The management of government-owned Hindustan Copper (HCL) could not be wiser than to recommission progressively the mines abandoned earlier in a mindless sweep. Equally sensibly, the reinvigorated HCL, thanks largely to the copper market working to its advantage, is focussed on opening new mines and identifying virgin deposits.
The shift in HCL emphasis from being a producer of refined copper using smelters which have little to recommend for themselves in terms of technology, energy use and capacity to a miner of copper ore and producer of concentrate is what is going to underwrite the viability of the company in the long run. Not very long in the past, the company was adrift for a flawed business strategy.
The HCL moves coincide with the world already experiencing increasingly tighter supply of copper, thanks to many leading mines across the globe developed over two decades ago yielding ore with less and less metal content.
Explaining why the world production of ore now is consistently remaining below the target, Richard Wilson, chairman of metals consultancy Brooke Hunt, says, “Most mine projects will exploit the highest ore grades possible in their earlier years of production to facilitate rapid payback of capital. The trade-off then becomes sharply falling grades as mining progresses.”
Ageing mines and therefore, ore grades falling universally will be working to the advantage of HCL now on a mission to commission new mining capacity. This is because Indian ore’s copper content is less than in the case with the ore found in Latin America or Africa. In the last one decade the average copper content in ore globally is down over one percentage point forcing miners to remove more and more earth to produce the same amount of concentrate, the smelter feedstock.
So to the extent there is ongoing deterioration in world ore quality, HCL’s disadvantage of owning relatively inferior deposits gets diminished. The bottomline for HCL is it must dig earth a lot more efficiently than now and by doing so it will always earn more by selling concentrate than running old smelters.
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Any amount of investment by HCL in mines rehabilitation and development of new mines will be justified in view of the growing consensus that of all metals, the outlook for copper remains the brightest. This is inspite of the fact the major Western economies remain on choppy waters and China, accounting for over 23 per cent of the world copper production may allow further cooling of the real estate sector, a major point of copper use.
Starting June, three-month copper gained $1,400 to $7,400 a tonne and then lost some ground. But operators must react to the disturbing news about the fall in factory index in the US and also rise in claims for jobless benefits. The US is the world’s second largest user of copper after China.
If the experts are still of the opinion that the red metal will first climb to $9,000 a tonne within a year and then progressively approach $10,000 a tonne, it is because the fundamentals like copper production targets are missed regularly and stocks with both London Metal Exchange and Shanghai Exchange falling are supportive of copper. The copper ore quality may be falling, warehouse stocks declining and the underlying demand remaining strong despite hiccups in the world economy, but because of the inordinately long time taken in opening new mines, there is no way supply can be stepped up quickly.
No doubt supply side would have been in better shape had not weak copper prices in the past discouraged investment in new mines development.
There cannot be a more affirmative confirmation of the very positive outlook for copper than what the CEO of Rio Tinto Tom Albanese says; “Copper is the only metal I see where prices in the intermediate and long term are well above the marginal cost of production.”
Even while Rio is counted among the world’s four leading producers of the metal, Albanese laments the fact that he did not have more copper to sell in this year’s first half. This pining for more of the red metal could see Rio pushing Bougainville Copper, of which it is the majority owner, to reopen Papua New Guinea’s Panguna mine, one of the world’s largest deposits but closed since 1989.
For the same reason, Brazil’s Vale, often described as a one trick pony for its overdependence on iron ore, is to make an investment of over $400 million in African Rainbow Minerals to develop a new copper mine in Zambia. Also in pursuit of its ‘medium term strategic objective of becoming one of the main copper producers in the world,’ Vale will be commissioning a 100,000 tonnes smelter in Carajas in Brazil in 2011 and a smaller 18,000 tonnes smelter at Tres Valles in Chile this year.
Vale, which now owns 300,000 tonnes of smelting capacity will perforce be looking beyond Latin America for raising its copper profile as the best opportunities there are already usurped. The urge of Hindalco and Vedanta to buy copper mines abroad is easily understandable.