Copper build a missed opportunity for majors

It hasn't prevented their share prices from succumbing to fears that iron ore prices are headed south in a big way.But their relative outperformance compared with pure iron ore play Fortescue Metals Group shows that should the long anticipated decline in iron ore prices begin to take shape in coming months, having copper in the portfolio is a good thing.Copper at $4/lb and more is never going to replace the earnings being reaped from iron ore, still at a boom time price of $157/t for the time being, but with forecasters such as Macquarie tipping $100/t for the 2022FY and $79/t in the 2023FY.It is better to have copper than not, though.The red metal averaged all of $2.80/lb in (calendar) 2020. The (current) extra $1.20/lb does not sound like much of a big deal when said quickly. But multiply it out over BHP's 1.6Mtpa copper output, and the revenue boost is $4.2 billion.The pattern is repeated in copper at Rio, which is also reaping the benefits of a strong rebound in aluminium prices.Again, the strength of the base metals is not going to shield either BHP or Rio from the earnings crunch should $100/t iron ore in 2022FY come to pass, with lower prices still to follow.But the damage will not be as bad as for Fortescue under the same scenario (Macquarie forecasts Fortescue's 2021FY profit of $7.91 billion becomes $3 billion in 2023FY).Having said that, can copper be relied on to provide BHP and Rio with an offset to the coming shakedown in iron ore prices that everyone is forecasting?According to BHP, more than likely, but not immediately.In a view widely shared, BHP expects the copper market faces the "challenge" of first absorbing a wall of new production coming from a raft of new copper projects and expansions in Peru, Chile, central Africa and Mongolia.The additional production comes on stream between 2022 and 2024 and will keep the market in surplus notwithstanding the bullish impact of massive stimulus spending and the metal's key role in the electrification of everything in a decarbonising world.In commentary that accompanied its December half profit, BHP said once the new production was absorbed, a structural deficit could open up in the mid-to-late 2020s, at which point "we again see some sustained upside for prices.''"Looking even further out, long-term demand from traditional end-uses is expected to be solid, while broad exposure to the electrification mega-trend offers attractive upside," BHP said."Grade decline, resource depletion, water constraints, the increased depth and complexity of known development options and a scarcity of high-quality future development opportunities are likely to result in the higher prices needed to attract sufficient investment to balance the market."It is these parameters that are critical for assessing where the marginal tonne of primary copper will come from in the long run and what it will cost," BHP said."We estimate that grade decline could remove 2Mt per annum of mine supply by 2030, with resource depletion potentially removing an additional 1.5-2.25Mt by this date, depending upon the specifics of the case under consideration."All that leads BHP to the view that the price setting marginal tonne in a decade's time will come from either a lower grade brownfield expansion in a lower risk jurisdiction, or a higher grade greenfield project in a higher risk jurisdiction."Neither source of metal is likely to come cheaply," BHP said.It is under that scenario that BHP has copper earmarked as a future facing metal, one that it wants more of, along with nickel and possibly potash. Rio also wants more copper in the portfolio, while Fortescue has opted to focus on green electricity, hydrogen and ammonia projects.Having long enjoyed windfall profits from iron ore, the wonder is that BHP and Rio did not add to their copper profiles by diverting some of the current iron ore largesse in to acquiring more options in the red metal.The time to have struck was last year when the pure copper players with projects that would sit comfortably within BHP and Rio were dealing with a $2.80/lb copper price average. Their share prices - and the price of notable assets - have climbed more than 40% since, making acquisition opportunities all that more expensive.The new generation of leaders at BHP and Rio quite rightly are more risk averse than the leaders during the mining boom that came to an end in 2011, a year in which copper averaged $4/lb and iron ore $169/t, which is about where we are now.Stepped-up exploration and the entry into advanced copper discoveries/projects is now the preferred route to expanding the pipeline of projects.That's all well and good but currently bolstered by windfall iron ore prices, the more game option of injecting some certainty into the process by going down the copper acquisition route in preparedness for the coming structural supply shortage now stands as a missed opportunity.*Barry FitzGerald writes a regular column for www.miningnews.net.

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