14th September 2017
Q1 – Cameron, thanks for joining us today from Ulaanbaatar, Mongolia.
Cameron you have had a number of executive roles in the copper sector during your previous 28-year career with Rio Tinto. This included your last role, being heavily involved with the largest expansion project currently taking place globally in the hard rock sector, the Oyu Tolgoi copper-gold mine in Mongolia. What is your take on the recent move in the copper price?
Personally I think the recent run up in the price is overdue.
The influence of “one off” scrap and warehousing having been absorbed into the market earlier in the year as reflected by continued tightening in TC/RCs. The absolute growth in copper demand continues to be robust with record absolute consumption and net depletion of existing reserves – and the demand-supply balance remains finely tuned in the near term.
Supply interruptions have had a positive effect on recent prices but are in line with disruptions that are more common in the market place after a period of few shocks, and have coincided with the peak of new supply from the previous commodity cycle having come into the market.
Other factors likely to have a bullish impact on prices over the coming year are
– Unpredictability around Grasberg – aggressive guidance for the ramp-up but…
– China scrap imports – these have increased significantly (especially as the copper price has recovered) but if a ban on dirty copper scrap comes to pass this could be bullish
– Grid-related spending in China is predicted to stay strong and grow
– And unfortunately the destruction wreaked by Hurricane Irma will see some once off rebuilding in the USA and its near neighbors
Q2 – Expanding on this, how do you see the medium to longer-term copper price and where is Oyu Tolgoi’s ongoing expansion expected to fit within this landscape?
I am bullish on the long-term copper price and see further increases well above the current levels.
Several factors will favorably influence price on both the demand and supply sides. Firstly, the push to renewables and electric vehicles is now being accepted as a given with sufficient economies of scale to support, when not if the need to de-pollute and the improved competitiveness of green technologies will see further absolute growth in copper demand.
Governments are increasingly going to mandate requirements for EV’s and ESS – the latest to indicate they are coming to the party of this was China last week. The numbers being touted for the additional copper demand from EV’s is very significant – even when using the most conservative factors the market is already starting to price this in for minor and specialty metals with exposure to EVs. However it is not yet being priced into copper despite copper being the metal with the greatest absolute dollar amount exposure to this structural shift.
To help put quantify the potential impact of EVs, Robert Friedland forecasts that over 20 billion pounds of copper will be required in 2040 – that is equivalent to about 40% of today’s total copper production and demand.
Glencore uses much more conservative forecast factors – an extra 600kt of copper per annum within 12 years. That is more than the largest mine in the world, and mines that size take 15 years to develop. To help position OT’s underground project, it is the standout addition to the supply side, the largest expansion project by some margin – but in itself will only add about 2% to global supply
In other words there need to be 3 new OT’s already entering the pipeline for development to met conservative forecasts for incremental demand for EVs – that is clearly not occurring, no where close to it.
Q3 – Your paths have crossed with Robert Friedland and he has described “most copper mines today are like little old ladies waiting in bed to die”. While on the dramatic side, Robert does pick up on the structural challenge for the industry with supply from the previous commodity cycle having just peaked, and reducing grades and depletion of existing reserves meaning the industry is now required to bring on stream the equivalent of a new Escondida, the largest copper mine in the industry, every 12-18 months just to keep production flat, let along keep up with demand driven by new technology and more efficient use of electricity (such as the electric vehicle).
The challenges in Chile and Indonesia have been well documented this year, what jurisdictions do you see this new supply coming from?
Robert is right, declining grades and resources of the worlds best/biggest mines is with us – this means less copper each year from our existing mines. And he also stresses the upside to demand and describes the transformation of the auto industry in the next 20 years as the most significant demand transformation.
The mining industry has been focussed on cost reduction and value over volume for the past 3-4 years. Exploration and expansion budgets have been slashed so turning on new supply is not going to come quickly.
For example to maintain its existing production levels more or less flat Codelco, the world’s former largest copper miner, has an US$18 billion 5 year investment plan, already cut from US$25 billion due to its balance sheet.
