In the copper industry, the cost of capital has been too high to justify the returns for mine investors and is the driving force behind the bull market for the past decade — this is a sentiment shared by analysts at Stifel Financial.
“If you look back to the supply growth rates in the industry from 2009 to 2016 or so, copper supply grew at a compound annual growth rate of around 3.5-4%, so effectively half of GDP, so relatively good considering the Chinese bull thesis was the early 2000s commodity bubble,” McGill said. The reason, said McGill, is what he referred to as the “legacy asset” thesis that is increasingly being understood by the market.
“So, you’re seeing as grades get lower, companies will have to increase their capital intensity to pull that production forward because your reserve grades are getting lower; you’re seeing legacy assets now need to be buoyed by new supply, and the cost is still too high to bring new projects online.”