Posts Tagged ‘copper mining’

More pressure on copper as commodities start to fade

FCXFollowing on from my post last week “What goes up  must come down” , where I looked at the two largest producers of copper, Chile‘s Codelco & also the American firm Freeport McMoRan, I have spent some time over the weekend researching the copper market & looking to see if I could find anymore signals that would show market direction.

Re-capping on the trade, FCX so some very significant selling volumes from the open on Friday &  the trade triggered as FCX fell through the 65 mark, where I commited to 50% of my planned exposure, the remaning 50% was then entered at 64.25 & I rode this down to 63.06.  I am looking to repeat this trade as a swing this week & here are some of the reasons why.

As previously stated on Freeport McMoRan, the company has scaled back copper production & has increased gold production to an all time high. Freeport is making some serious cutbacks & cost management is a major theme, as with many other major stocks, so I am still bearish on FCX as a whole from a fundamental standpoint.

Whats more interesting, is looking at some other factors that help bear out (nice pun) my thesis that we are looking at short term oversupply of copper. First let’s have a look at the copper Exchange Traded Fund : JJC, it has seen a strong uptrend  since early this year, returning a tad over 100% year to date, however looking at this technical chart, it would seem to be overbought & is signalling this.

JJC

Turning to a shorter term chart & looking at volumes on JJC, we can see that it hit & refused it’s upper Bollinger on Thursday 13th & saw some very aggressive selling in high volumes on Friday. If we then look closer at the history of the ticker, it has a habit of withdrawing back to it’s 20 Day Moving Average, which would give a reasonable bottom at 36.90 on any significant breakdown. So, I am looking to take another short position in JJC (if I can, it’s pretty illiquid) & see if I can’t double up on my FCX trade.

JJC 3 month

Another indicator that all may not be well is the performance of the Base Metals ETF : DBB, which holds an equal 33.33% in copper, aluminium & zinc. DBB has also had quite a years so far, with a return rate of 53%, on Friday this started to look fragile & there was fairly spikey activity in the ticker all through the day, finally closing 3.8% down, so not a bright day for metals at all. Again looking at a 3 month chart, we can see that DBB has been hitting it’s head against the upper Bollinger since mid July & at the latter end of last week also refused. Needless to say that Friday saw some volumes selling off, although not as heavily as FCX & JJC. The reasoning behind this is that DBB is held by select financial institutions & they are unable to un-reel their positions very quickly.

DBB

So to summarise, FCX still looks weak, JJC in my opinion is looking to implode & the major ETF in this sector is on the retreat. Again, I’ll be looking at shorting Freeport down, as per the tactics from my last post & if I can get in on JJC, I’ll be tapping into a short there too, looking for an exit at around 38.50. If the sell off continues, next stop for me is the 34.20 mark, so I’ll look to drop the short at 34.50. Add to all this the negative sentiment on China  & commodities right now, I think these swings could be real earners for this week.

Author has no current holdings in any stock mentioned

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What goes up must come down, is copper running out of steam ?

gravityCopper prices are at an all time high, coming off of deep lows in December 2008 of $1.25 lb, 3 month delivery is currently trading in Shanghai at $2.90 lb / $7,431 per tonne, extending the metals five week winning run. Shanghai copper looks to end the week almost 8.5% up, its strongest 5 day performance in more than two months. But are there stormy times ahead? Chilean mining giant Codelco, which is the worlds largest producer of the red metal, has just announced results for H1 2009.

Copper production including output from its 49% stake in El Abra, rose 16% to 822,000 tonnes in the first half of 2009, from 715 000 tons in same period in 2008. However, it seems all is not as sunny as the production figures would lead us to believe.  Codelco has seen its profits sink by 82% in the first half from $4.11 Bn to $722 Mn, due to lower copper prices. A worldwide slump in molybdenum prices from $72 to $20 year on year, has also not helped things along either. Although copper has had a good run, the question is, has it run out of steam, with Chinese buyers supposedly easing away from contracts, having fuelled the boom by stockpiling since November last year.

Not the case according to Codelco Chief Executive Jose Pablo Arellano. He is bullish & feels that copper demand is likely to continue due to ongoing requirements from China and stimulus programs in the world’s leading economies.

“The key factor in the rise in prices is China, in the next few quarters, we should see the stimulus programs in the United States, Europe and Japan start to have an effect, something we haven’t seen yet.”

