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China wavers - copper prices weaken

March 17, 2014

China consumes 44% of the world’s copper, but it has an even larger impact on the copper market in that the reddish metal is used as collateral in its shadow banking system. Since the start of the year copper has declined sharply, now trading at under $3.00/lb. 

A small solar firm last week missed an interest payment to investors—the first default of its kind for China—signaling a new willingness by Beijing to allow companies to fail as it works to reform the world’s second biggest economy. More defaults are expected to follow, and while experts say this will ultimately be healthy for China, it’s causing some market turmoil in the short term. 

Investors worry that a series of corporate failures could spark a collapse in a popular method of financing linked to copper. Chinese companies import copper to secure loans at low interest rates by using the metal as collateral. The borrowed money can then be used to fund business operations or even invest in higher yielding assets. This method has been popular with companies unable to secure traditional bank loans. As much as 80% of China’s incoming copper stocks over the last few years have been used to secure financing.

For northern miners lower copper prices are bad news. Capstone’s Minto Mine lost money in 2013. The ‘cash cost’ for production at this mine is somewhere between $2.45-2.55 per lb. but actual profitability is higher. The mine employs 350 people-Yukon’s largest mining operation. The decline in the copper price meant that Capstone recorded a net loss of $9 million for 2013 as compared to net earnings of $56 million in 2012. The loss at the Minto mine was $24 million in 2013.

Capstone decided that its development activities at its Kutcho, BC property were not significantly advanced in 2013 as the company focused on the acquisition of Pinto Valley. Kutcho’s production profile and mine life no longer fit within Capstone’s growth strategy, so the company will be looking at selling its Kutcho project.

Imperial Metals’ Red Chris mine is scheduled to start production this Spring. It has reserves of over 300 million tonnes of ore grading 0.359% copper and 0.274 g/t gold provide for a 28 year project life at a milling rate of 30,000 tonnes per day. The mine is is located 80 km south of Dease Lake. The cost of constructing the Red Chris mine is estimated to be $500 million. The 2012 Red Chris Feasibility Report indicates an after tax internal rate of return (IRR) of 15.7% at metal prices of US$2.20/lb copper and US$900/oz gold.


BC’s Red Chris mine will open at a time of weak copper prices. Hopefully, Capstone’s Minto mine can optimize its operations and continue its production.