Tuesday, July 6, 2010

Investors Guru Small Cap Stock Observer

BMO Predicts Tightening Copper Market

Buried in a recent, 84-page BMO Global Mining Research report is a prediction that the global copper supply will tighten over the next decade.

Although there are currently dozens of development projects in progress around the world, BMO cautions that “the majority of this capacity ‘potential’ is from 2013–2017, implying little short-term copper supply growth.”

Copper producers like Freeport-McMoran (NYSE:FCX), new miners like Copper Mountain (TSX:CUM) and exploration companies like Catalyst Copper (TSXV:CCY) should all benefit from this bullish outlook on Copper markets.

According to the BMO report, the risk of oversupply for copper is low. New copper development projects will be offset by mine closures and declining grades.

An annual 3% copper market growth rate combined with the diminishing capacity of existing mines would require dozens of new mid-tier mines to be delivered to satisfy future demand. The BMO analysis highlights the potential for copper supply disruptions, higher prices and increased volatility.

The Australian Resources Super Profit Tax (RSPT) is likely to slow down the development of domestic copper projects in Australia. Many investors are steering clear of Australia until the full economic impact of the new tax is calculated.

Xstrata (LSE:XTA) said it will stop development of its $600 million Ernest Henry underground copper project. Rio Tinto (NYSE:RTP) is also reviewing its Australian projects.

According to the report, “potentially, the global ‘tax rush’ could impact projects outside of Australia. Any significant changes to taxes in the South America region, which represents a large proportion of global growth, could have a large impact on copper output.”

Rising copper prices are not likely to cause significant demand destruction. Everything electrical requires copper. A new car is outfitted with 3 miles of copper wire totalling about 43 lbs. An average new home contains 400 lbs of copper. Alternative energy sources, like wind and solar - all require massive amounts of copper to transmit the generated electricity.

Copper is a globally entrenched product: a 25% reduction in U.S. housing starts will cause only about a 3% shrinkage in the global copper market.

There are many ways to invest in copper.

FCX is a $31 billion mining mammoth with recoverable proven and probable reserves totalling 104.2 billion pounds of copper. They are also diversified into gold, molybdenum, silver and cobalt deposits. Like a tall hybrid fruit tree, their growth rate is likely to be modest.

Copper Mountain (TSX:CUM) is developing an open pit mine in Princeton, British Columbia, to produce a yearly 100 million plus pounds of copper by June 2011. Mitsubishi purchased a 25% interest in Copper Mountain for $28.75 million and have arranged the $250 million required to debt finance the project. CUM soared 300% in the last 12 months, but has recently pulled back 30% to $2.39.

It is estimated that Mexico hosts a quarter of a trillion dollars worth of copper. At the current rate of production it would take 152 years to mine their inferred resources. Mexico has a sophisticated mining culture with a history of creating equitable deals between indigenous groups and foreign exploration companies.

Catalyst Copper (TSXV:CCY) is a Canadian resource company with a big copper asset in Mexico. It is managed by John Greenslade and Terry Hodson who were drivers of the team that developed the Boleo copper-cobalt deposit in Mexico.

Greenslade and Hodson are proven copper men – strong on the geology side - and a reputation for expert stick-handling through environmental regulatory processes and community relations.

In the last couple of weeks, Falcon Drilling has commenced the 2010 CCY exploration program by mobilizing two diamond drill rigs at the La Verde property, located in Michoacan State, Mexico.

Porphyry copper mineralization at La Verde has been explored since the 1970s, resulting in the discovery of two mineralized copper zones: East Hill and West Hill.

Catalyst has optioned the 17,000 hectare La Verde copper porphyry target in Mexico from a subsidiary of Teck Resources (NYSE:TCK). La Verde copper is situated in the Sierra Madre del Sur approximately 320 kilometres west of Mexico City.

The company is also backed by the Endeavour Financial group, who have created some of the top performing junior mining stocks of the last 10 years.

Initial drill targets include confirmation holes across the known mineralization as part of the technical support required to bring the property into NI 43-101 compliance, as well as the commencement of drilling previously untested IP targets.

La Verde has an exposed porphyry system amenable to open pit mining — a cheap way to get metal out of the ground. The project is located in an area with a pre-existing infrastructure: 150 km to coast with water, power and rail all nearby.

Catalyst can earn a 60% interest in the La Verde project by advancing US$6 million (paid) to a subsidiary of Teck Resources and incurring aggregate exploration expenditures of US$10 million by December 31, 2012.

Catalyst is currently trading at $0.11 with average daily volume of around 800,000 and a market cap of $24 million. The La Verde copper property is close to rail and power. And it’s sitting in the middle of a politically stable, rich copper-producing region.

At this price and with a drilling program already underway, CCY surely presents an interesting investment opportunity.

Investors Guru Small Cap Stock Observer publishes interesting articles by contributing writers, in addition to its own content. This article was written by Peter Cole and we have not verified its details.

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