The Critical Metals Report: In the past, there has been some confusion about the term "critical metals." What do you consider to be critical metals and why?
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 correct?
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 ore does.
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 about?
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 decline?
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, well over 20 million metric tonnes (20 Mmt) per year. Current warehouse inventories only account for about eight days of world supply.
These 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 manipulated?
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.
Established 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 sources.
To be 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.
Curis is 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 visited?
MF: Yes.
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.
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.