But what of US based Freeport McMoRan (NYSE:FCX), Codelcos main rival & erstwhile partner ? Last month, Freeport beat analysts expectation by a long margin, but again the upbeat news needs to be examined a little more closely. Net earnings for the quarter were $588 million, or $1.38 per share, compared with $947 million, or $2.25 per share in the same quarter of 2008, with revenues dropping to $3.68 billion from  $5.44 billion, or 38%. Revenues were bolstered by gold sales, as the company ramped up production from 265,000 ounces in Q2 2008 to 837,000 ounces this year, but is debatable if this pace can be sustained, never mind improved upon. In In June, Chief Executive Richard Adkerson told Reuters there was no sign of recovery in the developed world that would lead to a restart of its idled U.S. copper operations, despite a pick-up in Chinese buying.

FCX has been riding high of late & I am kicking myself having looked for an entry at the $45 mark back in early June, only to be beaten by the market surge that has occurred. Bears should not be too dismayed however, as it looks as though play is going to start running the other way. Inventories on the London Metal Exchange have been on the decline since March, mainly due to companies like Freeport scaling down operations, whilst feeding the Chinese appetite. March is also when we started this huge bull run, which in my opinion is starting to look a little fatigued & toppy. One of the major indicators that I have been looking at on a weekly basis is the price of copper versus declared inventory on the LME. As you can see, inventory declinbe petered out in early July & we are now seeing that inventory starting to climb.

LME Copper

Now looking at FCX from a technical standpoint, its pretty obvious that it has been performing well in it’s channel (hat tip to anyone that has been long since March ), but it has also significantly not managed to break through the upper Bollinger band. It’s headed there right now, with a closing price yesterday of $66.07, the upper Bollinger is marking time at $66.87 & my expectation is that FCX is going to fail & pull back relatively sharply, with first major support at the $60 mark. If it falls through that level, I can see it triggering off a steady fall to the $52-$54 range, any “bad” news from China or any of the developed economies, will put on added pressure. According to Short Squeeze, short interest in FCX has increased by 8% in the last month, which is always an indicator that something is on the horizon, especially in a stock that is 80% held by institutions.

FCX

So to summarise, China is not buying in the volumes it was, US / Europe / Japan recovery is a long way off, Codelco made huge losses whilst bolstering production & Freeport has only made positive steps due to cost cutting & stepping up gold production, not withstanding its problems at it’s flagship Grasberg mine in Indonesia. That gold production doesn’t have a lot of headroom either. I’ll be keeping a very close eye on this & if significant volumes start selling through to $65, I’ll be riding down the ladder as far as I can.

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Miners to benefit from change to Indonesian law

copper-miningUnder Indonesian law, foreign mining companies operating in the country are required to sell 51% of their local holdings back to the government after 5 years of commercial operation. However, Newmont (NYSE : NEM), will only be asked to relinquish 17% of its subsidiary, PT Newmont Nusa Tenggara (PTNNT), as 20% of this entity is already held by a local partner. An international arbitration panel on March 31 gave Newmont and minority partner Sumitomo Corp. a 180-day deadline in which to divest 17% of PTNNT to local buyers, ruling that the companies were in default of their contract of work for failing to meet divestiture schedules in 2006-2008.

With the Indonesian government estimating the total value of PTNNT at $4.9Bn , Newmont & Sumitomo are locked ina valuation battle with the governmet & local companies, who are keen to pick up a share in the companies gold & mining concerns. Some 10% of PTNNT is earmarked for regional governments in Sumbawa, the location of the company’s Batu Hijau copper and gold mine, and the central government will have first right of refusal on the rest of PTNNT.

“We are still discussing the pricing formula” for the stake in PTNNT, with other government departments” Bambang Setiawan, director general at the Department of Energy and Mineral Resources “the department is also conducting preliminary negotiations with Newmont over the sale of the unit as yet it is unclear when a deal might be reached.”

It’s not all grim news for Newmont though. This week, Indonesian officials met regards mining rights in areas of protected forest. As we have written before, (Indonesia the long road back), The country has vast natural resources that Indonesia is keen to exploit, using the above formula to develop modern facilities in the country. Now ministers are expected to pass a decree that will allow mining companies to carry out underground mining activities in areas of protected rainforest.

