As investors shift their focus towards the materials utilised in battery chemistries, copper is one commodity that mustn't be forgotten. Copper is one of the critical commodities required to drive society's continued energy transition and renewables penetration. Over the next decade, three fundamental drivers should continue to drive the commodity higher and, by association, investment returns and dividends for investors. The primary drivers are the continued penetration of electric vehicles (EVs), the rise of renewable energy and an anticipated structural deficit between supply and demand.
As society and industry shift towards electrification and away from fossil fuels, the world has seen a meteoric rise in EV sales. According to the International Energy Agency (IEA), EVs have grown from approximately 2.5% of global car sales in 2019 to 9% in 2021. With the continued focus on reducing carbon emissions, continued demand for EVs is expected to continue throughout future decades. While the outlook for EV demand is favourable for reducing our global footprint, it is also highly beneficial for copper. EVs can use up to three and a half times the amount of copper required for an internal combustion engine passenger car. Coinciding with EV growth, the required growth of EV charging infrastructure will also push copper demand higher. Wood Mackenzie, the consultancy group, indicates that "by 2030, there will be more than 20 million EV charging points, consuming over 250% more copper than in 2019". The requirement to roll out the charging infrastructure and demand for EVs will be two robust tailwinds for the commodity.
Global annual passenger vehicle sales estimates by drivetrain – Source: Bloomberg NEF
Global share estimates of total annual passenger vehicle sales by drivetrain – Source: Bloomberg NEF
Overlapping with the rise of EVs and EV charging infrastructure is the increasing penetration of renewable energy. In 2020, renewables had a 29% share of global electricity generation, according to the IEA. Estimates indicate that by 2050 the proportion of electricity generated by renewables will be closer to 60% or 70%. This estimate is illustrated in Bloomberg NEFs graphic below, under the "Gray Scenario". The expected continual growth trajectory supports copper demand due to renewable power stations typically requiring more than 5x more copper than a conventional power plant.
Electricity generation estimates by technology – Source: Bloomberg NEF New Energy Outlook 2021
The last driver is the anticipated structural deficit for the commodity in the middle of the decade. Several factors contribute to the potential structural deficit, such as the drought of new discoveries, demand (from EVs, renewables, electrification and urbanisation) outstripping supply, geopolitical pressures and the current souring of the economic environment.
While copper production has been increasing, most of the new copper produced was generated from old discoveries from the 1990s. According to S&P Global Market Intelligence, they are only able to "identify three additional discoveries over the past five years, which added only 5.6Mt" While a lack of new discoveries will drive up demand for established discoveries and subsequently, the required multiples to acquire assets, in the medium term this will contribute to the anticipated structural deficit. S&P Global Market Intelligence and Wood Mackenzie indicate a potential deficit in copper markets in the middle of the decade. A shortage would cause elevated copper prices and, by association, robust cash flows (and potentially dividends) for copper securities.
Estimated scenarios* for global copper market balance – Source: S&P Global Market Intelligence
"In High Ambition, the supply system is put to the test. It is based on performance levels that were achieved in earlier years, plus a major increase in recycling and in which, overall, things go forward without much disruption. Rocky Road represents a continuation of trends as they are today and have been for the past several years of high price" – S&P Global Market Intelligence
To further compound the issue, copper production is highly geographically concentrated, with Peru and Chile responsible for approximately 40%. Both nations have had local stakeholders increase pressure on operating entities which may hinder future investment and discovery budgets. Additionally, the greater the upward pressure on prices, the greater the local stakeholders' incentives will grow. Recently, Free-Port McMoran delayed committing capital within Chile due to issues related to a potential increase in mining taxes.
The overarching deteriorating economic environment and demand pullback within China (which consumes nearly 50% of newly mined copper annually) are not assisting in eradicating the potential structural deficit. Freeport-McMoRan CEO Richard Adkerson notes that "our new projects are certainly in a holding mode until we get clarity, not only on the political scene, but also on the global economic situation". With incentives for new production lacking, the likelihood of a structural deficit is ever-increasing.
With robust tailwinds emerging over the next decade, two pure-play stocks strategically positioned to benefit are Southern Copper Corporation and Antofagasta.
Southern Copper Corporation (SCC)
Southern Copper Corporation (SCC) is one of the largest integrated copper producers in the world. Its primary production commodities include copper, molybdenum, zinc and silver. The Groups mining, smelting and refining facilities are situated in Peru and Mexico, and the Group conducts exploration activities in Argentina, Chile and Ecuador. Over the last three years, approximately 81% of revenues have been generated from selling copper, 8% from molybdenum, 5% from silver, and 3% from Zinc.
We are positive on SCC given its competitive positioning as a global copper player, supported by the tailwinds of increasing EV, EV charging and renewable energy demand. The Group is positioned low on the cost curve (as illustrated below), which will provide additional insulation against volatile commodity prices, which we have recently experienced. Additionally, it has production expansion options available within its existing assets and estimates a 73% increase in production by 2030 compared to 2020.
Risks to the investment case of SCC include weaker-than-expected copper markets and lower prices, recovery of Chinese demand and unfavourable business conditions within Chile and Peru.
SCC Copper Overview – Source: SCC Investor Presentation 2022
Copper Cash Cost Curve – Source: SCC Investor Presentation 2022
Antofagasta plc (ANTO)
Antofagasta is the second name we believe is strategically positioned to benefit from the tailwinds noted above.
Antofagasta is a pure-play copper miner based in Chile's Antofagasta and Coquimbo regions. Its copper operation produces both concentrates and cathodes while generating by-products of gold, molybdenum, and silver. Antofagasta is solely focused on "upstream" mining operations and has no smelting or fabricating capacity within the Group.
Antofagasta is situated on the cusp of the second quartile within the cash cost curve and can increase production through its existing reserve base. While the 'Luksic Abora Family dominates the shareholding', the company has a strong track record of pursuing operation excellence and remaining aligned with shareholder interests.
Antofagasta has all its producing assets within Chile, which is currently undergoing mining royalty reform. This may encourage the company to diversify its operating base into other mining jurisdictions, such as Peru. Presently, the mining royalty tax is being revised and under review in the Senate due to large push backs from large mining entities.
Antofagasta Growth Options – Source: Antofagasta HY Results 2022
Risks to the investment case of Antofagasta include weaker-than-expected copper markets and lower prices, recovery of Chinese demand and unfavourable business conditions within Chile.
While we note that Australian mining magnates Rio Tinto and BHP have attractive copper assets, their share price is primarily driven by iron ore fluctuations instead of copper. Therefore, they have not been highlighted in further detail.
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