Are copper discoveries keeping up with production?

In a June 2008 study entitled “Strategies for copper reserves replacement”, Halifax, N.S.-based Metals Economics Group (MEG) concludes that copper reserves in the ground maintain a comfortable cushion of about 30 years’ production. However, two potential problems are identified: a shortage of major new discoveries, and escalating costs.

The study says that the largest copper producers, accounting for 70% of world supply, have increased their annual copper production between 1997 and 2006 by 66%, to almost 10.9 million tonnes per year from 6.5 million tonnes. They have used both exploration and acquisition to replace almost three times their production over the past ten years at an average cost of US$119 per tonne, for a remaining reserve life of about 30 years as of 2006.

Over the past ten years, the global copper industry has also added sufficient reserves to keep ahead of production, and currently has enough copper in the pipeline of existing projects to increase production in the near-to-medium term. However, things are not as rosy as they may seem; the study has identified two potential areas of weakness that will affect the industry in the long term: escalating costs at all stages of the pipeline, and a shortage of major new copper discoveries to replenish reserves from anticipated higher production.

The decline in major new discoveries over the past decade will place pressure on most companies’ production in the long term. Since 1995, world mined copper output totaled 172 million tonnes, and during the same period almost 195 million tonnes of copper in resources were found in major new discoveries. While the copper in these new discoveries may appear sufficient to replace production, less than 18% of these resources had been updated to reserves by year-end 2007, and many of the discoveries are located in countries with elevated political risk. Further, since 1999, discoveries have fallen short of what is needed to replace production. (It is possible that reserves will be increased by current discoveries not yet taken into account.)

While the copper industry as a whole, and the major producers specifically, have added enough reserves to keep slightly ahead of rising production over the past ten years, most of those reserves were added at current operations, rather than via grass roots exploration. In the long term, recently discovered resources are not adequate to replace the copper being mined, particularly in light of increasing production. Given the recent significant inflation in exploration costs, companies should expect to spend more on exploration to replace depleted reserves. Another reason for escalating exploration costs is the fact that companies expand their search farther afield into more remote and riskier regions.

Companies must hope that the increased copper exploration budgets reported in recent years, which MEG expects will continue in 2008, are sufficient to compensate for the dramatic cost increases, and that new significant discoveries will be found to address the long-term imbalance.

The study reports copper production of almost 15 million tonnes in 2005, while about 13.5 million tonnes were found. In 2006 copper production was about 15 million tonnes, versus about 13 million tonnes found. In 2007 production rose to about 15.5 million tonnes copper, while only about 7 million tonnes were found. Approximate copper exploration spending was US$700 million in 2005, US$1.2 billion in 2006, and US$1.8 billion in 2007.

Lisbon, Portugal-based International Copper Study Group (ICSG) reports world mine production of 14.9 million tonnes copper in 2005, 15 million tonnes in 2006 and 15.4 million tonnes in 2007. ICSG projects 2008 mine production at 16.4 million tonnes copper, refined production at 19.6 million tonnes, and copper usage at 18.5 million tonnes. The 2009 forecast puts mine production at 17.9 million tonnes copper, refined production at 21 million tonnes, and copper usage at 19.4 million tonnes.