Kevin Puil thinks analysts need to be realistic when it comes to
copper. The Malcolm Gissen & Associates portfolio manager
points to copper's historic levels at over $3/lb as proof that
there are brighter times ahead for base metals as economies around
the world continue to industrialize. On the other hand, with
economic projects less abundant than they once were, supply is
under severe pressure. The good news is, as Puil remarks in this
interview, there's money to be made for investors who can pinpoint
the right projects. Read on to learn who's on Puil's list.
The Metals Report:
Kevin, base metals analysts from London to Sydney to Toronto are
increasing their price outlook for copper. Do you agree with their
bullish outlook for 2013?
Yes, I absolutely agree with their bullish outlook. In fact, I've
been bullish on copper for quite some time. Although there have
been many analysts purporting that the commodities cycle has run
its course, I disagree. The fundamentals for copper remain highly
favorable and I continue to see secular demand for most
commodities, copper in particular. Industrialization and
urbanization, especially in the BRIC [Brazil, Russia, India, China]
countries, is not about to stop, and this continues to put pressure
on copper miners, who struggle to keep up with demand. Supply
growth has slowed due to lower grades, higher costs and political
unrest. In addition, the new projects and mine expansions that were
scheduled to come on-line haven't materialized, and if they do, it
will not be in a timely fashion.
Quite frankly, I think you could see copper peak above $4 a
pound [$4/lb] this year, and $3.75 is reasonable for an average.
It's interesting to look back at the five-year average for copper.
Even though a lot of analysts are using ~$2.75/lb as their
long-term outlook, copper has only broken below $3/lb for that
brief amount of time during the financial crisis. The rest of the
time, it's been well above $3/lb. I think it's about time they
brought the price up to a more realistic level.
What particular jurisdictions do you see as having advantages in
moving projects forward to alleviate some of the supply
A lot of the traditional copper-producing countries and
jurisdictions are becoming less mining friendly, be it from
governments wanting a larger stake, such as Mongolia, or
scalability not being achievable because of inadequate power
supply, such as in Chile. Many producers are looking toward more
mining-friendly, politically stable places. In the U.S., Arizona
comes to mind. It's a politically stable place to mine with
extensive infrastructure close to many of the deposits. In fact,
it's an excellent operating jurisdiction, with great
infrastructure, labor and neighboring operations including smelters
with excess capacity. I think you're going to see a lot more
activity out of Arizona.
What are some names that you're following in Arizona?
A number of operating companies are based there, but I tend to look
upstream to the advanced development companies. My top junior pick
is probably Redhawk Resources Inc. (RHWKF.PK), a very under
followed company. Redhawk controls the Copper Creek deposit, which
is just north of Tucson. It couldn't be located in a better
jurisdiction with better infrastructure all around it. The deposit
currently contains close to 8 billion pounds of copper, including
Measured, Indicated and Inferred, although ultimately I think it's
going to end up being quite a bit larger. It's largely overlooked
by most sell-side analysts because I don't think they understand
the geology. I won't go into detail, but it's not your ordinary
porphyry system. It's an early halo-type porphyry deposit with the
dominant copper-bearing veins being of the early dark micaceous or
EDM veins, rather than the quartz stockwork veins, which are more
common in porphyries. A good example of this type of deposit is
also found in Butte, Montana. I believe this system is a lot bigger
than is currently being modeled, and I'd be surprised if the
company remains independent much longer. I'm looking forward to its
preliminary economic assessment [PEA] later this quarter, and would
expect a little pin-action on the heels of it.
Redhawk recently chose to develop Copper Creek, which is its
flagship project, as an underground mine. Can you help investors
understand that decision?
I believe the company went with the underground scenario because
it's a lower-cost method in terms of the initial capex-cheaper than
implementing an open-pit operation. In the current climate of
multibillion-dollar projects, I would think this makes the project
look a more attractive as a takeover target to an intermediate
miner. As I said, I'm looking forward to its PEA, which should be
out sometime this quarter. In the mining world, there are a lot of
eyes on this project. My model suggests some pretty robust
economics even with an underground situation, and I'm looking
forward to the economic assessment to confirm this.
