Insights From The Super-Producing Copper Mines

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Includes: AAUKF, AAUKY, BBL, BHP, BVN, FCX, GLCNF, GLNCY, MITSF, MITSY, MSBHF, MSBHY, NGLOY, NILSY, RIO, SCCO, SMMYY, STMNF, TECK, VALE, VEDL
by: Joshua Hall
Summary

I take a deep dive into the 10 highest producing copper mines in the world based upon 2018 production levels. I call them super-producers.

In 2018, the super-producers were responsible for 27.6% of world mine production.

The weighted average cost of production in 2018 for the super-producers was $1.90 per lb.

Chile gets a lot of attention for copper; however, Peru has almost as many super-producers (3 versus Chile's 4).

Introduction

In this article, I take a deep dive into the 10 highest producing copper mines in the world based upon 2018 production levels. I refer to these mines as super-producers. In another future article, I plan on looking at the 10 highest producing copper mines of the future (e.g., 2025 to 2030) to see how the structure of the super-producers may change.

These super-producers have enormous ore bodies that underpin decades of production. These are cornerstone assets for the Majors that own them and the qualities of these mines influence cash flow generation for decades as well. For this reason, it is especially worth understanding the comparative quality of these mines. I often find that the size of a Major's dividend yield is directly correlated with the quality of its key assets.

The Major Players

Many of these super-producers have more than one owner. The capital requirements for these projects are obviously larger, so the Majors like to diversify their risks.

Here is a list of the players that own a majority or equal-majority stake in at least one of these super-producers:

This list includes only 3 of the top diversified Majors. Notably, this group includes 2 large producers — Freeport-McMoRan and Southern Copper — that have business models focused exclusively on copper.

Here is a list of the players that own a minority stake in at least one of these super-producers:

Most notable here are the Asian firms — 3 Japanese (Mitsubishi, Mitsui, and Sumitomo) and 2 Chinese (Guoxin and CITIC). These firms have historically provided capital in exchange for minority stakes to secure offtake for their domestic smelters.

Rio Tinto and Teck each have a minority stake in one super-producer.

The top diversified Majors that do not own either a majority or minor stake in a super-producer are Nornickel (OTCPK:NILSY), Vale (VALE), and Vedanta Ltd. (VEDL). In particular, this and the fact that Vedanta Ltd. does not own any copper mines gives weight to the case for them wanting to merge with Anglo-American which has a majority stake in 2 super-producers.

The Super-producers

The table below ranks the super-producers from highest to lowest 2018 production. Note the following concerning the information included in this table:

  • Production/Reserve grade - The production grade is the grade of the material mined in 2018 whereas the Reserve grade is the grade of the deposit classified as Proven & Probable Reserves. In cases where the 2018 production grade is significantly higher than the Reserve grade, this could signal a decline in future production and possibly an increase in costs if capital is not committed to growing the rate of production. (Note that Proven & Probable Reserves are Resources that have been quantified as economic to extract.)
  • These mines typically produce mainly from a large sulfide deposit that is mined to produce a copper concentrate. These deposits also tend to have a usually smaller and lower grade oxide portion that is mined and processed through a hydrometallurgical route that includes leaching (solvent extraction) and electrowinning (SX-EW). In these cases, I only included the higher-grade sulfide portion of the deposit to provide a better comparison of grade and Reserve life between deposits.
  • My "Costs" figure here is calculated using the following formula: Revenue - EBIT / Production and is a better estimate of actual profitability than the lower "C1" or "unit cost" figures published by some miners. For perspective, the average copper price in 2018 was $2.97 per lb.
Mine Majority Owners Country 2018 Production / Reserve* Grade Reserve Life (Years) 2018 Production (tonnes) 2018 Costs (lb.)
1 Escondida BHP (57.5%); Rio Tinto (30%) Chile .91% / .70% 34 1,213,000 $1.93
2 Los Bronces Anglo American (50.1%); Mitsubishi (20.4%); CODELCO (20%); Mitsui (9.5%) Chile .76% / .58% 30 737,525 $1.90
3 Grasberg Freeport-McMoRan (81.28%) Indonesia .98% / 1.03% 33 580,403 $2.24
4 Collahuasi Glencore (44%); Anglo American (44%) Chile 1.29% / .98% 53 559,091 $1.35
5 Cerro Verde Freeport-McMoRan (53.6%); SMM (21%); BVN (20%) Peru n/a / .36% 31 475,737 $2.24
6 El Teniente CODELCO Chile n/a / .86% 25 465,000 $1.92
7 Antamina BHP (33.8%); Glencore (33.8%); Teck (22.5%); Mitsubishi (10%) Peru .97% /.91% 11 446,222 $1.58
8 Morenci Freeport-McMoRan (72%); SMM (28%) USA n/a / .40% 14 430,839 $1.99
9 Buenavista Southern Copper Mexico .54% / .44% 44 414,071 $1.68*
10 Las Bambas MMG (62.5%); Guoxin (22.5%); CITIC Metals (15%) Peru n/a / .64% 16 385,000 $2.22
Total 5,706,888
Average .69% (Reserve) $1.91
Weighted Average .70% (Reserve) 30.5 $1.90