“The presidential decree will give legal basis so that underground mining is allowed in protected forest areas.The existing law only forbids open-pit mining in protected forest areas,”  said Setiawan.

Information from the mining & energy ministry show that Indonesia has mineable nickel reserves of 547 million tonnes, 112 million tonnes of bauxite and 43 million tonnes of copper,  tin stand at 336,911 tonnes, measured in terms of refined tin, while gold reserves were 4,341 tonnes,

Two other mining majors that will also look to profit from this law change are Rio Tinto (NYSE : RTP) & Freeport-McMoran (NYSE : FCX).

Rio Tinto is currently looking to develop a new nickel operation on the island of Sulawesi, Rio estimate that the mine could produce up to 46,000 tonnes of nickel metal a year, estimated investment costs stand at $2 Bn. Sulawesi is densely forested & the change in law should mean that the company can expand its operations significantly.

Meanwhile, Freeport-McMoran has been active in Indonesia for a much longer time. PT Freeport Indonesia has operated the Grasberg mining complex since the early 70’s, Grasberg is one of the world’s largest single producers of both copper and gold & as Freeport claims, contains the largest recoverable reserves of copper and the largest single gold reserve in the world. Grassberg will continue surface mining until 2015, at which time it will then begin sub-surface mining, according to Freeport’s website.

Indonesia looks to be well on the way to attracting large amounts of FDI into its commodity sector, providing an economic boost to local populations spread across this vast country. India & The Emirates have already committed to investing $4Bn into an aluminium smelting plant, with fully integrated power & logistics last year, with the relaxation of the rules governing mining concessions, the country could well benefit from China’s projected expansion.

South America : Copper cartel on the horizon ?

blackboard_copper22With global copper prices sinking from a 2008 high of $4 per lb, down to todays miserly, $1.25 per lb, it is hardly surprising that the two major copper producing countries in South America are looking at ways to buoy up their operations. Last week, Peruvian president Alan Garcia dropped some strong hints that Peru & Chile should coordinate on copper production , in order to achieve greater control of prices on international markets.

“I believe that as countries with a strong mining presence in the world we must work in a joint manner, because when brotherly countries produce and compete with the same metal, the only thing we achieve is a fall in the price of copper, and we are both losers”, said Garcia

Demand growth in China, the world’s largest user of the metal used in plumbing and wiring, slowed to an estimated 9.8 percent in 2008 from 26 percent in 2007. Freeport-McMoran amongst others has shelved projects including a $450 million expansion at its Chilean copper mine El Abra. Freeport owns 51 percent of the mine and Codelco the remainder. The decline cut net income at Chile’s state-run Codelco, the world’s top copper miner, by nearly half to $4.5 billion in 2008.

In December, Jose Pablo Arrelano, CEO of Codelco stated copper prices will be “depressed” next year and demand almost “stagnant” as the international economic crisis leads to higher stockpiles of the metal. This will undoubtedly hurt other players in the commodities market, including BHP Billiton (NYSE – BBL) & Freeport McMoran (NYSE – FCX), Freeport McMoran have made some inroads to looking at the problem, the board announced in early December ,a  Revised Operating Plan in Response to Weak Market Conditions. Which is basically a slow down in extraction & refining in both its North & South American operations.

In Chile & Peru, copper extraction looks like a loss leader at the moment, in aggregate across all units, costs in 2009 are predicted to range from between $0.85 – $1.45 per pound. BHP have similarly looked at cutbacks regards copper extraction, the world’s biggest mining company, has delayed plans for an energy plant in Chile that it planned to build to supply two of its existing copper mines.

As discussed in an earlier post, Aussie-Canuck operator Equinox opened the largest copper mine in Africa last year, at Lumwana in Zambia, which when it comes fully online in early 2009, will be churning out 172,000 tonnes of high yield concentrate per year, which can only bring about additional competition for Codelco, BHP & Freeport, especially as Equinox has hedged production at $2.00 for the first three years of operation at Lumwana & have an estimated existing extraction cost of $0.80.

Chile may be able to weather the storm as Otto at Inka Cola puts forth in this article, the country has one of the highest per capita reserves in South America, totalling $26.49Bn, he further argues that Chile has an additional  $23Bn “tucked away in overseas accounts to call on.” Which is a considerable cushion to see out 2009, as Codelco & Arrelano await  global copper demand to turn positive in 2010.

