The Gold Report | Nov 13, 2012 04:39PM ET
The Critical Metals Report:
In the past, there has been some confusion about the term "critical metals." What do you consider to be critical metals and why? Mickey Fulp:
TCMR: So your classification of a critical metal is based on the need and the supply and demand, is that correct? MF:
TCMR: One that most people don't classify as a critical metal is copper, but you do. What are the supply and demand fundamentals that you think make copper critical right now? MF:
TCMR: As you're looking at the price of copper, what are the indicators that you watch for? Is it global gross domestic product? Is it the Shanghai Exchange warehouse inventory data, Baltic Dry Index, bulk dry materials shipping rates?
MF: All of the above, plus London Metal Exchange warehouse inventories, which are the largest in the world; COMEX inventories, which are the third largest; the total world inventory, the Bulk Dry Index, which indicates shipping rates of commodities like copper; LME canceled warrants, which is inventoried copper designated for immediate delivery; monthly demand for the metal from China and world mined copper and refined copper production. At this juncture, China drives the world copper market, consuming somewhere between 35–40% of supply. TCMR:
MF: We've been in a holding pattern for copper and that's reflected in the range-bound prices seen for most of the last year, with prices between ~$3.30–3.90 per pound (lb). The same can be said of the world's economy—we can't say if it's especially healthy, or especially sick, or more likely, just has the "blahs."
This summer I wrote a "Mercenary Musing" called "Long-Term Fundamentals of the Copper Market"; I'm very bullish on the long-term copper outlook. "Short-Term Fundamentals of the Copper Market" followed about a month later. In it, I was equivocal on the direction of copper in the short term, and by the short term, I'm generally looking one to six months out. So now we're four months into that time frame and I still have the same view of the copper market. It's relatively healthy, but it is not robust. TCMR: MF:
TCMR: So you think it's the U.S. political situation, and not the China situation that's driving the recent decline? MF:
TCMR: The International Wrought Copper Council (IWCC) recently predicted a 281,000-tonne surplus in 2013. Do you agree with that, and if not, what's your projection and why?
MF: I'm not a copper analyst per se, but I do understand copper supply and demand fundamentals. I don't make projections like that; I'll leave that for the analysts whose full-time work is analyzing a particular commodity. This supposed 281,000-tonne surplus, do you know how many days of world copper use that is? TCMR: MF:
These projections always assume a certain amount of supply disruption every year such as labor strikes, accidents, infrastructure failures, weather, etc., usually something on the order of 5–10 days of world supply. So this 281,000-tonne surplus is basically calling for a balanced copper market. The IWCC is saying we're going to have another year largely in supply-demand balance. The copper market has been in supply-demand balance for the last five years. So what else is new? TCMR:
MF: For the next few months, I might expand that range to $3.30–4/lb. But if you look at overall supply costs, including operating, infrastructure and general and administrative costs, they probably average about $3/lb for producing copper worldwide. Therefore, it's a safe bet to say that if prices go below $3/lb, then supply starts coming off the market drastically and the price will go up. TCMR: MF:
The real concern here is that physical ETFs for industrial metals could be disastrous for the supply-demand fundamentals of the market. I personally do not think that this ETF is going to come about. If it does, then we will have even more manipulation of the copper market than at present. I don't think that would be good for a healthy supply-demand balance. TCMR:
MF: All markets are manipulated. Duh.
TCMR: By whom?
MF: By large speculators with vested interests in that particular market. Get used to it. Learn to live with it. Our task should be to learn to speculate, trade and profit within the paradigms that we are given. TCMR:
MF: No. It is more speculative than most other markets though. TCMR: MF: TCMR: MF:
One of the future wild cards will be India because it is the world's second-largest country in terms of population. Lots of people still don't have electricity and a big portion of their electrical grid went down briefly last summer. Copper demand is going to be driven number one by China and number two by the rest of Eastern Asia; that would include mainly India and Indonesia. Further out, it will be sub-Saharan Africa. About 25% of the world's population still can't turn on a light switch at night. That's one of the reasons I'm a long-term bull on the copper market. TCMR:
MF: There are new projects coming along, but for the most part they are either brownfield projects or they are much lower grade than we are seeing for current producers. The problem is we cannot find enough good copper deposits to replace the reserves that are currently being mined.
