Mine finance21 Jul 2022 12:33
The current and consensus forecast copper price levels are insufficient to incentivize the new supply that will be needed as the world moves to a fully electrified economy, a senior Stifel GMB analyst tells The Northern Miner.
According to Egizio Bianchini, vice-chairman and Stifel’s head of metals and mining investment banking, the copper industry’s average price and company valuation multiples both need to increase significantly for the industry to even “attempt to deliver an aggressive supply response to expected demand,” he said in an interview.
“The global copper industry is undersized and undercapitalized to deliver a strong supply response to what is expected to be a firm demand profile,” Bianchini said.
According to the Stifel executive, notwithstanding the high margins the sector is currently enjoying, the copper price remains well below incentive pricing when considering the risk factors associated with developing, financing and building a mine in the current environment.
Among the factors increasingly stifling mine development are unpredictable and additional environmental regulations, ESG-related considerations, a deteriorating geopolitical environment, seemingly high incentives for governments to increase their portion of the ‘financial pie’ (also known as resource nationalism), dramatically increasing inflation for goods and services, and the expanding timeframes for executing mine development and construction.
Despite those headwinds, the copper price appears robust compared to trailing prices. At face value, forward-looking copper pricing expectations appear strong enough to entice significant new production to come on stream. However, it’s not that simple, explains Bianchini.While the established global copper producers are generating margins that historically would have resulted in the addition of substantial new supply, Bianchini says there’s a 12-million-tonne-per-year copper supply gap emerging from 2025 onwards. “Nothing is coming down to supply pipeline even nearly to cover the missing metal,” he says.
The top seven public copper producers combined fail to reach a market capitalization of a single top technology company by a long shot,” he said.
What does it all boil down to? The prospect of much higher copper prices down the line.
For illustrative purposes, Bianchini created a fictional copper company, Universal Copper Inc., to demonstrate the sensitivities involved in putting together a finance package for an average copper project. In this scenario, Universal Copper’s project is located in South America. Assuming a 60% debt and 40% equity financing package, US$1.9 billion of the initial capex would be funded through debt.
However, Bianchini notes the size of the debt package would be difficult to stomach for traditional mining credit funds as the average preferred participation is closer to US$200 million. Also, banks prefer to take a smaller hold size, meaning a huge bank syndicate would
Sign In
Follow the stocks