Peru on the other hand does not look as if it will fare so well, although looking at Otto’s chart, they have a reasonable level of foreign reserves, the Andean nation is beset by rising unempolyment & a lack of foreign investment. Peru’s largest miner Southern Copper (NYSE – PCU) posted  a $125 million net loss in the fourth quarter, compared with a $311 million profit in the year-ago period, due to demand destruction. It is estimated that more than 9,000 miners have been laid off in Peru, whilst new projects have been suspended, including Southern Copper‘s plan to invest $1 billion in the Tia Maria mine. These cutbacks have already helped slow Peru’s growth rate to a projected 5% in January.

The question is, will Garcia’s plan, if it comes to fruition be timely enough ? We have seen how long it has taken OPEC production cuts to start to have an effect on the market price of crude. Of more concern for Garcia will be the new productive mines being opened in Zambia by Equinox at Lumwana & also the the Chinese backed Chambishi mine, which is operated by China Non-Ferrous Metals Mining Corporation (CNMC). The expected copper ore output is one million tons per annum, with a projected service life of 25 years. China has also embarked on an acquisition spree of late, which had also brought it interests in Australian miners such as Rio Tinto. Garcia will also have to play a careful game, as China is estimated to have committed to investing over $6 billion in Peru’s mining sector over the next five years. Politics come into play of course & the Chinese are expert in this field, my gut is that production cuts will come, although China will no doubt be exempt from any surging price changes in the near future.

My feel is that the copper mining stocks will remain low for a good time to come, much has been made of the Chinese stimulus bill, however, there is no guarantee that this will come to fruition any time soon, as & when it does kick in, China will be adequately supplied by its current investments in South America & Africa, as discussed in this piece. I am however, a little more bullish on the mining sector in general & have just initiated a position in the S&P Metals & Mining Index (ETF –  XME ,) which looks as though it may be building momentum for a bullish 2009.

All that glitters …

3a44c770a0

is not gold … but copper, especially if you are Equinox Minerals (ASX – EQN) / (TSE – EQN). Equinox is an international exploration and mine development company, dual listed on the  Australian & Canadian stock exchanges.

 Equinox has exploration activity being undertaken in Zambia and interests in Australia and Peru. The company is focused on operating its 100% owned Lumwana Copper Project in Zambia. The Lumwana Copper Mine will produce an average of 172,000 tonnes per year of copper metal contained in concentrates for the first 6 years of its 37 year mine life. The 20 Mtpa plant is now fully operational and production commenced in early December 2008.  Full production will be reached in 2009 at which time Lumwana will be Africa’s largest copper mine.

On 3rd December, Lumwana gave its first copper concentrates, with a concentration grade of 41%, fulfilling a 9 year odyssey for Equinox &  its CEO Craig Williams :

Equinox is pleased to accept handover of the Lumwana process facilitiers & commence ore commissioning & production ramp up. We are very pleased to bring online the lasrgest copper mine on the  African continent, which will not only be a long term, low cost producer, but will make a major social & economic contribution to Zambia.

Although there is a global slump in commodities, Equinox would seem to be in a good position, compared to many competitors. The Lumwana mine allows extraction with a production cost of $0.80 per lb, with todays copper spot price of $1.46, things could be better & according to Williams they are. Equinox managed to hedge production last year, which allows them to sell for the next two years at a minimum of $2.00, the hedge book giving a $300M edge to Equinox for its term, nice play & caps off.

An interview with Williams can be seen here, from the Business News Network, where he outlines the company strategy regarding Lumwana.  (personally love the way the interviewer (Canadian) says aboot !!)

In addition, Equinox has completed a Uranium Feasibility Study (“UFS”) investigating the onsite treatment of discrete and high grade uranium mineralization contained within the Lumwana copper pitshells. The study confirmed the viability of onsite uranium treatment. Should Equinox be successful in negotiating viable yellowcake off-take agreements and secure the requisite project capital financing, the Company expects plant construction to take 18-24 months.

Equinox believes that at Lumwana there exists significant opportunity to expand and optimize the concentrator and mine throughput rate as well as opportunity to assess and evaluate the additional near mine deposits discovered to date. Equinox maintains an active “pipeline” of exploration projects on its Zambian tenements which presently total some 6,284 km2. In particular, exploration of targets on properties near Lumwana is focused on resource definition which, if successful, could deliver additional ore to Lumwana Mill.