Dr. #Copper & #Chile

Grades keep coming down- but costs as well thanks to cost reductions and lower energy prices and a devalued Chilean Peso. 

Chile is the largest copper producer in the world contributing 30% of global mine output.  A look at the average copper grade produced shows how significantly the average copper grade in Chile has come down: From 1.11% in 2004 to 0.86% in 2012.

 

Below are some comments from SCOTIABANK:

 

A Review of Cash Costs at Chilean Copper Mines…: Scotiabank LatAm Metals & Mining Analyst Alfonso Salazar noting that The Chilean Copper Commission (Cochilco) recently published its new Observatorio de Costos report, comparing cash costs of Chile's largest mines in Q1/16 vs. Q1/15. The analysis includes 19 large-scale mining operations with total mine output representing 88% of Chile's production in the period. For reference, Chile produced 5.8 million tonnes of copper in 2015, contributing 30% of global mine output. According to the study, the average cash cost in Chile's large mines declined US$0.20/lb in the period to US$1.28 per pound from US$1.48 per pound. Lower costs YOY were the result of:

 

1.     Cost-reduction initiatives undertaken by management (US$0.14/lb), which were necessary to remain competitive against a backdrop of lower copper prices.

2.     The positive impact of market factors, including a weaker Chilean peso and lower oil and energy prices (US$0.14/lb).

 

However, cash costs were negatively impacted by some adverse geological and market factors, including declining ore grades, copper production cuts, and lower by-product (molybdenum, gold, silver) prices. From a total of 19 mine operations included in Cochilco's analysis, 14 decreased their cash costs in Q1/16 (to US$1.25/lb from US$1.50/lb in Q1/15). Cash costs increased at five Chilean mines during the period (to US$1.46/lb from US$1.39/lb).

 

What Is Driving Cash Costs Down in Chile?

 

How much lower can cash costs get in Chile? The tables below shows two different cash cost breakdowns provided by Cochilco. Alfonso notes that costs of some relevant production inputs seem to already be in an uptrend (TC/RCs, fuel, and freight) when compared with Q1/16. In addition, the Chilean peso strengthened by 3% in Q2/16 vs. Q1/16 and is now up 7% so far in Q3/16 relative to Cochilco's analysis' period. As such, Alfonso is of the thought that costs will likely face upward pressure from now on. Further to this, and in the longer term, Alfonso expects continued (Chilean) ore grade declines to negatively affect production and unit costs; as ore grades continue their a downtrend and rock hardness negatively affects throughput, Alfonso believes mines will face cost increases related to higher energy, water, and labor costs per unit of copper produced.

 

Two Additional Cash Cost Breakdowns Provided by Cochilco

 

Average Copper Grades in Chile Expected to Continue Trending Down …

 

 

Savings today may impact production in years to come. To preserve cash, state-owned copper producer Codelco is planning to delay investments in projects that will take longer to mature, as noted by CEO Nelson Pizarro during CESCO week in April. Over the next five years, the strategy should result in US$4B less capital expenditures and US$2B of operating expense savings. The expected impact on production volumes should be small in the first five years (around 70kt on a cumulative basis) but will likely increase in time (to 600kt in the following five-year period and to 2Mt in the subsequent five years). As a result, Codelco's copper production guidance of 44 million tonnes in the next 25 years (1.76Mtpa on average) should be revised down.

 

No Signs of Higher Production in Chile Despite Billions Invested in New Chilean Mines

 

Small and medium-sized mines are at a clear disadvantage to large mines in a scenario of depressed copper prices, as they lack the economies of scale and, in some cases, access to financing. In addition, a decline in ore grades tends to have a more pronounced effect on small and mid-sized mining operations than on larger mines. A second report published recently by Cochilco – Situación de la Mediana Minería – provides an update on mid-sized mining operations in Chile, albeit using a relatively small sample of 23 companies in the study, with total production of 259k tonnes (Cu Eq) in 2014. The report concludes that not only has the average cash cost for mid-sized operations (US$2.28/lb in 2014) remained consistently above that of large-scale mines, but it has also been highly dispersed in past years.

 

Cash Costs of Mid-sized Copper Mines in Chile (Red Line) Highly Dispersed and Above Large Mines (Blue Line)

 

The hottest metal this Year is #Zinc. This is the Story

Here is a comment on the Zinc market from Scotiabank:

 

 

Market participants are saying that an already tight zinc concentrate market has become even tighter.  Global smelters and refineries have been revising up production drawing on as much concentrate as they could get and now port inventory of zinc concentrates is down significantly by the end of July.  Given the low availability of concentrate there is an expectation that smelters/refineries will be forced to take maintenance shutdowns.  This should translate to a tighter refined zinc metal market. The market has been expecting a refined metal deficit and it looks like things are setting up nicely to visibly show it.  Interesting the market shrugged off the LME zinc inventory spike in New Orleans +29,800t which probably was hidden stocks getting flushed out.   Right now, it is really the zinc concentrate tightness that is exciting the market in our view. TC=Treatment charges by smelters.

