Copper Supply and Financing Challenges in the face of increased Demand – There is No Transition Without Africa (so where is the Capital?) 

By Tshepo Magagane, Mine Finance Senior

Africa is blessed with an abundance of base metals including Copper across the Central African Copperbelt (Zambia, DRC), Kalahari Copperbelt (Botswana, Namibia), Kaoko Copperbelt (Namibia, Angola).

Prospective tenements are available; however, they lack capital to risk-unlock into Feasible Projects. There are no new Pre-Feasibility Stage projects, and capital is required to unlock them.

This is already impacting on the amount of virgin ore coming to the market, creating extensive problems for Concentrate supply. There is already a substantial lack of new copper concentrate supply. Currently, TCRCs for Chinese smelters just decreased USD7 per ton week-over-week to a negative USD23 per ton.

We have observed smelters closing operations, primarily due to the lack of ore.

China’s port stocks have been declining, as a result of the scarcity of supply.

This highlights the challenge the Copper market is already facing.

Participants in the market understand this challenge, however all are diverting the available capital to producing projects.

The Global Copper market will require at minimum, USD250 billion over the next decade and estimates put the capital requirements to 2050 at USD2 trillion.

Traditionally, Merchant Banks were the panopticon of Mine Finance, being able to unlock projects from Geophysics stage through “risk-unlock capital or otherwise known as equity”. These institutions no longer exist due to Basel III implications which resulted in liquidity, capital requirements that made it economically unfeasible to extend these products to mining projects.

As it stands the Capital Pool for Mining Projects is as below:

1. Assets Under Management (AuM) in Specialist Mining Funds globally is only USD17 billion (a little of that is dry powder)

2. Merchant Banks which were the panopticon of unlocking mining projects are no longer there 3. Only 3% of the AuM is comfortable with Africa or have a strategy focusing on the continent

4. Junior listed market (also unsuitable for developing projects) is on its last legs

Compared to the minimum requirement of USD250 billion over the next decade.

Unless money finds its way into greenfield projects, no incremental virgin ore is coming out – it is that simple!

Robert Friedland who discovered both Oyu Tolgoi (Mongolia) and Kamoa-Kakula (DRC) succinctly said “forget about even Replacement Cost when forecasting the long-term price of Copper, the price of Copper is the price of peace”!

In the age of Electrification, the world will need more Copper than the Copper that has been produced historically to date. For example, you currently have 80 million kilometers of Transmission lines in the Global North, the lines require maintenance and additionally to be doubled.

The Chinese understand this challenge and have learned their lessons from the issues they encountered in the 2000s with Steel Making Raw Materials. Hence, 15 out of 19 projects in the DRC are Chinese controlled or influenced (aggressive and bold acquisition of Copper assets is across Tier 1, 2, 3, 4 projects).

This leads us to believe that if a country does not have a well capitalised and focused strategy to secure Copper, it runs a high risk of being de-industrialised (or not being able to industrialise). Rio Tinto Chief Technical Officer said last year on Copper grades “0.6% is the new 3.0%”. This presents significant challenges, best captured by First Quantum’s Head of Exploration;

[There are literally hundreds of low-grade deposits in the 0.1-0.25% Cu range waiting to be developed if the copper price appreciates (and more importantly the operating margins permit). But the energy involved in mining, hauling, crushing and pulverising this rock to extract the tiny amounts of copper in each tonne is so enormous, and now so expensive and carbon intensive (if that worries you), that one has to wonder if this is really the right direction.]

We estimate that the low-grade environment will result in a Capital Intensity level of USD80,000 per tonne of annual production (this is 8 times current pricing). This compares with greenfield projects over the past decade at USD22,000 per tonne of annual production (Las Bambas) and USD43,000 per tonne of annual production (for Oyu Tolgoi and Reko Diq). Brownfield projects have been observed coming in at around USD28,000-32,000 per tonne of annual production.

Unlocking supplies for Copper is a Herculean and urgent task, the technicals and geology present a tremendous challenge globally and this is further complicated by the lack of financing for Copper projects, more so for African mining projects.

However, the challenge presents exceptional opportunities for capital as given the high-grade nature of Africa’s geology, means that the Capital intensity and Operating Cost structure of African projects is not dependent on a rise in Copper prices. This means that African projects are sustainable even in a downside scenario whereby prices are less than current levels. As prices begin to respond to the supply challenges to unlock low grade Copper grades, that upside will flow directly to CashFlows and Valuations.

The Copper market reminds us of what occurred with Steel Making Raw Materials in the 2000s, whereby in the early 2000s, you had Iron Ore assets which were written off or zero-value attached to them, yet within a few years, we saw the voracious appetite from China for the Commodities which resulted in prices having a marked jump from the Operating Costs of the main seaborne iron ore producers (at the height, prices were c20 times the Operating Costs).

History does not repeat but it sure does rhyme!

The Transition requires Minerals from Africa and to unlock African projects, you require a quantum shift in the amount of available capital.

And to unlock African projects sustainably, complying with the Equator, IFC, ICMM Principles is a function of the available capital when a project owner acquires a license and begins with soil and rock sampling – without Africa, there is no Transition, hence it is imperative to solve this Gordian-Knot of Capital focused on African mining projects.

The US recently made pronouncements about Critical Minerals which was simply “we will bulldoze our way around permitting and Environmental, Social, Governance concerns have to be put aside”. You do have to ask, even if the courts allow it, will it survive the next administration?

Profound changes in international trade and economics will result in Mercantile Era winlose scenarios, no country can be dependent on others for key minerals.

Concurrently resource endowed countries in Africa must use this once-in-ageneration opportunity to catalyse their economies through Mine Development. The Royal Bafokeng best in class case study must always be the guiding light for African countries and communities.

We need to be discovery a Kamoa each year for the next 20 years, why pre-MRE capital is so important. Notes:

Mining license – what does it take to have one?

1. You need to submit the Feasibility Study, EIS, Reserve Statement

2. That means you must have

a. Completed the Feasibility Study – let us put at USD70-100m

b. Must have Completed the EIS

c. Must have Completed the Reserve Statement (JORC/SAMREC)

3. What goes into that

a. Geo/orebody model

b. Drilling – Likely cost you about USD60-80m

4. To get to that, you needed to understand that there is a Resource there

Likely to have cost you USD5-10m or even more All of that is equity capital…

So when you say “do you have a project that has a mining license, ask yourself…why would someone do all that work and just give the project to you?”

Tshepo is a vocal thought leader (over 2 decades in Global Financial Centers) on how the clean energy transition can be used to catalyse Africa’s development with his thoughts taking centre stage at key forums such as the EU-Zambia Business Forum, EU Raw Materials Week and the Zambia Mining Insaka to name a few. He is working on projects that seek to unlock Africa focused specialist mining capital, guiding key players on how to unlock independent projects and artisanal small-scale miners to contribute to the Copperbelt’s development.