A Contrarian's Call on Copper - Mickey Fulp

00:00:09 I'm going to talk about copper as Ellis led you to know. Nice pun by the way. I'm the mercenary geologist basically geologist for hire. You can find me at mercenarygeologist.com. My Twitter feed is @mercenarygeo, 681,000 Twitter followers, about 6,500 subscribers to my newsletter.

00:00:37 Disclaimer you know it, but I got to say it nothing I say can be construed as investment advice or an offer to buy or sell any financial instrument. I'm a contrarian. I've been a contrarian that's the way I made money in this business we're an eye on 25 years in bull and bear markets. Of course you know where we are we're in Vancouver.

00:01:04 It's been lovely here lately so if I left the sunshine in New Mexico and I came to the sunshine in Vancouver and you can't say that very often. Here's a 14-year spot copper price and you asked me why 14 years? Well this is the only daily data that we are able to access without paying Thompson Reuters 10 grand for their database. This is a copper chart and it starts in 03 which is by mid 03 we had a bull market for gold but it took a while for that to filter down into the industrial metals.

00:01:44 In fact it basically took until mid 2005 but before we saw a viable copper price to support development of new copper mines. To blip on your radar screen in January of 07 really not sure why that happened, I can't remember why that happened but it was a spike down. Copper immediately recovered and it averaged if you look between say 06 and through the middle of 2008 right before the global economic crisis.

00:02:23 Copper averaged somewhere in around $4 a pound, 3.75, $4 a pound. We had the blip on the screen which was the global economic crisis. What led the world's economy out of that and at during the depth of that copper hit a buck 28. Now that's not sustainable. Was metals commodity demand from China mainly and the reason for that is China quantitatively ease whatever the hell that means.

00:02:56 It’s way out of the global financial crisis by building infrastructure. They didn't issue a lot of Yuan. They didn't take on a bunch of a debt where they -- where their central bank, they issued bonds and the central bank buys them back the way we did in the U.S. and Europe. They bought commodities that peaked in January of 2011 and but the bull market for metals really continued into the beginning of 2013. As you see it's been downhill ever since.

00:03:35 The reasons for that or many but really it was the slowdown in the Chinese economy. China now consumes well over 40 percent of the world's copper. We hit rock-bottom last January 20th, January 20th of 2016 when all commodities bottom. That's when oil bottom, gold bottom, copper bottom. You can see that on the chart that would be about the end of January of 2016.

00:04:09 We've had this bounce lately. Now what we're going to do is look at the one-year price. I'll show you what's going on there and why I think the price would be paved the way that they have. What happened on November 8th? We had new president. What happened on November 9? Price of copper spiked upward.

00:04:30 That all had to do with the Trump infrastructure build out so we had a very low copper price hovering around this $2.10, $2.20. A base established by that. We spike up, we spike down but the copper price has been fairly sustainable at $2.50, $2.70 cents since Trump was elected. The idea Trump's going to build out infrastructure similar to what China did in 2009 has really spurred the industrial metals market.

00:05:08 Price is sustained right now about 255 to 260. Copper supply-demand fundamentals this is all data from the International copper study group for 2015 which once again is the latest data I can get. Unless I want to pay 5,000 for this year's study and I'm not going to do that. World mine supply, 19 1.1 million tons, world refine production, total refinery production, oxide and sulfide 22.9 million tons. You noticed how balanced the copper market is. 23 million tons demand last year.

0:05:49 This supply demand has been imbalanced for now on six from 2007 through 2016 so basically 10 years. Every year a small surplus or a small deficit usually a small deficit because of disruptions strikes whether port accidents, rains in Chile, et cetera, et cetera. I want to show you how copper production is increased since the world started becoming electrified in 1900. 3.4 percent annual growth per year.

00:06:32 If you look an interesting thing is oxide copper the SXEW, the high level oxide copper. That process basically was invented. Heat bleach SXEW in the late 60s and early 70s and mainly in Arizona, U.S. Bureau Mines, first production ranchers mine, Bluebird Mine in Miami, Arizona in 1971-72. Look at the acceleration and growth starting about 1990 and that has been mainly from oxide copper deposits. That's important for late, for later ideas of where the price is going.