The largest planned supply increases, other than from Mongolia, are planned to come from Peru, the DRC, its neighbor Zambia and Russia – hardly what risk averse investors and banks would regard as safe havens, and often face infrastructure and power challenges . . .
These increases will barely keep supply in line with existing demand. When you look at what looks great in the global exploration pipeline, there is not much. As such the industry will need to search broadly – and the newer frontiers such as Southern America (Ecuador), Mongolia, Papua New Guinea, Indonesia, and the DRC will definitely be in play
Q4 – As CEO of Oyu Tolgoi you oversaw almost US$7b of capex and successful commissioning of what has become the largest project in Mongolia. More recently you have been executive chairman of Terracom, a coal producer in the Southern Gobi and Queensland.
During your career with Rio Tinto you were responsible for 5 mining operations all in different emerging frontiers, and you remain founding President of the Institute of National Strategy in Mongolia. How do you see Mongolia as an investment jurisdiction and place to find and develop a copper project?
Well – Mongolia is a proven jurisdiction – it has a track record. And it is one of the largest exporters of coal into China.
Oyu Tolgoi, a world-class mine, has been built. This was done in a land-locked country, in a desert region that had no roads, no power, no readily available water, no air transport, no trained workforce in country and a mining service industry in its early stages. And Oyu Tolgoi’s shareholders eventually put in place a US$4.3 billion project finance package that was supported by 21 of the world’s largest banks and IFI’s.
If you can do it once successfully, you can do it again.
The prospectivity for finding more high-grade porphyry copper resources is as high as the other key regions. In the 1970’s there were only old mines in Northern Chile. This area is now home to 15 modern mines and supplies over 10% of global copper. The landmass and structures are deemed comparable to the Southern Gobi Devonian belt. And the Mongolian political landscape is not anti-mining, it is pro-development
New infrastructure, and reform and progress of the mining sector really underpin the recent IMF lead financing package of US$5 billion, very large for a US$12-13 billion pa economy.
Q5 – Investor appetite appears to be coming back to the exploration sector, and for those who have lived through previous commodity cycles they will remember exploration provides the greatest leverage to a new commodity cycle.
The recent re-rating of SolGold, which is pre-resource copper-gold exploration play in Ecuador, 18 times your money since March last year, and now land grab from other juniors and majors alike in Ecuador has got the markets attention.
Do you think Mongolia has the potential in 12-18 months to be seen as the next “hot spot” like Ecuador?
Mongolia was once the hotspot, in the last commodity cycle it was almost mandatory for the major copper players to be seeking to gain exposure, and Ecuador is now seen as a hotspot. Ecuador has had to work hard to win back investors and be re-rated. There was the change of government to pro-development, an IMF bailout package agreed.
Lundin Gold are the promoter of a $670m gold project – buying a stalled project from Kinross (discovered in 2006) and then doing a stabilization agreement with the Government. A new discovery by SolGold – a small cap who as you say has seen its share price increase 18x. The government is now releasing EP’s to credible foreign exploration and mining companies, with the likes of Newcrest, BHP and Fortescue, as well as juniors undertaking a land grab strategy.
Turning to Mongolia The question marks regarding mining investment – really related to three factors.
Firstly, resolving the OT dispute, and a few other commercial litigations much smaller in size
Secondly, resolving the IMF bail-out package
And finally, restarting the issuance of exploration permits – which have been largely on hold since 2010.
These three factors are significantly behind us with exploration permit tendering resumed – as illustrated by Rio Tinto and related entities picking up ground. This process is expected to imminently accelerate.
The IMF package will ensure sensible governance and a pro-business focus to leverage the economy and provides visibility for the upcoming 3-year period where there are now no elections with a super majority government in place. The majors have all been to Mongolia and are re-scouting as we talk.
The rocks haven’t changed nor has the Southern Gobi’s sustainable competitive advantages of terrain (flat, no trees, not at altitude), rapidly development infrastructure and location to China (new silk road and responsible for almost 50% of copper consumption). Successful exploration has occurred during the turnaround with a high profile greenfield gold success by Erdene Resources (ERD on the Venture Exchange) at its wholly owned Bayan Khundi and Altan Nar projects.
