Copper is often referred to as
"Dr. Copper," the metal with a Ph.D. in economics. Yet most
analysts don't view it as a critical metal. In this interview with The Critical Metals Report, Mickey Fulp, author of
The Mercenary Geologist, gives his thoughts on why the experts are
wrong and why copper should be considered a critical metal.
Mentioned : Curis Resources Ltd.
Metals Report: In the past, there has been some confusion about the term
"critical metals." What do you consider to be critical metals and
Mickey Fulp: Critical metals are the major
metals that are used globally in industrial applications and are essential
for world economic health. They include iron, aluminum, copper, the various
iron alloys, zinc, lead, tin and uranium. These are the real "critical
metals," the ones that enable the world's economy to function.
TCMR: So your classification of a
critical metal is based on the need and the supply and demand, is that
"Critical metals are the major metals that are used
globally in industrial applications and are essential for world economic
MF: It's based on the fact that they
have major tonnages mined and processed and are essential to industry and
world economic health. Critical metals either trade on worldwide markets
through spot, futures and options or they trade as bulk dry commodities, as iron
TCMR: One that most people don't
classify as a critical metal is copper, but you do. What are the supply and
demand fundamentals that you think make copper critical right now?
MF: Copper's always critical. In my
opinion, some so-called experts have bastardized the idea of what critical
metals actually input to our industrial society. Copper is absolutely one of
the critical metals because it is so tied to the functioning world economy.
For example, you can't transmit electricity without copper. Ask the people in
New York and New Jersey right now if transmission of electricity is critical.
TCMR: As you're looking at the price of
copper, what are the indicators that you watch for? Is it global gross
domestic product? Is it the Shanghai Exchange warehouse inventory data,
Baltic Dry Index, bulk dry materials shipping rates?
MF: All of the above, plus London
Metal Exchange warehouse inventories, which are the largest in the world;
COMEX inventories, which are the third largest; the total world inventory,
the Bulk Dry Index, which indicates shipping rates of commodities like
copper; LME canceled warrants, which is inventoried copper designated for
immediate delivery; monthly demand for the metal from China and world mined
copper and refined copper production. At this juncture, China drives the
world copper market, consuming somewhere between 35–40% of supply.
TCMR: What are you seeing in those
indicators, particularly out of China?
MF: We've been in a holding pattern
for copper and that's reflected in the range-bound prices seen for most of
the last year, with prices between ~$3.30–3.90 per pound (lb). The same
can be said of the world's economy—we can't say if it's especially
healthy, or especially sick, or more likely, just has the "blahs."
This summer I
wrote a "Mercenary Musing" called "Long-Term Fundamentals of
the Copper Market"; I'm very bullish on the long-term copper outlook.
"Short-Term Fundamentals of the Copper Market" followed about a
month later. In it, I was equivocal on the direction of copper in the short
term, and by the short term, I'm generally looking one to six months out. So
now we're four months into that time frame and I still have the same view of
the copper market. It's relatively healthy, but it is not robust.
TCMR: It's lingering at the bottom end
of that range you talked about, at roughly $3.47/lb today. Do you see it
staying there? Do you see anything changing in those indicators we talked
MF: Copper has dropped something on
the order of $0.30/lb over the last month or so; the major reason is the
"net longs" have come out of the market. Traders have been
unwilling to risk speculative money in something that is obviously one of the
most speculative markets on earth, and that's the futures and options market
of copper. I don't think that what's happened over the last month in any of
the metals is so much due to supply-demand fundamentals as it was
geopolitical reasons connected with the U.S. elections.
TCMR: So you think it's the U.S.
political situation, and not the China situation that's driving the recent
MF: Absolutely. All financial markets
were in holding patterns in the month leading up to the election.
TCMR: The International Wrought Copper
Council (IWCC) recently predicted a 281,000-tonne surplus in 2013. Do you
agree with that, and if not, what's your projection and why?
MF: I'm not a copper analyst per se,
but I do understand copper supply and demand fundamentals. I don't make
projections like that; I'll leave that for the analysts whose full-time work
is analyzing a particular commodity. This supposed 281,000-tonne surplus, do
you know how many days of world copper use that is?
TCMR: Tell me.
MF: About five days of global demand.