00:07:16 Copper mine production still dominated by Chile but less though than it was 10 years ago. The Chilean decline in copper production will continue in my opinion. It will not be as drastic as say what happened to South Africa and Gold from the 1990s into the 2010s. I think we are going to continue to see a decline in relative production, percentage production from Chile. China is growing but they don't have that many good copper deposit.

00:07:52 The real growth and the real problem with the copper market over the last couple of years has been a 50 percent increase in production from Peru mainly in Antamina but also Sierra Verde and Las Bambas. That has upset the applecart a bit. We had this long sustained bull market for copper and as commonly happens we had a build out of copper producers and things coming online just at the time that Chinese demand started to come up. I think this copper low copper price, the fact that we had more production than was really demanded and a lot of that is the swing market and that happens in the scrap market.

00:08:45 I think that's going to rectify itself soon. Copper smelter production, this illustrates the growth in Chinese and also Asian smelters over the last 10 or 15 years and China now refines something on the order of 40 percent of the world's copper. Refined copper production so how's that broken down well you have primary sulfide production from concentrates. You have the SXEW which basically mates 99.99 percent pure copper cathode at the mine site, refined on site. Then we have the refinery secondary and that's scrapped and that's not recycled scrap that scrap from filings and machines and lays and wastes copper that is then put back into the into rod and ball mills and reconstituted.

00:09:42 Anyway you see the growth of copper. I mean look at it I was a child in 1960 and we're -- the world's using four million tons of copper a year. Now we're using 23 million tons of copper a year. Here we go, the standard growth and we'll get to some reasons why on that coming up soon. I mentioned the copper it has supply demand balance and how this is basically been imbalanced with little, very little perturbations over the last 10 years now. Now the 2016 data is coming but I can guarantee you the market was in very small deficit last year.

00:10:29 Here's the key slide here. This is the key fact fluctuate and this plots the world's population from 1950 when we were at what about 2.7 billion people. We are now at 7.3 billion people. Also plotted there in the jagged line is the copper consumption per person on the planet. Not only are we adding a lot more people to the planet every year. The average copper budget is increasing and it has really started to increase since about 2,000 -- well you see this deepening of the curve starting in 1990 but a lot of this growth is demand from people that don't have electricity that are now being electrified.

00:11:32 This is a key component of why I am a copper bull in the mid to long term. Metals market fundamentals. A lot of this is driven not by the bricks because Russia is not a growing economy. The demographics of Russia, it’s bunch of old people. There's not a lot of demand coming from Russia but the Bicks, Brazil, India Indonesia, China and their brethren that would include all the other emerging market countries in the world.

00:12:05 That is where the copper market is growing significantly. It's also growing in the U.S. We use two percent more copper last yea. We’ll use significant and more amount of copper if Trump gets his infrastructure build-out plans going. What's the deal here? Well deposits are tougher to find. They are mines are much harder to develop now so we have this lag time. All the easily found copper deposits in the world have already been found.

00:12:40 Now we're getting to the tougher stuff. We have geopolitics with corrupt and unstable governments and resource nationalism. Everywhere you go in the world now you have environmental and Aboriginal opposition for sure will raise its head. We have all these U.S. funded NGOs that permeate the world and that's not going to end any time soon. When I first start giving this talk maybe eight or ten years ago and it evolves over those years. I had a slide that said exploration and development timeline was 10 to 15 years.

00:13:22 Now I kicked that out to 15 to 20 years and it can be that long. What really is happening now with the year-over-year annual growth that we know is going to occur. It's occurred most years since 1900. We are having supply shortfalls. We will have supply shortfalls. This is the new copper required per year.

00:13:46 Who's going to tell me where this is and it can't be a geologist okay. Where is that? The world's oldest open pit copper mines still producing. No, Bingham Canyon Utah. The first porphyry copper developed by Daniel Jackling in1903 continuously producing for 114 years now. This mine has mined in its lifetime somewhere around 18 to 19 million tons of copper metal. That's what we use in the world every year. We've got to find one of these giant mines. I mean this is -- if not the biggest man-made excavation on the planet, it's the second biggest.

00:14:42 Chuquicamata might be bigger. I'm not sure. This is visible from the friggin moon so, we've got to find that much copper every year. World refined copper usage and this is a replay of a slide I showed previously from 1900. Notice the steepening of the curve starting in 1990. We're using more and more copper every year. Where it would come from? You tell me.