These support Erdene having the potential for multiple mines in the near future. And Mongolian focused companies are doing deals, raising money and having their share-prices re-rated C$45m cash raised in equity over past 15 months. Erdene share price re-rated by 5x, and they have recently acquired a project next to their flagship orebodies
Q6 – Recent articles have quoted Codelco’s CEO saying they are preparing to invest in Mongolia, other articles have mentioned Rio Tinto has just resumed exploration drilling activities again in the Southern Gobi for the first time in 5 years and i believe they are now again looking at expansion opportunities in the local copper space.
Given the size of OT, they will need to find something world class to move the needle.
With the attractive outlook for copper and Mongolia being regarded as one of the last under explored frontiers, what do you see as the attractive exploration plays offering investors exposure to what these majors are already starting to again look for in Mongolia?
If Chile is so prospective why is Codelco looking to foreign shores?
Yes, Rio are actively exploring again in Mongolia, and maybe this is indicative of their view of the true prospectivity of the Gobi.
Just this week there is a large group of copper-focused geologists, representing some of the other majors, doing a technical visit to the Gobi visiting Tsagaan Suvarga, Oyu Tolgoi and Xanadu’s Kharmagtai project
Xanadu bought the Kharmagtai project from Turquoise Hill, has raised capital 4 times since, each time an a increasing share price and now has a A$100m market capitalization as it continues to explore to find a fourth mineralized system required for it to potentially transition to development
Also active in the copper space is Kincora,
Kincora late last year completed a transformation transaction to form the dominant position in the most prospective parts of the Southern Gobi copper belt
and subsequently established an industry leading technical team who have found multiple tier 1 copper porphyries.
In fact I am off to the Gobi tomorrow with Kincora’s CEO, Sam Spring, and VP of Exploration, Peter Leaman to check out the drilling activities, which have only in the last month kicked off.
Q7 – On Kincora, if i recall it correctly the original Ivanhoe Mines was about a similar market capitalization before it drilled the “discovery” hole at Oyu Tolgoi, a project which drove its market capital over $30 billion at its peak. Robert Friedland is a shareholder in Kincora via his private company High Powered Exploration, which last year completed an all-share transaction vending in the majority of the best parts available of the Oyu Tolgoi copper belt.
I appreciate your a shareholder and advisor to Kincora, and it is a story we recently took an interest in, participating in its recent raising. How do you see their portfolio, team and targets?
Yes, I have been involved financially with Kincora since early 2014, and I am a believer in the Gobi yielding at least another OT type resource. Kincora has a great team, great landholdings and some exciting targets it has just started drilling.
Having Friedland’s HPX vehicle on the register is a plus and we have elicited new strategic shareholders in the recent capital raising. We are itching to get on with the physical exploration, evaluate and move to the second stage of our program where we broaden the target selection and also looking to advance targets 3 & 4 for drilling. This will include a move to our Red Well EP so we can see the Rio’s rigs up close.
Q8 – M&A in the copper sector was surprisingly robust during the commodity cycle downturn with the diversified majors generally now having overweight budgets for copper. A recent Australian Financial Review article lead with the line “nothing in life is more certain than death, taxes and speculation that Rio Tinto might acquire the 49 per cent of Turquoise Hill Resources that it does not already own”, which given TRQ is trading at effectively the capital invested in OT and is fully funded with what will be the third biggest copper mine in the world with further expansion potential is not unsurprising.
What is your personal view of likely corporate activity in the Mongolian copper space?
There will always be speculation on the OT/Rio/TRQ front. It keeps the journos busy. Entrée, a partner in the OT underground is also a potential target. Xanadu has stated it has attracted the interest of numerous industry players Rio is not the only one who wants to own an elephant in the Gobi, In fact I believe that Kincora has the prospects and potential to do another Ivanhoe.
