Grade decline (Coppers)
Below is a summary of Q4 processed grades vs. reserve grades across the copper sector. In-line with Q3 overall average processed grades were 15% above reserves, but ranging from -38% to +100% at the mine level. At the corporate level the range is -38% (TRQ) to +74% (HBM), and while there's no implied criticism because you can only mine what's in front of you, clearly grades should normalise over time, easing or tightening operating margins. In summary:
Q4 Processed Cu Grades vs. Reserves:
Much like in Q3, on a mine level the highest in Q4 were Constancia (80%), Aktogay (+66%) and Las Bambas (+59%), though by importance we can't overlook the gradual decline that is slowly occurring at Escondida (+46%), and indeed Codelco where head grades have fallen from 1.6-1.8% in the 1970s to ~0.7% today. Declining at around 0.017% each year, that's ~40ktpa of copper loses each year. Or put another way, Codelco needs to add 6.7Mtpa of mining and milling capacity each and every year to offset grade decline.
Although there is an argument to suggest owning those on the left of the chart over those on the right (over the long-term anyway), it clearly isn't that simple given things like the impact dilution can have on quarterly performance (e.g. at MLX), or reconciliation (e.g. HBM). However to focus on the two outliers:
Hudbay: Quarterly head grades were 0.54% at Constancia vs. a 0.30% reserve grade, more or less in-line with the mine plan. However while the grade decline is going to be painful when it comes, there are two reasons to remain optimistic at the moment – Namely the introduction of Pampacancha ore, plus the ongoing positive grade reconciliation.
Constancia mine plan:
As illustrated above, mining at Pampacancha is expected to begin later this year, providing a nice copper grade sweetener, as well as additional precious metals. It postpones the inevitable grade decline until 2022. In terms of grade reconciliation, the last technical report put the grade reconciliation at 117% on grade, and HBM has since said the copper grade bias is expected to exist through the ore body. As a result there will be a revision to reserves and resources in April, though this is expected to be less than the actual reconciliation achieved to date.
Turquoise Hill: Q4 head grades were 0.53% vs. a reserve grade of 0.86%, in-line with the mine plan. However as the underground comes on-line grades are going to move substantially higher, to nearly double the reserve grade. In summary from the last technical report:
It might be a few years away yet, but at some point you'd have think TRQ is due a big re-rating.
