Copper – the new oil
By Tshepo Magagane
Copper (Commodities Context) – I cannot even begin to capture how well placed we are with various ventures on this – across the various sectors and products.
When we started, there was a JPM analyst who the market made fun about – he was incredibly bullish on Kumba – Kumba had been spun out of Iskor (ArcelorMittal South Africa) at a cost+3% arrangement for 6.2mtpa (prorated to any expansion) – ie no one ascribed any value to iron ore assets (steel market was in a terrible state from 80/90s and the dot-com bubble had made things worse).
No one wanted to do mining – it was this sub-sector stuck away in Global Industrials – when I started the work was mostly earn-out arrangements with miners just selling assets; NO, abandoning assets – see Zambia/DRC case studies.
Then something strange just started happening – MDs would ask you for these pieces of analysis – looking at Demand/Supply curves – but more so honing in on China (weighing models according to Chinese GDP growth).
You are still young, inexperienced therefore cant really fully appreciate the bigger picture unfolding – I am not kidding you – within months; you had 5 to 8 live deals – mining budget is being upped by multiples by senior management – super senior MDs are now talking to you, demanding stuff.
The Bulks Super Cycle driven by China.
I remember this walk in Soho with the CFO of the Family Office in 2010 post the tragic death of the principal – just overwhelmed by “yeah, our chance has passed…we are going to hit Chinese Peak Steel within a few years”.
Joined Merchant Bank – still focused on Bulks but increasingly looking at Base (I only looked at Base if they were part of the diversified before then) – I could see the issues in the DRC with the likes of Metorex (operational restructuring); could also see FQM losing its assets and then going into the construction of Khoemacau and the subsequent restructuring.
And you go “THERE IS NOT ENOUGH COPPER OUT THERE” – just for Industrialisation.
Decade back we went around withe the then ZCCM CEO talking this story – no one was interested.
We can see it on a daily basis on how tight the conc market is.
We saw iron ore fly-up from USD30/t to close to USD300/t (while major producers produced at about USD15/t) – it was 2 decades of >70% ROCE. NB: Iron ore is the 4th most abundant element on earth and China also has huge reserves – they tried to break the previous annual settlements away from the Japanese/Korean steelmakers but it backfired with prices doubling at next point – then they tried to take over Rio Tinto (and were blocked by Canberra – why they are at c15%) – and why they are currently pushing so hard to gain the upper hand, 2 decades later (they have such a LT view).
That fly-up scenario was coming for Copper when I looked at the replacement cost of SAmerican low grades a decade back re: 8-10x…
…when you add Electrification – I dont even know what is going to happen (the market has been slightly hinting at this with CopperCos going to premium over NAV 3yrs back).
We are well placed🤞🏽