Who would be the potential suitors?
Well, with the available number of good projects in good
jurisdictions shrinking, I think there are a number of potential
suitors. Larger companies such as Freeport-McMoRan Copper &
Gold Inc. (
) and BHP Billiton Ltd. (
), which used to operate a mine directly across the highway from
Redhawk, might have their eyes on this. However, I wouldn't be
surprised to see the likes of, say, Teck Resources Ltd. (
), KGHM Polish Copper Ltd. (KGHPF.PK), Anglo American Plc (AAUK),
Imperial Metals Corp. (IPMLF.PK) or Grupo Mexico make a move. It's
really wide open; I think the potential project size will also be a
Any other Arizona players on your radar?
Another Arizona player is Augusta Resource Corp. (
The Arizona Department of Environmental Quality just awarded an Air
Quality Permit for Augusta's Rosemont Copper project. What does
that mean for investors?
Well, first off, Augusta's had a difficult run in Pima County. It
experienced a lot of opposition to the project and permitting has
been an issue, so this permit is a major step. It's not the final
go-ahead permit, but it's a major hurdle that it has now overcome.
I believe it still needs the final Environmental Impact Statement
[EIS] as well as the water quality permit, but this news just
represents another signal that the Rosemont project should be fully
permitted in due course. It's a big copper-molybdenum porphyry
deposit. It should have very robust numbers, and it is construction
ready. I could see this in production in perhaps H2/15. It has good
infrastructure, good economics and with this permit in hand, I
could see it beginning construction as early as later this
Augusta recently expanded a loan. Tell us about the cash and debt
I'm not that concerned about the additional debt. It's an extension
of the Red Kite facility, and a project this large is ultimately
going to require a lot of financing regardless-I'd rather see some
offtake agreements and debt rather than additional equity raises.
It doesn't need to expand the resource anymore, so I'm okay with
its cash situation. Not to mention, it also has KORES as a partner,
which by the way, might present a bit of a wrinkle for potential
suitors, although I could still see a company like Grupo Mexico
taking a hard look at Rosemont.
What are some other copper-focused names you're following and that
Panoro Minerals Ltd. (POROF.PK) is an exploration and development
company operating in Peru. It's got a great portfolio of about a
dozen properties that include copper, gold and polymetallic
deposits. Its two flagships, Cotabambas, a high-grade, gold-rich
copper porphyry-style deposit, and Antilla, a copper-molybdenum
porphyry, both have the potential to become large mines. They're
located in a prolific copper- and gold-producing area, with majors
such as Xstrata Plc (XRAF.PK), HudBay Minerals Inc. (
) and First Quantum Minerals Ltd. (FQVLF.PK) operating in the
neighborhood. Panoro has experienced management and a well-funded
operation. PEAs on both those properties are expected this year, so
I'm watching those closely. In addition, the local population is
supportive of mining, and with operations nearby, I don't expect
any problems with permitting. Both these projects also have good
infrastructure nearby, something that is becoming more important
these days. This is one that I would absolutely keep my eye on.
I love seeing these porphyry systems for a number of reasons.
First, the byproduct helps keep cash costs under control, but these
large copper-gold porphyries are also definitely in vogue as
acquisitions. They're attracting other types of companies, more
diversified miners or even gold miners, that wouldn't normally look
at a pure copper play.
What is another copper name the Encompass Fund is following?
In terms of producers, we've got a position in Teck Resources. It's
the largest diversified miner in Canada with a focus on copper, met
coal and zinc. It has great exposure to high-quality, large-scale,
low-cost production. That's what we love to see. In addition, it's
got a fantastic pipeline of low-risk projects, not to mention a
strong balance sheet. It was touch and go at the end of '08, when
equities were plummeting across the board, and there was concern
that Teck had bitten off more than it could chew, but it has since
come back and management has proven that it has the goods. That
remains a core holding of ours.
