Strategies For Copper Reserves Replacement

HALIFAX, NS - Metals Economics Group's (MEG) recent Strategies for Copper Reserves Replacement study (June 18, 2008) concludes that the world's largest copper producers, through a combination of acquisition and exploration, have replaced almost three times their reserves lost through production over the past ten years at an average cost of $119/metric tonne (mt). From 1997 to 2006, this group of companies (accounting for about 70% of current world production) increased their annual copper production by 66%, from 6.5 million mt/year to almost 10.9 million mt/year, for a remaining production life in reserves of about 30 years as of 2006.
Over the past ten years, the global copper industry has also added sufficient reserves to keep ahead of production, and currently has enough copper in the pipeline of existing projects to increase production in the near-to-medium term. However, MEG's study has identified two potential areas of weakness that will affect the industry in the long term: escalating costs at all stages of the pipeline, and a shortage of copper being defined in major new discoveries to compensate for the anticipated higher production burn rate.
While industry observers are well aware of rising costs facing the industry, MEG's analysis suggests that the decline in copper contained in major new discoveries over the past decade will add pressure to most companies' production in the long term. Since 1995, world mined copper output totaled 172 million mt, and during the same period almost 195 million mt of copper in resources was found in major new discoveries. While the copper in these new discoveries may appear sufficient to replace production going forward, less than 18% of these resources had been updated to reserves by year-end 2007, and many of the discoveries are located in countries with elevated political risk. Further, since 1999, discoveries fall well short of what is needed to replace production. Nevertheless, because of the time required to define and evaluate a large deposit, there may be current fledgling discoveries that could eventually be retroactively attributable to recent years.
While the copper industry as a whole, and the major producers specifically, have added enough reserves to keep slightly ahead of rising production over the past ten years, most of those reserves were added at current operations. MEG's analysis shows that recently discovered resources, particularly in light of the trend of increasing production, are not adequate to replace the copper being mined in the long term. If annual averages over the past decade were to hold going forward, the major producers' current exploration spending levels should be enough to replace reserves depleted through production. However, given the recent significant inflation in exploration costs, the actual investment required is on the rise and companies should expect to spend more going forward, just to maintain the current balance. In addition, the perception that "all the easy copper has been found" is forcing many companies to expand their search further afield into more remote and riskier regions, which adds to exploration costs and further inflates the investment required to replace reserves through exploration.
Looking ahead, companies must hope that the increased copper exploration budgets reported in recent years, and which MEG expects will continue in 2008, are sufficient to compensate for the dramatic cost increases, and that new significant discoveries will be uncovered to address this long-term imbalance.
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