00:15:16 Where's the new copper going to come from? North in South America we have the world's best copper deposits or the greatest number of the world's best copper deposits, those are mature provinces. There are no more outcropping copper ore bodies and left around that have not been discovered and drilled out. The DRC, the Democratic Republic of the Congo. The Southwest Pacific, very good copper deposit. DRC arguably the best copper and cobalt deposits in the world but they're geopolitically untenable.

00:15:57 Ask all the companies that went far and far away in the last boom and how many got basically burned by what I call second and third world resource nationalism. Where are people moving? They’re coming back to places like the good old U.S. of A where we have rule law and we have a new Trump administration that is favorable toward development. Also Zambia, you got to put Zambia in that. That's a stable part of the copper belt of southern Africa.

00:16:27 The problem in Zambia is power. They don't have any power. They got no way to get power. It's a landlocked country that has imports all its oil and there's no easy solution for them with power. Where will the copper come from? Well I mentioned copper oxides but those are limited. We've seen this expanding growth of copper oxides now for about the last 30 years. Think about it. How many eroded weathered copper deposits where you can take sulfide copper and make oxide copper through weathering?

00:17:06 There's a limited supply of those. They have to be number one and in semi-arid or historically wet dry terrain. You get the leaching of the copper. They have to have low pyrite compared to chalcopyrite. There's a limited expansion capability of copper oxides worldwide. We will no doubt mine lower and lower grades as time goes on. That's the history of mining in the world as the time goes on in any commodity you continually mine lower and lower grades as because they become economic as you mine out all the high-grade deposits.

00:17:49 The real key here I think is exploration. We need to get smarter. We need to look at buried deposits and we need to look deeper. The solution to that really is technology and innovation. I am a cornucopian as opposed to a Malthusian. A cornucopia is a scientist who thinks the world has whatever we need when we need it, we can develop. We're not going to run out of copper.

00:18:21 We're not going to run out of oil. We're not going to run out of gold. We're not going to run out of anything. Sometimes as geologists and engineers we find too much we're too successful. Anyway, so where's the copper coming from? We've got to find new companies. We've got to find deposits. If they're high-grade so much the better and there are a few of those around, why am I a copper bull there are 85 million more people on this planet every year and using current demand each one of those person going to use three kilograms of copper.

00:18:55 That's about six and a half pounds of copper. That's a lot of copper folks. 25 percent of those people go to bed in the dark, going to get up when the Sun comes up. They live in the dark. I've spent a significant amount of my exploration career in the third world without electricity. That's changing. Its changing mostly in Eastern Asia's where it's changing but most of the world's population without electricity or in Asia and sub-Saharan Africa. I don't think it's going to happen in Sub-Sahara Africa very soon but it certainly is happening in China and India and other parts of Eastern Asia.

00:19:33 3.4 percent annual demand since 1900. That's not going to annual demand growth I should say that's not going to change and demand growth is much greater than discovery and development. Remember we got to find a Bingham Canyon every year, every year. Junior companies speculations what are my criteria? A flagship property that's economic at $3.30 a pound? That's generally accepted figure for a new development build out, large high-grade sulfides or small copper oxides in geopolitical favorable jurisdictions.

00:20:14 For me that's North America, tight share structure with insider holdings and technical and experienced successful managers. Here's my compelling call on copper Trilogy Metals formerly Nova Copper an upper tier junior resource company in the Ambler mining district of Alaska. Two giant and high-grade deposits, the arctic VMS poly metallic dominated about 50 or 60 percent of metal value in copper and [inaudible 0:20:48] the sedimentary hosted copper cold off deposit.

00:20:53 When you're speculating in any stock you must beware of the frogs masquerading as princes. The company that's following me just happens to be my new pick on copper Rick Van Nieuwenhuyse is going to give a talk on Trilogy and this company is a prince in my opinion. I can be reached at this email address. We will have copies of my newest mercenary musing on Trilogy Copper at my booth and at Rick's booth immediate following his stock. Thank you very much.

00:21:29 Male: Thank you Vic.

00:21:30 Mickey Fulp: Thank you.