Prime Meridians – A Crisis Arrives In The South American Copper Market

This week in Pierce Points:

Pennsylvania got tough on shale drillers. An industry group says new laws may increase Marcellus well costs by up to 30%. 

Chile threatened to close a major copper mine. Antofagasta’s Los Pelambres project is charged with multiple violations.  

Russia went on a resource spending spree. A $7.5 billion deal to buy India’s Essar Oil may be just the beginning.

The U.K. secretly paid coal power plants. The government is keeping them on standby, to prevent blackouts this winter.

Iran found 16 bidders for new oil fields. 50 petroleum projects will be offered in a licensing round up until November 19. 

A Crisis Arrives In The South American Copper Market

Further to the second item above, things are getting very tough in the South American copper sector right now. 

Even as copper prices have sagged to a month-low below $2.10 per pound, supply from some of the most important mining nations on Earth is looking dubious. 

One of the most critical spots is Chile. Where this week’s news on a potential government intervention at the Los Pelambres mine shows a major trend unfolding — namely, a move toward much stricter standards for mining. 

This is something miners in Chile have been dreading. With the fear being that regulatory uncertainty will delay or completely kill new projects here. 

Such developments couldn’t come at a worse time for the industry. With copper miners — including Chile’s state-run Codelco, the world’s largest copper producer — already reeling from lower prices.

That’s having substantial effects on planning for new mines. With Codelco saying last week that it now plans to delay several capital projects. Previously, the company had planned a number of mine expansions to happen simultaneously — but the firm now says it will put off a sulphide project at Radomiro Tomic until 2024, delay a new mining level at El Teniente until 2023, and postpone the expansion of the Andina mine until 2024.

That’s a lot of planned production suddenly losing visibility from the market. All of which is having a tumultuous effect on Codelco. 

Delayed projects were one of the major reasons cited this week by Codelco’s main workers union — the Federation of Copper Workers — as a potential trigger for strike action. With the group saying it will walk off the job completely to protest spending cuts from the company.

That threat appears to have created a bit of a reprieve for Codelco. With Chile’s Finance Minister saying Wednesday that the government will have to give “slightly more” funding to the state miner this coming year, to address the issues above. 

Given the cautious tone here though, it’s unlikely that Codelco is going to get enough funds to restart any of the delayed projects mentioned above. Which means that copper supply growth from Chile is increasingly looking dubious. 

Normally, this might cause prospective miners to shift focus to other countries. Likely elsewhere along the South American Cordillera, where the geology is similar to Chile’s.

But things aren’t looking so rosy almost anywhere in this part of the world. 

Peru is the next obvious choice — being the world’s third-largest copper mining nation. But news this week shows that things aren’t easy here either — with protestors still blocking the road to the massive Las Bambas copper mine operated by China’s MMG.

That comes after one protestor was shot dead last week by police during a botched attempt to clear the barricades. A development that has ratcheted up tensions — to the point where locals turned away teams sent by the federal government to negotiate a settlement. 

The fact that protestors won’t even talk to the government is concerning. Especially given the Las Bambas disruption is the first real test of new Peruvian president Pedro Pablo Kuczynski, who took office this past July. 

If Kuczynski is unable to solve this issue, it doesn’t bode well for other projects in Peru — either existing or planned. And this already hasn’t been the easiest place to build new mines, with big projects like Newmont’s Minas Conga having been effectively crippled by local opposition. 

Where else might miners go? Colombia has been slowly emerging as a potential destination for copper — lying at the vastly under-explored northern end of the Cordillera. 

But here too some recent issues have emerged. 

Colombia’s Supreme Court recently handed down a landmark ruling on mining. Dictating that local governments — perhaps all the way to the municipal level — have a right to block mining projects in their districts. 

That creates an extremely uncertain environment for new mines. Some places may be okay, especially where mining is already an established part of the local economy. But some parts of the country may now prove completely inhospitable, which has been the case in areas like that near AngloGold’s massive La Colosa gold discovery. 

Is there any hope? Perhaps. One interesting item did emerge in terms of positive news for South American copper the past few weeks. 

Growing interest in the former pariah nation of Ecuador. 

It’s in that country a bidding war has broken out between mining majors BHP Billiton and Newcrest Mining, for control of one junior-held deposit here: the Cascabel copper-gold project owned by Australia/U.K.-listed SolGold. With each major offering to finance at least $30 million in equity into the company, and joint venture the project for up to $275 million. 

That’s a hefty spend. And to see such commitment from not one, but two majors simultaneously doesn’t happen very often. 

Perhaps this is a sign of the times. Given all the problems emerging in former go-to South American copper nations, Ecuador may seem like the best option in the region at this point. 

That could signal a major shift in investment patterns coming. Watch to see if interest rises for Ecuador projects, while enthusiasm for that nation’s neighbors to the north and south wanes. 

Here’s to taking the easier path,

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Dave Forest

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