 

Total global zinc stocks are now at 782kt which is +4.3% YTD and +4.0% YoY.

Days of Consumption = 19.4

 

 

 

… And Where Do You Get Your Zinc On?  Check out our Zinc Sensitivities in the Table below…  Our Metals Research Team showing what a 10% and 20% move in Zinc prices would do to our numbers for Teck, Lundin, Hudbay, Trevali.  We assume zinc prices will average $1.10/Ib in 2017e.

 

 

 

 

 

 

 

 

 

Source:  Scotiabank Metals Research

Investing in #Gold #MiningStocks: The Big Picture

Here are some of the basic and macro points you should always bear in mind when investing in Junior Gold Mining Stocks. 

This from Gwen Preston the Resource Maven https://www.resourcemaven.ca Maven Mondays:

On The Macro: Context and Requirements   To start I want to post (with permission!) this gold price chart from Jordan Roy-Byrne of www.thedailygold.com.

The blue line is the average price pattern from the two best bull markets (1976 and 2008) while the red averages the price from the last four rebounds. Black is us today, clearly tracking the four-cycle average very closely. If gold continues to track like that the price could reach US$1,500 per oz. before the end of the year.      Beyond that – well, you can see the possibilities. Including gold priced at US$1,900 by the end of next year.      I put this up for two reasons: to stoke excitement, in case anyone is lacking that, and to bestow confidence that it still makes sense to buy stocks today that are already up significantly.      A lot of companies will see share price gains if gold follows anything close to the trajectory shown above. Some, however, will rise farther and faster than the rest. My job is to identify which those are, and in recent weeks I've gone through my outlook in a couple different ways (including last week's list of the kinds of opportunities available today).      This week I want to outline the project attributes that I think will matter most. In the last bull market bigger was better and few cared about cost. Things will be different this time around. I think this bull market will focus on assets that actually make sense (at least to start – if the market gets really hot then sense could well disappear again). So with pragmatism in mind, here is my list of essential project attributes. Location. That starts with rule of law (security of mineral rights, reliable fiscal structures, etc) but of equal importance also includes social license (from sage grouse to water rights to spawning grounds to artisanal miners to tree huggers to political impacts) and accessibility (steep mountains? roads anywhere nearby? lots of waterways that would require bridges?) Not every project has to answer all the questions of Could It Be A Mine right off the bat, but major hurdles like these can really limit speculative interest in a discovery. Infrastructure. People think this only matters in terms of building a mine, but it matters way before then. I was chatting with a geologist yesterday who has decades of experience in Russia. He has a list of prospects in the Russian Far East that he would love to explore – but just to mobilize a drill program there costs $1 million, and that's before the first foot of core. These considerations matter, especially in a market that is demanding consistent news flow (after a long bear market, investors are still jittery and will take gains and run if not given constant reasons to stay. GSV is a perfect example.). The costs of working in difficult locations mean ongoing financing struggles AND gaps between exploration programs, because working constantly is too expensive. Together those represent a big challenge in today's market. Grade with scale. The last bull market saw miners in an inane race to produce as many ounces as possible, without any thought for making money. That setup led companies to develop marginal assets – decisions that are still hurting balance sheets to this day. Marginal assets will not come back into favor any time soon. The best way for an asset to support better economics is with higher grades. That being said, those grades need to come within a package that offers scale potential – the big returns will come from takeovers where a major bids at a premium to buy a company for its large, high-grade discovery. Easy. No project is ever easy, but an oxide deposit with good grade that gives up its gold in a run-of-mine heap leach will have a serious advantage over a refractory asset that would require roasting, or even a hard polymetallic ore that needs multiple stages of grinding and floating to produce concentrates. Historic advantage. Unless it is a brand new discovery (which can also work), there needs to be a reason why the project didn't work in the last cycle and a way the new team is approaching past work differently to make it an asset for them. The right path for the time. This is a people requirement – the folks in charge of the asset have to consider the project's potential and what is going on in the market to come up with a plan that delivers progress people will care about. Sometimes focusing on putting a small oxide deposit into production makes sense, but in other cases drilling to expand that deposit would deliver much bigger results. Sometimes making a big deposit bigger is important, but other times the market needs metallurgical work and permitting progress and infrastructure plans to accept that the asset makes sense. It depends on the asset, the market, the costs, the timelines, and the goal, but at the end of the day it has to be a story that investors want to hear at the time