The world uses somewhere between 55,000–60,000 tons of copper per day,
or well over 20 million metric tonnes (200 Mmt) of copper a year. Current
warehouse inventories only account for about eight days of world supply.
"Current copper warehouse inventories only account for
about eight days of world supply."
projections always assume a certain amount of supply disruption every year
such as labor strikes, accidents, infrastructure failures, weather, etc.,
usually something on the order of 5–10 days of world supply. So this
281,000-tonne surplus is basically calling for a balanced copper market. The
IWCC is saying we're going to have another year largely in supply-demand
balance. The copper market has been in supply-demand balance for the last
five years. So what else is new?
TCMR: So you still think that
$3.50–4 range is intact?
MF: For the next few months, I might
expand that range to $3.30–4/lb. But if you look at overall supply
costs, including operating, infrastructure and general and administrative
costs, they probably average about $3/lb for producing copper worldwide.
Therefore, it's a safe bet to say that if prices go below $3/lb, then supply
starts coming off the market drastically and the price will go up.
TCMR: An SEC decision on a proposed JP
Morgan copper exchange traded fund (ETF) has been delayed again, at least
till December. Could such an ETF really take as much as 30% of official
inventoried copper off the market and if so, what would that do to prices?
MF: It does not surprise me that it's
been delayed once again because of the possible economic effects on the
copper market and given the ability now for a single entity to exert
significant control over inventories. If 30% of the copper stored in
warehouses is not available to the market, prices could skyrocket.
The real concern
here is that physical ETFs for industrial metals could be disastrous for the
supply-demand fundamentals of the market. I personally do not think that this
ETF is going to come about. If it does, then we will have even more
manipulation of the copper market than at present. I don't think that would
be good for a healthy supply-demand balance.
TCMR: Do you think the copper market is
MF: All markets are manipulated. Duh.
TCMR: By whom?
MF: By large speculators with vested
interests in that particular market. Get used to it. Learn to live with it.
Our task should be to learn to speculate, trade and profit within the
paradigms that we are given.
TCMR: Do you think the copper market is
manipulated more than other markets?
MF: No. It is more speculative than
most other markets though.
TCMR: If 30% of warehoused copper were
to go away, that would make it even more vulnerable.
MF: Absolutely. Think about what that
will do if you take 30% of official warehouse inventories, the short-term
surplus waiting for a buyer, off the market. Obviously, with less of a
buffer, the general overall effect would be increased prices. For example,
look at precious metals ETFs. They have been one of the biggest drivers for
price increases over the past few years.
TCMR: What countries would you say are
the biggest users of copper and what are the biggest supplier
countries? And are there any projects in particular you're watching?
MF: The biggest supplier
of mined copper is Chile. The U.S., Peru, China and Indonesia are other big
miners. The largest suppliers of refined copper are China, Japan and Chile,
reflecting where the smelters are. The biggest user is China. Numbers two,
three and four are Western Europe as a whole, the U.S. and Japan.
One of the
future wild cards will be India because it is the world's second-largest
country in terms of population. Lots of people still don't have electricity
and a big portion of their electrical grid went down briefly last summer.
Copper demand is going to be driven number one by China and number two by the
rest of Eastern Asia; that would include mainly India and Indonesia. Further
out, it will be sub-Saharan Africa. About 25% of the world's population still
can't turn on a light switch at night. That's one of the reasons I'm a
long-term bull on the copper market.
TCMR: Are most of the producers long
established, or are there some new projects that have the potential to change
the supply-demand fundamentals going forward?
MF: There are new projects coming
along, but for the most part they are either brownfield projects or they are
much lower grade than we are seeing for current producers. The problem is we
cannot find enough good copper deposits to replace the reserves that are
currently being mined.
producers are mining lower and lower grades at higher cost and, based on
supply and demand fundamentals, copper prices must continue to rise over the
longer term. But by the same token, operating and capex costs are keeping
pace or exceeding the price increases. So, as Brent Cook is very fond of
saying, the world uses a Bingham Canyon every year, about 17 Mmt of newly
mined copper and that does not include 4-5 Mmt of scrap supplies and recycled
copper. We have to find more and more and that's hard to do with world use
growing at an average of 4% per year since 1900.
TCMR: Is technology making it easier to
find underground sources?
