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6/21/10

Codelco's costs (an excerpt from IKN59, out yesterday)

As well as a lot of stockfollowing we also do macro-regional stuff as regards mining in The IKN Weekly, so here are 341 words selected from the 11,347 sent to subscribers yesterday. The section was about costs at Codelco and what they might mean for the industry as a whole. Enjoy.

Codelco’s costs evolution provide a backbone to copper pricing

More Codelco, but for different reasons. A stats-packed article in Chile’s La Tercera this week (19) highlighted the rise in costs for copper production. Adding a bit of searching at the Codelco website (20) to the La Tercera note, the chart below came into being and shows that in the period 2007 to the estimates for 2012, the cost of producing one Lb of cathode at the company will have doubled in six years if Codelco estimates prove to be accurate.

Now for sure you can point to Codelco as perhaps not the most efficient major miner in the world (for example, it’s not overly surprising that the payroll of this State run company is inordinately large compared to roughly equivalent megaminers such as VALE or BHP), but the big size and the relative stability over time of Codelco production and fixed assets does give us a pretty useful benchmark for the whole industry.

The most obvious first reflection that comes from that chart is that the era of sub-$2 copper is now confined to history, assuming we don’t suffer a major and prolonged deflationary period (something that’s extremely unlikely). When marginal costs rise to this kind of level it makes no sense at all to expect copper to return to low levels for any great period, as good old fahsioned supply and demand dynamics will soon crimp supply if prices drop.

This small section of today’s Weekly isn’t saying that copper couldn’t possibly drop below $2/lb. Of course it could, as if the market applies enough pressure a spike to such low prices is possible (though unlikely). What we are saying here is that there’s very solid fundamental reasons to assume long term prices of above $2 and little reason to expect a sub $2/lb price for much more than the shortest period possible. If the world’s biggest copper player expects costs to have doubled in the six years to 2012, consider that a very strong backbone for longer-term pricings going forward.