Established producers are mining lower and lower grades at higher cost and, based on supply and demand fundamentals, copper prices must continue to rise over the longer term. But by the same token, operating and capex costs are keeping pace or exceeding the price increases. So, as Brent Cook is very fond of saying, the world uses a Bingham Canyon every year, about 17 Mmt of newly mined copper and that does not include 4-5 Mmt of scrap supplies and recycled copper. We have to find more and more and that's hard to do with world use growing at an average of 4% per year since 1900. TCMR:
MF: There are some new tools such as deeper-seeing geophysics tools and remote sensing satellite imagery. The problem is that we've found the outcropping copper deposits in the world. So now we have to discover new, deeper, potentially mineable underground sources.
To be successful, that process comes from a combination of very good multi-disciplined work and new interpretations by companies going back into previously explored districts, specifically places like the southwest U.S. and Chile. So we are making new discoveries employing boots-on-the-ground geology, advances in satellite technology, geophysics, data processing and, as always, drilling. TCMR: MF:
Curis is developing a new in situ recovery (ISR) project in southeast Arizona. It will be the first greenfield ISR project in the world. Curis has received a permit for a test mine facility and construction will start soon. The stock has been beaten up unmercifully and I think it has very good upside. TCMR: MF: TCMR:
MF: The current projection is that the Florence project will be producing copper from the test mine facility sometime in the second quarter of 2013. TCMR:
MF: Yes.
TCMR: What did you see when you went there? How do you like the management team?
MF: It's a Hunter Dickinson company, so there's no doubt about the management team. It has a good share structure and has the ability to finance. There's not much to see when you go look at an ISR project though; they simply are well fields, tank houses and water impoundments. At Florence, there's flat desert, a few hills and some irrigated fields. We did look at the core and at an old well field and facilities that were developed by BHP around 1990, which abandoned it due to poor copper prices at the time.
TCMR: Copper is a new field for a lot of investors. What advice would you have for someone thinking about getting into the space?
MF: Investors need to find and stick with good, fundamentally strong companies. Unless you are a much more speculative gambler than I am, the futures and options copper markets are not something that I consider a small investor can profit in.
I'm a long-term bull in copper and so I'm always looking for good copper projects. I certainly want them to be in the lowest quartile of operating costs to reap windfall profits during the good times and to weather low prices during the bad. I picked Curis because their projections for operating costs will be some of the lowest in the world as an in situ recovery project and not a big open-pit or underground mine. TCMR:
MF: It's always my pleasure.
Michael S. "Mickey" Fulp is the author of The Mercenary Geologist. He is a certified professional geologist with a Bachelor of Science in earth sciences from the University of Tulsa, and a Master of Science in geology from the University of New Mexico. He has 35 years' experience as an exploration geologist searching for economic deposits of base and precious metals, coal, uranium, oil and gas and water. Fulp worked for junior explorers, major mining companies and investors as a consulting economic geologist for 20 years, specializing in geological mapping, property evaluation and business development. In 2007, he went from the sell- to the buy-side as an analyst, writer and speaker.
DISCLOSURE:
1) JT Long of The Critical Metals Report conducted this interview. She personally and/or her family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Critical Metals Report: None. Interviews are edited for clarity.
3) Mickey Fulp: I own shares of the following companies mentioned in this interview: Curis Resources Ltd. I personally and/or my family am paid by the following companies mentioned in this interview: Curis Resources Ltd. pays a fee to sponsor my website. I was not paid by Streetwise Reports for participating in this interview.
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