MF: There are some new tools such as
deeper-seeing geophysics tools and remote sensing satellite imagery. The
problem is that we've found the outcropping copper deposits in the world. So
now we have to discover new, deeper, potentially mineable underground
successful, that process comes from a combination of very good
multi-disciplined work and new interpretations by companies going back into
previously explored districts, specifically places like the southwest U.S.
and Chile. So we are making new discoveries employing boots-on-the-ground
geology, advances in satellite technology, geophysics, data processing and,
as always, drilling.
TCMR: Is there a project that interests
you right now?
MF: The company that attracts my
attention is Curis
Resources Ltd. (CUV:TSX.V; PCCRF:OTCPK). It's a company I cover and hold
a share position in.
developing a new in situ recovery (ISR) project in southeast Arizona. It will
be the first greenfield ISR project in the world. Curis has received a permit
for a test mine facility and construction will start soon. The stock has been
beaten up unmercifully and I think it has very good upside.
TCMR: It looks like it's at $0.67/share
right now. It was much higher, almost $4/share back in 2011. Do you think it
could reach its previous highs, and if so, what would send it there?
MF: That's not my current target
price on it. I started covering the stock about a year ago when it was
trading in the $0.90 range. I had the opportunity to cover it much earlier,
and declined because it was overbought. It finally got to a
price where I thought it had significant upside, i.e. a double in 12 months
or less. That has proven not to be true because the company had some
permitting difficulties, which have now been resolved, and then got hit by a
negative publicity campaign in a very bad junior
market. The stock got as low as $0.36/share this summer. At its current
trading price, I consider it a buy.
TCMR: When we're talking about the
catalysts for the stock, you said it should be in production soon. When do
you think it will be in production?
MF: The current projection is that
the Florence project will be producing copper from the test mine facility
sometime in the second quarter of 2013.
TCMR: Is this a site that you've
TCMR: What did you see when you went
there? How do you like the management team?
MF: It's a Hunter Dickinson company,
so there's no doubt about the management team. It has a good share structure
and has the ability to finance. There's not much to see when you go look at
an ISR project though; they simply are well fields, tank houses and water
impoundments. At Florence, there's flat desert, a few hills and some
irrigated fields. We did look at the core and at an old well field and facilities
that were developed by BHP around 1990, which abandoned it due to poor copper
prices at the time.
TCMR: Copper is a new field for a lot
of investors. What advice would you have for someone thinking about getting
into the space?
MF: Investors need to find and stick
with good, fundamentally strong companies. Unless you are a much more
speculative gambler than I am, the futures and options copper markets are not
something that I consider a small investor can profit in.
I'm a long-term
bull in copper and so I'm always looking for good copper projects. I
certainly want them to be in the lowest quartile of operating costs to reap
windfall profits during the good times and to weather low prices during the
bad. I picked Curis because their projections for operating costs will be
some of the lowest in the world as an in situ recovery project and not a big
open-pit or underground mine.
TCMR: Thank you for your time.
MF: It's always my pleasure.
Michael S. "Mickey" Fulp is the author of The Mercenary Geologist. He is a certified
professional geologist with a Bachelor of Science in earth sciences from the
University of Tulsa, and a Master of Science in geology from the University of
New Mexico. He has 35 years' experience as an exploration geologist searching
for economic deposits of base and precious metals, coal, uranium, oil and gas
and water. Fulp worked for junior explorers, major mining companies and
investors as a consulting economic geologist for 20 years, specializing in
geological mapping, property evaluation and business development. In 2007, he
went from the sell- to the buy-side as an analyst, writer and speaker.
Want to read
more exclusive Critical Metals
Report articles like this? Sign up for our
free e-newsletter, and you'll learn when new articles have been published. To
see a list of recent interviews with industry analysts and commentators and
learn more about critical metals companies, visit our Critical Metals Report page.
1) JT Long of The Critical Metals
Report conducted this interview. She personally and/or her family own
shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Critical Metals Report: None.
Interviews are edited for clarity.
3) Mickey Fulp: I own shares of the following companies mentioned in this
interview: Curis Resources Ltd. I personally and/or my family am paid by the
following companies mentioned in this interview: Curis Resources Ltd. pays a
fee to sponsor my website. I was not paid by Streetwise Reports for
participating in this interview.