Copper Market Update - Feb

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dan_s
Posts: 34471
Joined: Fri Apr 23, 2010 8:22 am

Copper Market Update - Feb

Post by dan_s »

I have no experience in metals and I'm certainly not an expert on copper, but stuff like this does draw my interest.

Plus, I found out that Goehring & Rozencwajg have a large position in Excelsior Mining Corp. (EXMGF), a company that will soon open a copper mine in Arizona.

I've read G&R reports for years. They are super smart guys that do a lot of research before making any investments.

Here are their thoughts on copper

Copper Markets: India Begins to See Growth

As we mentioned in our introduction, copper prices were weak during the quarter, falling by 6%
over concerns about slowing global economic growth and the effect of trade wars. Copper- related
equities were weak as well, with many bellwethers falling by over 20% during the quarter. Despite
the weak price action, copper fundamentals remain very strong. Global exchange traded copper
inventories (the LME, Comex, and Shanghai Metals Exchange) peaked at 900,000 tonnes in March
and have plummeted by 570,000 tonnes or 65% since then to stand at 330,000 tonnes today. Inventory
behavior suggests that global copper markets have slipped into sharp deficit. Our models tell us this
will only accelerate from here.

In our past letters we have discussed the rising importance of India to global copper markets. Our
models consider the total per capita installed stock of copper in an economy and its real GDP per
capita. These models accurately predicted that China would progress from 45 lbs installed per person
in 2006 to the 175 lbs installed per person today. While we expect Chinese copper demand to continue
to grow strongly over the coming decade, we have also commented how India has thus far underinvested
in its per capita copper stock given its size. For example, when China was at a comparable level
of per-capita GDP, its installed copper base was 45 lbs per person while India today is at 14 lbs.

In any economy, electricity distribution infrastructure is a major source of installed copper. In
particular, electrical substations that connect high-tension power lines to individual households utilize
huge spools of copper wire to step-down the electricity and render it useful for consumers and businesses.
In our last letter, we explained how Indian Prime Minister Modi had recently announced the fulfillment
of a campaign promise to connect every Indian village to the power grid early last year. After returning
from our research trip to India last February, we discussed the disconnect between PM Modi’s claims
and the meager levels of copper installed in the Indian economy. We argued it would be impossible
to connect 1.3 billion people to the power grid without a substantial investment in the copper stock.
Subsequently, it was revealed that a village was deemed to be “connected” if any government building in
the village had electricity. While high-tension power lines (not copper intensive) had been installed
throughout India, the number of copper-laden electrical substations remained very low.

We argued that as the Indian government moved to connect individual households, the number of
necessary substations would increase dramatically and serve as a catalyst for increased Indian copper
demand. Data from the WBMS now suggests this may currently be underway. In October, Indian
refined copper demand surged by 13,000 tonnes or 33% on a year-over-year basis to reach 50,000
tonnes per month. The Indian government has recently announced two key goals that could result
in much higher copper demand going forward. First, PM Modi announced his goal to have 25 mm
Indian homes connected to the power grid by December 31st 2018. Preliminary indications are
that most of these homes met the deadline and are now connected. However, the rapid increase in
connections has given way to very poor reliability across much of the Indian power grid. According
to the World Bank, India ranks 80th out of 137 countries in terms of electrical reliability, despite
being the sixth largest economy in the world (and the fastest growing).

Once again, we believe the issue is inadequate investment in the substation infrastructure. If a
power grid lacks enough sub-stations for its underlying demand, widespread power outages like those
currently experienced across much of India would result. Our hypothesis is consistent with the
simultaneous observations that the Indian installed copper stock is low for an economy of its size and that
a large number of household connections has resulted in increased widespread outages. The only way
for India to fix the latter is to invest in the former – with huge implications for global copper markets.

Now that PM Modi has fulfilled his promise of connecting some 25 mm households that lacked
access to the electrical grid, his next target is to provide stable 24/7 electricity to all end users by
March 31st 2019. While a laudable goal, it seems like a herculean task in such a short time. Regardless of
whether PM Modi achieves his stated goal, it seems clear to us that demand for electrical substations
(and, by extension, copper) is set to continue the sharp growth we have seen over the last six months.

How big could this impact be? If India were to achieve only 50% of the installed copper base that
China had back in 2006 when real per-capita GDP was at a comparable level, India would require
an additional 10 pounds per person. Given India’s population of 1.4 bn, this equates to an additional
6 mm tonnes of installed copper. Taking the conservative view that this “catch up” will play out over
the next five years suggests that monthly demand will reach 100,000 tonnes per month – nearly
double the level seen in October.

While these figures might seem unreasonable, please remember that when China went through
this same experience, it grew refined demand from 50,000 tonnes per month to 100,000 tonnes
per month in a period of less than a year. Following this jump, Chinese refined-copper demand
continued to surge ten-fold in the next 13 years, eventually exceeding 1 mm tonnes per month. If we
are approaching a similar inflection point for India (and we think that we are), then global copper
inventories will continue drawing down sharply, helping to boost prices.

Given the huge sell-off in copper-related securities, many of them are trading at massive discounts to
their net-asset-values given $2.50 copper. Copper remains our favorite theme outside of energy and
we think that we are now in the process of a period of strong demand growth.
------------------------------
I met with the CEO of Excelsior Mining a few months ago when he was in Houston. I was impressed by him and what his team has accomplished. They are on-track to open the copper mine in Arizona by Q4 2019 and they have all the financing in place to do so. I hope to get them to host luncheons for us in April or May.
Dan Steffens
Energy Prospectus Group
dave_n
Posts: 92
Joined: Thu Aug 09, 2018 4:08 pm

Re: Copper Market Update - Feb

Post by dave_n »

Dan,

Here is a link to a video on Amerigo Resources website where the CEO is interviewed. They talk about copper supply/demand imbalance (good stuff is around 8:30m into video). Key issue has been low copper prices which has discouraged investment in new development. As copper supplies become taxed, price needs to go up to encourage mine expansion. In the video, they state that it can take up to 10 years to develop a new mine. So whenever the spike in prices does happen, it could be for an extended period of time.

http://www.amerigoresources.com/investo ... act_sheet/

See video at bottom of web page titled "Commodity TV".

Also, if you look at Amerigo's November earnings summary, slides 16-18 have some great info on forecasted demand vs. supply.

http://www.amerigoresources.com/_resour ... r-2018.pdf

I did post some info on Amerigo a while back. This company is an unrecognized gem. Virtually no mining risk and life of mine through 2037! It is a Candian stock, but trades in US under ARREF.

Dave
dan_s
Posts: 34471
Joined: Fri Apr 23, 2010 8:22 am

Re: Copper Market Update - Feb

Post by dan_s »

I just finished my weekly podcast. When I send out the link to the podcast, I will attach the G&R Q4 report. It is full of very good stuff, primarily supporting their prediction that this is going to be a great year for investments in commodity based companies.

G&R is not bullish at all on natural gas, but they agree with me that some super high "gassers" are trading at insanely low multiples.
Dan Steffens
Energy Prospectus Group
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