrastructure assets—roads, railways, bridges, power generating stations, seaports—are often needed to extract and transport the ore and concentrate. Second, the operating expenses (opex)—rubber tires, wages, fuel, camp costs—are not stable; they keep going up.
TMR: Production costs have been high for a while. Why are you so concerned now?
RM: Copper has become especially capital intensive. The low-hanging fruit has been mined. Companies have to go further off the grid to find deposits. The deposits now being mined are getting older; the metallurgy is more complex and grades are going down. In 2000, it cost $4,000–5,000 on average to build the infrastructure to produce a ton of copper. Now that number is north of $10,000/ton. Nickel is the only other metal with that kind of increase in capital intensity.
Declining ore grades mean miners need a much larger relative scale of mining and milling operations to get the same amount of metal. New mining projects are often in remote areas of developing countries with little to no infrastructure. When you are in the middle of the jungle, without access to roads, railways or seaport, you have to build all that. That’s why new copper and nickel mines cost upwards of $8 billion ($8B).
TMR: Do you think the economy is recovering and how does that impact the demand for copper?
RM: Economies in the developing world—the U.S., Japan, the Eurozone—are not recovering. (See chart below.) I would expect growth to be 1.5-2% for the next couple of years, which is not enough to stimulate new demand. In contrast, the BRIICs (Brazil, Russia, India, Indonesia and China) are expected to grow at least at a 6% average. These countries are undergoing massive industrialization and urbanization that will more than make up for the slowdown in the West.
TMR: Given the copper shortage, will senior companies like Teck Resources Ltd. (TCK:NYSE; TCK.A:TSX) and Vale S.A. (VALE:NYSE) go looking for new deposits or do you see more merger and acquisition activity?
RM: I prefer junior companies that already have a deposit. One that meets my criteria is VMS Ventures Inc. (VMS:TSX.V). Its Reed Lake project in Manitoba, Canada, is a 70/30 joint venture with HudBay Minerals Inc. (HBM:TSX; HBM:NYSE). It will be in production later this year. The ore will be trucked to HudBay’s milling and concentrating facilities. By 2015, VMS will have decent cash flow after paying back HudBay, with close to $100 million ($100M) flowing to VMS over the current five-year life of mine (LOM). The deposit could grow along with the LOM. Manitoba is mining friendly, has a skilled local workforce and all the infrastructure you need.
For the rest of this interview, click here: http://www.theaureport.com/pub/na/15172