Investing in copper explorers, developers, or producers involves understanding the price volatility concerning the commodity. Global demand, influenced by the health of national economies, is part of the price equation. However, there are other things investors should consider when looking at copper.
Governments are increasingly flexing their muscles concerning copper operations in their jurisdictions. Rio Tinto plc (ADR) (NYSE:RIO) knows this full well. At its Oyu Tolgoi project (copper-gold)) in Mongolia, it is facing several issues with the Mongolian government. Oyu Tolgoi is one of the largest copper-gold deposits in the world. The expectation is that full production will occur here by 2021. There has been $1.1 billion paid in taxes and payments to the Mongolian government through to June of this year.
Mongolia owns 34% of Oyu Tolgoi. A Mining.com report (July 17; Frik Els) indicated: “Mongolia has long coveted a bigger slice of the mine and has twice in the past couple of years floated proposals to take majority control.”
The Government of Mongolia has numerous points of dispute with Rio Tinto. These include the amount of the original 2009 investment in the project, capital expenditures (capex), cost overruns, taxation, and more. The Oyu Tolgoi project embodies 30% of Mongolia’s gross domestic product (GDP).
Investors can note that Rio Tinto plc (ADR) (NYSE:RIO)‘s overall copper production increased during Q2 2013. Its strength is in a variety of copper projects in multiple jurisdictions (Australia, Chile, Indonesia, Mongolia, Papua New Guinea, Peru, South Africa, the U.S). Consequently, issues at Oyu Tolgoi are not going to bring Rio Tinto plc (ADR) (NYSE:RIO) to a standstill. Even with the political concerns of this project, Oyu Tolgoi did ship its first copper concentrate to China this month.
Rio Tinto’s overall strategy is to invest in low-cost, long-life, expandable operations. Its continuing goal is operational, productivity, and cost improvements.
Rio Tinto’s CEO noted in April: “My streamlined executive committee structure is now in place and demanding targets for 2013, including for cash cost savings, are locked into our performance measures. We are making good progress in achieving our cost-reduction targets and other priorities for 2013, and are determined in our pursuit of greater value for shareholders.”
Inherent dangers that affect production capabilities
Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) is one of the world’s leading producers of copper concentrate. PT Freeport Indonesia, its affiliate, produces copper concentrate in Papua, Indonesia (the Grasberg mine). The company is working on building up output at this mine following a May accident. There were 28 casualties and 10 injuries because of this accident.
Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) has noted that its costs in Indonesia are fixed. Consequently, the company incurred these costs even though the Grasberg mine was shutdown due to the accident. Investors should consider whether a company has the resources to rebound and have sustainable production capabilities after such tragedies in a specific jurisdiction. The inherent dangers in mining are a constant threat to employees and corporate operations.
For Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX), open-pit and mill operations started up again on June 24. Its underground mining operations started again on July 9. Investors should consider that the mine will probably only produce 80% of its targeted output for this year (500,000 tonnes of copper; 1.2 million ounces of gold).
In addition to this, the company’s copper-price realization for Q2 2013 was $3.17 per pound. This was less than Q2 2012 at $3.53 per pound. Investors should take into account production stoppages, fixed costs and the market price of copper as they perform due diligence.
Industrial production outlook
Global industrial production has considerable impact on copper (price) and copper companies’ fortunes. According to BMO Global Asset Management (Market Perspectives: January; 2013 and 2014 Market Outlook), the firm expects for 2013: “Modest global economic growth that will include [a] recession in Europe, slow growth in the U.S., slower growth in China, and solid strength from many emerging market economies.”
Its Escondida mine in Chile produces copper concentrate and copper cathode.Copper smelters use copper concentrate.Copper cathode is the foundation product of copper for high-grade applications (telecommunication cables, automotive heat-exchangers, circuit connectors, electrical devices, transformer strips, etc.).
Robust worldwide industrial production is vital to BHP Billiton Limited (ADR) (NYSE:BHP), which provides copper concentrate and cathode for these production processes.