Copper is the essential metal for modern society. Without copper our civilization would simply not exist as it does today. Copper resists corrosion, and alloys well with other metals. It’s our most efficient conductor of heat and electricity. In prior reports, we’ve pointed to copper as a critical green metal. As the world moves to green energy, copper’s role in electrification will be critical to a successful green energy transition.
Earlier this month S&P Global issued a powerful report detailing the looming copper supply gap, which, if not met could severely limit or cut short the world’s clean energy ambitions.
Since the 1990s per capita copper consumption has risen along with global GDP, in the coming decades that is expected to accelerate significantly as the world drives towards a lower carbon footprint.
Let’s start by looking at our future energy demand. The US, European Union and many other nations have pledged net zero emissions by 2050. In line with the Paris Agreement, this entails reducing global emissions by 45% by 2030 on the road to zero by the middle of the century.
To achieve this goal a spectacular rollout of green tech is required. This is where copper comes in play. Nearly all our critical green technology requires massive amounts of copper to exist.
Whether its solar or wind power. Or manufacturing fleets of electric vehicles and their batteries. Major investments in electrifying the power grid to sustain the electric vehicle market alone is enough to dramatically increase our need for the red metal.
This projected spike in demand over the coming decades places unprecedented stress on the limited copper supply we are currently mining. Global copper demand is projected to double – from 25 million metric tonnes in 2021, to nearly 49 million metric tonnes in 2035. Green energy is though to make up half of this demand.
Let’s keep in mind that demand from markets outside of green energy – like construction, appliance manufacturing, cell phones etcetera is also slated to grow at a compound rate of 2.4% between 2020 and 2050. So, even without an energy transition, copper demand would still increase significantly in the coming decades.
Automotive Demand
For the automotive industry, net-zero ambitions will require the transition from internal combustion engines to battery-powered electric vehicles. Many auto manufacturers are aiming to completely revamp their fleets to EVs and hybrid vehicles. The copper intensity in EV will significantly increase moving forward. For an internal combustion vehicle of any size there is approximately 24KG of copper, in a light duty EV its 60KG, medium duty EV has 139 KG and a heavy-duty EV has 425 KG.
The Tipping Point: Global Copper Market Balance
The S&P Global study found copper shortfalls begin in 2025 – as result of increased demand from energy transition and limited new copper supply. Their rocky road scenario assumes current mine supply and recycling trends continue, resulting in a 10 million metric ton shortfall by 2035. Even in the high ambition scenario, assuming significant enhancement in extraction and recycling rates the shortfall persists till 2035.
Best Value Among Copper Miners
This is clearly a very attractive macro backdrop for copper miners. We screened for value among all copper miners – both large and small cap.
Lundin Mining (TSX:LUN) is the cheapest large cap trading at a 50% blended valuation discount to peers and Sierra Metals (NYSE:SMTS) (TSX:SMT) is the cheapest small cap trading at 80% blended valuation discount. Additionally both companies offer very attractive dividend yields that are above the copper peer group and the S&P 500 market yield.
Lundin Mining – Geographically Diversified & Copper Focused
Lundin mining offers investors a significant geographic diversification in stable jurisdictions coupled with strong copper metal production.
In it’s most recent Q2 2022 earnings release the company stated that inflationary impacts will continue to increase operating costs for the year; despite these challenges the company generated $215 million of free cash flow.
Sierra Metals – Production Growth Runway
Sierra Metals provides investors a diversified mix of strategic metals (copper, silver, zinc, gold & lead), their mines are located in the jurisdictions of Mexico and Peru. Their Yauricocha mine (in Peru) has been producing for over 70 years, and the districts of Cusi and Bolivar (in Mexico) have a 300 year history.
Sierra Metals has a significant production growth runway ahead, with tonnage per day capacity expected to be 15,500 by 2027 – representing 65% growth from 2020.
Sierra Metals is a market awareness client of Capital 10X.
