Copper, Nickel and Zinc Won’t Be Cheap for Long
The almighty U.S. dollar is now hammering bottom metals and bottom steel equities. Haywood Securities Mining Analyst Stefan Ioannou says that augmenting direct and near-term supply shortages make bottom metals a discount that won’t last. In this talk with The Mining Report, Ioannou argues that juniors with good deposits and low costs are in a singular position to benefit, and lists several companies that demeanour to do only that.
The Mining Report: What outcome is a clever U.S. dollar carrying on bottom steel prices and bottom steel equities?
Stefan Ioannou: Base metals are labelled in U.S. dollars, so as a dollar rises in value, bottom metals tumble in value. Right now, copper is contrast a $3 per bruise ($3/lb) level, and zinc is flapping down toward $1/lb. And, of course, reduce bottom steel prices are reflected in reduce valuations of bottom steel equities.
TMR: Why is a U.S. dollar apropos stronger?
SI: Because of a strengthening U.S. economy or during slightest a notice of one. To give one example, a pursuit origination figure for Sep was approaching to be 215,000, though a series came in during 248,000.
TMR: How prolonged will this U.S. dollar trend last?
SI: With quantitative easing clearly over, that is still arguable, a vast doubt for a U.S. economy is when and by how many will seductiveness rates be increased. Elsewhere in a world, a other vital economies seem to be, if not slipping, not unequivocally flourishing significantly. Europe is kind of flat. China is still flourishing though not scarcely as quick as people had hoped for or expected. As a result, many universe currencies are down relations to a U.S. dollar.
TMR: What are your forecasts for bottom steel prices?
SI: Our steel cost forecasts for 2015 brazen embody $3.25/lb copper, $8.50/lb nickel and $1.15/lb zinc.
TMR: What are a mercantile assumptions underlying these forecasts?
SI: We try to collect steel prices that are arguably conservative, though we do take into comment some of a vital supply-demand fundamentals entrance down a pipe. For example, zinc is confronting a poignant supply necessity into 2016, so we could see zinc arise above $1.50/lb sincerely quickly. Would it stay there for some-more than dual or 3 years? Probably not, given a approaching boost in higher-cost Chinese prolongation that aloft zinc prices would trigger. Nevertheless, we see a medium-term investment event emerging.
TMR: Given how vicious China is to universe mercantile growth, how many do we unequivocally know about a Chinese economy?
SI: China has always been a bit of a mystery. The Sep Purchasing Managers Index (PMI) series was a same as August: 51.1. Anything over 50 indicates expanding growth, though it is resigned growth. The marketplace has been looking to 7.5% GDP enlargement in China this year, though it looks as if it won’t make that.
The worrisome aspects to a Chinese economy are an bum skill market, industrial overcapacity and high levels of corporate debt. Housing is about 25% of a Chinese economy, so policymakers are now deliberation relaxation debt restrictions.
TMR: Why do we trust a universe faces a copper necessity in a nearby future?
SI: On a supply side, a majors have in a final few years focused on slicing costs during existent operations. That’s apparently good for their bottom lines today. However, it also means new mines and greenfield developments are being deferred. So by 2017–2018 we will face a effect of a miss of new supply, that is direct outweighing supply.
TMR: Does a universe face a near-term nickel necessity as well?
SI: A vast motorist for nickel is a steel market, and this has been comparatively bearish. This year, however, Indonesia, that provides 25% of universe supply, criminialized a trade of nickel ore. Indonesia wants a mercantile advantages of guess a nickel ore in country, though it will take a integrate of years to build a infrastructure so that this mislaid nickel supply will re-enter a tellurian market.
The Philippines is also now deliberation a nickel trade anathema of a own. This nation haven reduction than 10% of a universe market, though it’s still a poignant number. Nickel ore stockpiles in China and elsewhere are still high, though are now being drawn down toward potentially vicious levels. There is a bullish evidence that we could see a nickel marketplace trip into necessity by as early as mid-2015.
TMR: What’s your viewpoint of a youth copper space?
SI: Everything we cover has come down in valuation. we consider there is event here. The best place to start is with a producers since they are generating income upsurge and have certain change sheets. One such organisation is Copper Mountain Mining Corp. (CUM:TSX). Its Copper Mountain cave in British Columbia—owned 25% by Mitsubishi Corp. (8058:JP)—has had a prolonged start-up. The organisation has only commissioned a new delegate crusher, that is finally going to pierce it to nameplate capacity: 35,000 tonnes per day (35 Kt/day) of throughput. This is a branch point, and we consider Copper Mountain Mining is staid for a rerating.