The World Economic Forum in Davos, Switzerland just named Teck one
of the 100 Most Sustainable Corporations in the world. How do you
view this development?
I think that's great. More eyes are now on a lot of these mining
companies and some of the practices they've had in the past. And we
look for that kind of responsibility in a company. We certainly
don't want to get involved with a company that may be, for example,
exploiting the indigenous people or destroying the environment
beyond what is necessary to extract the minerals. Teck has really
done well in terms of responsible resource development and
considering the community and the environment. From my travels and
my site visits, I've definitely seen an improvement over the last
10 years and I think a lot of that has to do with investors
pressuring companies, which is good to see.
What are some other copper-focused names you're watching?
I also like Lundin Mining Corp. (LUNCF.PK). It's an intermediate
producer with operations in Portugal, Spain, Ireland and Sweden, as
well as an interest in the Democratic Republic of Congo. It's a
very good copper and zinc name. Although Lundin's copper production
looks relatively flat over the next year or so, I could see an
expansion at the Tenke Fungurume mine increasing production quite
significantly. I expect its zinc production to increase by as much
as 50% year over year as well. It has a strong balance sheet, and I
could see it as a potential takeover target-again.
There was a deal with HudBay at one point, right?
Yes. That was back when Lundin's balance sheet wasn't quite as
strong as it is now, but ultimately I think it was the HudBay
shareholders who felt it wasn't a good deal.
What's your outlook for zinc, considering that some analysts think
that the percentage growth in price would be even larger than
copper's percentage growth this year?
Zinc looks good for the next couple of years. There are a lot of
mine shutdowns and structural issues in the mining industry that
are supporting an upward shift in zinc's price. I believe there's
something in the order of 2 million tons of zinc production that
will be lost over the next few years as a result of shutdowns;
that's about 15% of the global supply. Added pressure from capital
cost escalation, resource nationalization and deposit depletion
also suggests some pretty strong fundamentals ahead for zinc.
In summary, what are your parting thoughts on copper and zinc?
To sum things up, the commodities super cycle is still intact.
There's just a scarcity of supply as capital cost inflation and
declining grades persist. Mines are underperforming, and that will
continue. In addition, there just aren't that many large projects
like Oyu Tolgoi or Olympic Dam on the horizon. The low-hanging
fruit has already been found and it's getting more expensive and
more difficult to find the new projects. Governments are impacting
development with more stringent permitting and increased tax
burdens. This is affecting cost and delaying supply growth out
there. At the same time, industrialization in emerging markets is
running at a very high rate, leading to more demand for these
commodities. In a sense, everything we touch in this world came
from the ground, be it from agriculture, mining or energy, and as
the world progresses, we're going to need more and more of these
commodities and they're not that easy to find. But all of these
factors bode well for investors, and there's definitely an
opportunity here for investors if they pick the right
Thank you for joining us today, Kevin.
This interview was conducted by Brian Sylvester of
The Metals Report
and can be read in its entirety
, or on our
has more than 15 years' experience in the investment management
business. He is a portfolio manager at Malcolm Gissen &
Associates and the senior analyst at the Encompass Fund in San
Francisco. He spent the majority of his career working in Canada,
before relocating to California. He studied economics at the
University of Victoria and the University of British Columbia,
and is a Chartered Financial Analyst.
1) Brian Sylvester of
The Metals Report
conducted this interview. He personally and/or his family own
shares of the following companies mentioned in this interview:
2) The following companies mentioned in the interview are sponsors
The Metals Report:
None. Interviews are edited for clarity.
3) Kevin Puil: I personally and/or my family own shares of the
following companies mentioned in this interview: Redhawk Resources
Inc. and Teck Resources Ltd. I personally and/or my family am paid
by the following companies mentioned in this interview: None. I was
not paid by Streetwise Reports for participating in this
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours. I wrote this
article myself, and it expresses my own opinions. I am not
receiving compensation for it. I have no business relationship with
any company whose stock is mentioned in this article.
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