Copper is the missing ingredient of the energy transition

At 76, RICHARD ADKERSON is an elder statesman of the copper industry. For two decades he has been CEO of Freeport-McMoRan, one of the world’s biggest copper producers, valued at $55bn. He has seen it all, from short-term booms and busts to the China-led supercycle, and from industry fragmentation to consolidation. Freeport itself has pioneered some of the trends. In 2007, when it paid $26bn for Phelps Dodge, an Arizona-based company dating back to the Wild West days of the 19th century, it was the biggest mining transaction ever. It was also a masterstroke. Not so the company’s ill-fated diversification into oil and gas less than half a decade later, which he says was not his idea. That caused a near-death experience and had to be swiftly unwound after both energy and metal prices crashed in 2016.

Appropriately for a mining-industry executive, he has a gravelly voice, which he uses to conjecture about a potential copper crunch. The pressures of industrial development in the emerging world, as well as progressing electrification and decarbonisation as part of the energy transition, are likely to turbocharge demand for the red metal. S&P Global, a consultancy, expects copper consumption to double to 50m tonnes between now and 2035. Yet unless prices rise sharply, supply is unlikely to keep up. Besides new copper mines coming on stream in Mongolia and the Democratic Republic of Congo, such projects are thin on the ground, Mr Adkerson says. Concerns about the environment and indigenous rights make it harder to win approval for them. Moreover, in both Chile and Peru, which together produce nearly 40% of the world’s copper, mining is vulnerable to national politics.

As Mr Adkerson puts it, this is not a supply problem that money alone can solve. “There is just a scarcity of actionable investment opportunities in the world today,” he says. Wisely, he does not go as far as suggesting the world is running out of copper. Instead, he tells a story dating back to the days early in his career when he was a consultant to the oil industry. One of his friends was Matthew Simmons, a Texas-based investment banker famous for promoting the theory of “peak oil”, which posited that the world was running short of the stuff. And one of his clients was George Mitchell, who later gained fame as the father of the shale revolution that made a mockery of the peak-oil mantra. It was a salutary lesson, he chuckles. He always keeps one eye over his shoulder for a shale-oil equivalent in the copper business.

The comparison between the oil and copper businesses is useful. It helps illustrate the complexities of mining the metal. It also hints at how shortages may be overcome. Start with the differences between the two commodities. As Mr Adkerson explains, the technology for finding copper is not as effective as the seismic testing used to identify hydrocarbon reservoirs because copper deposits are spread over vast areas. Years of exploratory drilling are required. Moreover, a lot of oil exploration is done in the ocean, but as yet deep-sea mining is nascent and environmentally sensitive. Mr Adkerson notes that Lockheed Martin, an American armsmaker that had thrown its weight behind deep-sea mining, has just sold a subsidiary with licences to explore part of the Pacific Ocean. In effect, it is quitting the venture.

There are also stark differences in production. Not only is copper mining more concentrated by region than oil drilling. Whereas it takes years to go from licensing to operating an oil well, it can take a generation to develop a “greenfield” copper mine. The consolation prize is that copper mines do not deplete as quickly as oil wells. Some of Freeport’s mines date back more than 100 years.

Next consider the similarities. During the commodities supercycle up to the mid-2010s, both industries blew shareholders’ money on wildly overambitious projects, which landed them in the sin bin. Even as concerns about oil and copper supplies have mounted, investors have demanded shareholder payouts rather than risk equity on big capital projects. This has been exacerbated by pressure to reduce resource extraction from investors worried about environmental, social and governance (ESG) issues.

Yet the mood may be starting to shift. In the oil industry, high prices of crude have led companies like Shell and BP to rethink the pace at which they cut oil production. Similarly, copper miners are becoming bolder. In April BHP, a diversified mining giant, will put to shareholders of Oz Minerals its $6.4bn proposal to take over the Australian copper-miner. If approved, it will be its largest acquisition since 2011. Freeport says that it will raise capital expenditure this year to $5.2bn, up from $3.5bn in 2022, chiefly to expand underground development at its Indonesian mine, Grasberg. Mr Adkerson points out that some of this increase is a result of rising costs. But he also detects a new mood among investors. “Today, when I speak with our shareholders, they ask us where the growth is going to come from.”

Cu later

There are two possible answers. The first is to double down on “brownfield” sites where mines already exist. Freeport has 22m tonnes of copper reserves in America alone. It takes between six and ten years to develop such projects, and the current severe labour shortage could make it harder still. But it is more promising than starting from scratch. The second answer is technology. Mr Adkerson says Freeport has about 17m tonnes of residual copper left in its leaching processes. He hopes that new reagents, as well as new operating techniques using data analytics, will recover some of that in a way that is less costly than digging a new mine, emits less carbon and faces fewer regulatory hurdles.

The veteran miner doesn’t think this will have as impressive an impact on copper supply as the shale revolution did on oil. But he would say that. The greater the perceived scarcity, the higher the value of Freeport’s reserves, and the more his company is worth. You can almost hear him rubbing his hands at the prospect. ■

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