TMR: You only lifted your aim price, correct?
SI: Yes, from $3 to $3.50. We only saw a company’s Q3/14 prolongation numbers. The crusher formation went uniformly over a latter half of a duration and was doing over 35 Kt/day in late September, that should set a theatre for a clever Q4/14.
TMR: What other producers did we wish to discuss?
SI: Capstone Mining Corp. (CS:TSX) and Nevsun Resources Ltd. (NSU:TSX; NSU:NYSE.MKT). Capstone has 3 mines which, for a many part, are handling well: Pinto Valley in Arizona, Cozamin in Mexico and Minto in a Yukon. Pinto Valley was bought from BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK) final year for $650 million ($650M). The marketplace was doubtful during a time, though a organisation immediately drilled and stretched a project’s five-year reserve, that now supports a cave devise by 2026. This has been a diversion changer for Capstone’s capacity.
TMR: As a result, we wrote in Aug that Minto’s position as a “core asset” has been diminished.
SI: Minto has been a unequivocally successful cave over a years. But it’s removing to a indicate now where a remaining apparatus is for a many partial reduce class and aloft cost to produce. Cozamin, Capstone’s third mine, is also smaller than Pinto Valley, though it’s got unequivocally good class and a lot of scrutiny potential. It’s an subterraneous mine, so Capstone is going to continue to supplement pot over time. Plus, there’s a satisfactory bit of zinc entrance out of it.
TMR: Is Nevsun an instance of a perils of overstating domestic risk? The Bisha cave is in Eritrea, though it is nonetheless a success story, right?
SI: Very many so. we give a Eritrean supervision a lot of credit. It determined a well-defined and well-considered mining formula that lays out accurately how a supervision will attend and a stairs that need to be taken to pierce a devise into production. Bisha is now 60% owned by Nevsun and 40% by a government. The supervision got 10% for free, that is flattering customary opposite Africa, and proceeded to compensate satisfactory value for a other 30%.
Nevsun has tighten to $400M in income and no debt. That works out to $2/share, and so half of a company’s share cost is indeed cash. Nevsun’s biggest emanate going brazen is what a successive merger is going to be.
TMR: Bisha began with bullion mining and afterwards with copper. What is a future?
SI: Bisha is a 40 million ton (40 Mt) volcanogenic vast sulfide (VMS) deposit, world-class in distance and high grade. For a initial few years Nevsun mined 8 grams per ton (8 g/t) bullion from an open array that had fundamentally no frame ratio to it. Now a organisation is into a second covering of a VMS cake: supergene copper. It is mining grades good north of 5% now in an open pit. As Nevsun moves into a third layer, toward 2016, there will be zinc and copper, hopefully only as a zinc cost unequivocally starts to collect up.
TMR: What are a prospects for apparatus enlargement during Bisha?
SI: Bisha has always been a unequivocally impending land package, though this is a initial year Nevsun has spent poignant income on informal exploration. VMS deposits typically start in clusters, and Nevsun has already found a few smaller ones outward Bisha: one called Harena is 10 kilometers south. Assays expelled Sep 23 enclosed 0.85% copper, 3.96% zinc, 0.4 g/t bullion and 43.6 g/t china over 41.6 meters. Nevsun has already summarized a 1.2 Mt haven that stays open for expansion. Ore from a deposition will be trucked to a Bisha plant for processing.
TMR: Which copper devise many interests you?
SI: Highland Copper Company Inc. (HI:TSX.V), that is in Michigan’s Upper Peninsula, an area with a unequivocally prolific copper mining history. The organisation creatively had dual smaller, high-grade deposits: 543S and G2. Then in February, a organisation bought a Copperwood cave from Orvana Minerals Corp. (ORV:TSX) for $25M. This is an advanced-stage project: feasibility done, radically permitted, prepared to go. And afterwards Highland bought a ancestral White Pine cave and surrounding property. The thought now is to connect those deposits and build a centralized facility. Highland could furnish ceiling of 200 million pounds (200 Mlb) a year, a series that will attract a seductiveness of midtier producers.
TMR: After consolidation, how many will this devise cost?
SI: My ballpark series would be $650M for a 16 Kt/day operation.
TMR: But Highland wouldn’t be doing this on a own.
SI: It’s going to be a 50/50 corner try (JV) with AMCI Group. Highland’s bringing a devise to a table, and AMCI’s bringing a money: $45M by Dec 15, that is fundamentally all a appropriation compulsory to take a devise by feasibility, that is approaching by early 2016.
TMR: Which nickel devise many interests you?