*For Southern Copper's Mexican Segment which includes Buenavista and La Caridad that produced 132,478 tonnes in 2018.

Here is a list of insights from this data on the super-producers:

  • Total 2018 super-producer production was 5,706,888 tonnes. Total world mine production in 2018 was 20,705,328 tonnes (by my estimate), so these super-producers were responsible for 27.6% of world mine production.
  • In all but one case where reported (Grasberg), the grade of the ore mined in 2018 was higher than the Reserve grade. In general, this means that future production levels will decline unless the operators expand the rate of production. In several cases — Escondida, Los Bronces, Collahuasi, and Buenavista — the 2018 production grades were significantly higher than the Reserve grades of the deposits.
  • The average Reserve grade was .69% and the weighted average (by production) was .70%. I would say that .70% is a good benchmark for a world-class grade for a large copper project.
  • The average cost of production was $1.91 per lb. and the weighted average (by production) was $1.90 per lb. When compared to the average copper price of $2.97 per lb. in 2018, the average operating margin (or EBIT margin) for these super-producers was 35.7%. Assuming no interest deductions and a 35% average tax rate, the average net margin comes out to 23.2%. This reveals that a long-term copper price expectation of $3.00 per lb. is likely high enough to incentivize the Majors to keep developing their very best projects to at least maintain their current levels of production.
  • The lowest cost super-producer is the Anglo American and Glencore jointly owned Collahuasi in Chile. The reason why is clear, its 2018 production grade was the highest at 1.29%.
  • The second lowest cost super-producer is Antamina in Peru. Antamina not only benefits from a relatively high copper grade (.91%) but the mine also produces meaningful amounts of zinc which lowers the cost per lb. of copper equivalent production.
  • Freeport-McMoRan is the majority owner of 3 super-producers; however, its weighted averaged cost of production was the highest at $2.17 per lb. In general, this means that Freeport will have lower margins, a lower dividend yield, and trade at a lower price multiple. That being said, a higher cost structure also means more leverage to a higher copper price. This can lead to Freeport being a relatively weaker buy and hold stock, but its potentially higher volatility around the price of copper can make it a liquid trading vehicle to play a strong rise in the price of copper.
  • The weighted average Reserve grade for the group is 30.5 years. Most of the mines will continue to be mainstay sources of copper for decades to come.
  • Chile gets a lot of attention for copper; however, Peru has almost as many super-producers (3 versus Chile's 4).
  • Escondida is simply a huge mine with production roughly 3 times greater than some of the smaller super-producers. Any significant production setbacks at Escondida have a material impact on the broader supply & demand fundamentals of the copper market.

Conclusion

I hope you found this analysis of the super-producers beneficial. I find that understanding the data behind these bulwarks is especially helpful for measuring the strengths and weaknesses of other mines and the economic potential of junior development projects.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Rio Tinto and Vedanta Ltd. are holdings in some client and family portfolios that I manage. I have an economic interest in these stocks. I'm an investment advisor and owner of True Vine Investments, a Registered Investment Advisor in the State of Pennsylvania (U.S.A.). I screen electronic communications from prospective clients in other states to ensure that I do not communicate directly with any prospect in another state where I have not met the registration requirements or do not have an applicable exemption. Any investment advice or recommendations involving securities referenced in this article is general in nature and geared towards a readership of sophisticated investors. This article does not involve an attempt to effect transactions in a specific security nor constitute specific investment advice to any particular individual. It does not take into account the specific financial situation, investment objectives, or particular needs of any specific person who may read this article. Individual investors are encouraged to independently evaluate specific investments and consult a licensed professional before making any investment decisions. All data presented by the author is regarded as factual; however, its accuracy is not guaranteed. Investors are encouraged to conduct their own comprehensive analysis. Positive comments made regarding this article should not be construed by readers to be an endorsement of my abilities to act as an investment advisor.