SI: Talon Metals Corp. (TLO:TSX) and a Tamarack nickel-copper-platinum devise in Minnesota. This is a JV with Rio Tinto Plc (RIO:NYSE; RIO:ASX; RIO:LSE; RTPPF:OTCPK). Talon has a choice to spend $37M over a successive 3 years to possess 30%. At that indicate Rio Tinto has a preference to make. If a apparatus gets tangible to a indicate where it’s vast enough, Rio Tinto will build a cave as a 70/30 JV. Or if Rio Tinto decides it’s not vast enough, Talon can buy out Rio Tinto for $107M.
TMR: The organisation announced an initial apparatus guess Sep 2.
SI: This is a high-grade nickel-sulfide deposition of about 6 Mt now, with some-more than 2% nickel equivalent. It’s tighten to infrastructure. From a geological perspective, it’s identical to Voisey’s Bay. The deposition is done like a tadpole. The 6 Mt is located in a tail, that is far-reaching open and could enclose 10–20 Mt. The head, that hasn’t been drilled, binds a genuine blue-sky intensity for a unequivocally vast discovery. we consider that’s since Rio Tinto has kept an seductiveness in it. Even if a deposition turns out not to be vast adequate for Rio Tinto, it’s already looking as if it could be one heck of a deposition for a youth to midtier producer.
I should discuss that Rio Tinto had another nickel deposition in a northern U.S.: Eagle, that it sole to Lundin Mining Corp. (LUN:TSX) final year for $325M. Eagle is going to be a mine, though Rio Tinto sole that one and kept Tamarack. That should tell we something.
TMR: Are there other projects identical to Voisey’s Bay?
SI: North American Nickel Inc.’s (NAN:TSX.V) Maniitsoq devise in Greenland has a identical form of geology. One of a things a marketplace unequivocally likes to see in a nickel space is sulfide-nickel projects, like Maniitsoq, instead of laterite nickel. Processing is only a lot easier and good grades are common. Maniitsoq strike some unequivocally high grades right off a bat in 2013. It didn’t get those barnburner grades this year, though we don’t consider this story is over.
North American Nickel is owned 30% by VMS Ventures Inc. (VMS:TSX.V), whose primary item is a VMS deposition in Manitoba called Reed, itself a JV with HudBay Minerals Inc. (HBM:TSX; HBM:NYSE). VMS Ventures is removing income upsurge out of that. One approach to play a Maniitsoq story is to buy VMS shares. Then we get income flow, and a intensity advantages from Greenland.
TMR: What about other nickel-sulfide projects?
SI: Balmoral Resources Ltd. (BAR:TSX; BAMLF:OTCQX) has done a high-grade nickel sulfide find during a Grasset devise in Quebec, that has garnered a lot of attention. There is also Royal Nickel Corp.’s (RNX:TSX) Dumont devise in Quebec. Production start-up is targeted in 2016. On a one hand, it’s low class during ~0.3% nickel. On a other, it contains billions of tonnes, that translates into a prolonged cave life and a flattering poignant prolongation profile. The company’s in a midst of needing and shoring adult devise financing, that will expected entail a partnership.
TMR: According to Royal’s website, this would be a fifth-largest nickel sulfide operation in a world. When we supplement low class to that, you’re articulate a vast collateral output (capex).
SI: $1.2B is a feasibility investigate number.
TMR: Is Dumont contingent on a arise in a cost of nickel?
SI: Considering a capex, to beget an 18% inner rate of return, Dumont would substantially need a nickel cost of during slightest $9.00/lb. That said, a deposit’s distance underpins a cave devise that would camber mixed steel cost cycles.
TMR: Which zinc writer stands out?
SI: We trust that Trevali Mining Corp. (TV:TSX; TREVF:OTCQX; TV:BVL) is staid to turn a marquee name in a zinc space. Zinc is confronting a poignant medium-term supply emanate since of cave closures. Last year, a Brunswick #12 cave in New Brunswick, an Xstrata Plc (XTA:LSE) operation, was depleted. Soon, China Minmetals Corp.’s (CMIN:CH) Century cave in Australia and Vedanta Resources Plc’s (VED:LSE) Lisheen cave in Ireland will close, too. Within a successive dual years, something on a sequence of 10–12% of universe prolongation will be lost.
The flip side is that there are no poignant advanced-stage projects in line to make adult this deficit. Almost by default, anyone who has zinc in a name or has a zinc organisation is staid to do well. Trevali is a personality of that pack. It is in prolongation now during Santander in Peru, about 40 Mlb a year currently. Caribou in New Brunswick is slated to start commissioning in a second entertain of successive year. When it is adult and using during full scale capacity, it will supplement about 90 Mlb a year. Santander is scheduled for an expansion, substantially in 2016–2017, to 80 Mlb. At a finish of a day, we are looking during a zinc organisation with over 170 Mlb of annual zinc prolongation on a books.
TMR: Which other North American zinc projects seductiveness you?
SI: Foran Mining Corp.’s (FOM:TSX.V) McIlvenna Bay devise began a rough mercantile comment final month. It’s a VMS deposition with zinc, copper and other metals. It’s in Saskatchewan, only over a limit from Manitoba. Geologically, it’s within a Flin Flon Greenstone Belt and during 25 Mt is a third-biggest find in a world-class mining camp. It has vicinity to HudBay’s infrastructure, and it could be vital to HudBay during some indicate in a future.
TMR: HudBay’s share cost rose from $8 in a open to about $11.50 and afterwards fell to $9.25. Was a takeover of Augusta Resource Corp. and a Rosemont copper devise in Arizona a mistake?
SI: I would disagree that it was a flattering vital pierce for HudBay. The organisation put in an early bid, before Rosemont’s needing was completed. It took a chance, though got Rosemont during a ignored valuation. HudBay already has a growth image full with Lalor in Manitoba and substantially even some-more so with Constancia in Peru. So it is holding a longer-term viewpoint on Rosemont’s growth timeline relations to a project’s prior owner.
TMR: HudBay finished a $170M debt financing in August. How do we rate a enlargement contra a bottom line?
SI: Well, HudBay has to be careful. The organisation is now spending a lot of income to grow a prolongation form during mixed operations. Constancia is a $1.7B project. But a good news is that we were down during a site in September, and it is tracking on report and on budget. It’s 92% finish as we speak.
TMR: What about any projects in Alaska?
SI: There is Zazu Metals Corp.’s (ZAZ:TSX) LIK project. It has silver, as good as zinc. And some lead, as well, though zinc is a categorical focus. LIK is unequivocally tighten to Teck Resources Ltd.’s (TCK:TSX; TCK:NYSE) Red Dog zinc mine, a world’s largest, with about 5% of universe production.
TMR: LIK is a JV with Teck, is it not?
SI: Yes, though it’s somewhat opposite than your standard junior-major JV. In this case, Zazu is spending $18M to possess 80% and Teck will not have a successive back-in right.
TMR: What do we consider of a project?
SI: There’s unequivocally good determined infrastructure, and only opposite a devise range Teck has a deposition called Su. The area is fundamentally one vast deposit. If and when Teck puts Su into production, it would make roughly no clarity to do it though a total Su/LIK open pit. Furthermore, Red Dog is unequivocally high grade, though it’s also underpinned by an toilsome kingship structure with a First Nations organisation called NANA Regional Corp. Eventually, NANA will get a 50% net deduction seductiveness (NPI) kingship from Red Dog. LIK and Su have reduce grades, though there NANA does not reason an NPI kingship on intensity prolongation from a deposits.
The other care is that dual years ago Zebra Holdings, that is a Lundin family’s dependent trust, bought 20% of Zazu, arguably bringing Lundin Mining into a picture. And we design that with a zinc cost rising, determined producers are going to be looking for assets.
TMR: It has been pronounced that a low-hanging fruit in bottom metals has all been picked. Thus, destiny projects will be some-more formidable and expensive, so people are only going to have to get used to henceforth aloft bottom metals prices. Do we agree?
SI: As a majors have gotten bigger, a distance of a deposits they need to indeed make a disproportion to their bottom lines needs to be bigger. Unfortunately, class and tonnage are inversely proportional. Generally speaking, vast deposits are going to be low grade. And so costs will be higher. Right now, a center of a cost bend for copper is on a sequence of $1.50–1.75/lb. As we cave some-more and some-more lower-grade deposits, we wouldn’t be astounded if that position on a cost bend reached $2/lb.
TMR: Doesn’t this advise a sold event for what we competence call high-grade boutique projects?
SI: For sure. At a finish of a day class is king. we consider it always will be. If we can find something that has a reasonable tonnage and a good grade, we could be off to a races. Such projects can be organisation makers. For instance, Talon has a intensity to cave a modest-sized nickel deposition with unequivocally good grade. Again, substantially not vast adequate for Rio Tinto though unequivocally remunerative for Talon. That’s where a event lies for some of these smaller companies.
TMR: Stefan, appreciate we for your time and your insights.
Source: Kevin Michael Grace of The Mining Report