Tapping the demand for copper

17 March 2010

The region has huge potential for copper mining, with Saudi Arabia becoming the latest country to show growth in the market

Saudi Arabia is emerging as the Middle East’s fastest-growing copper market, with three new copper mines in the kingdom set to start commercial production by the end of 2011.

Although world copper consumption fell by 16 per cent to 3.4 million tonnes in 2009 as a result of the economic crisis, the UK analytical firm Commodities Research Group forecasts healthy long-term demand for the metal. The group predicts demand for copper will rebound this year by 8 per cent to reach 3.7 million tonnes.

Copper prices, which had fallen on the back of weaker demand, are also expected to strengthen in the months ahead, as demand recovers and production cuts affect the balance of supply and demand.

Copper prices averaged $5,164 a tonne in 2009, 26 per cent lower than the 2008 average of $6,952 a tonne. But French investment bank Natixis forecasts that copper prices will average $7,885 a tonne in 2010, rising further to $8,476 a tonne in 2011. At the beginning of March, levels stood at about $7,500 a tonne.

Key fact: The Al-Masane project aims to open with copper concentrate production levels of 16,264 tonnes a year in 2011

Source: MEED

Capital costs

The largest project under way in the kingdom is the Jabal Sayid copper and gold project, which is being developed by the Bariq Mining joint venture company, which includes Australian miner Citadel Resources Group.

The project is on schedule to begin production of 235,000 tonnes a year (t/y) of concentrate by mid-2011. Citadel is currently mobilising underground mining teams and placing orders for long-lead items.

It’s difficult to get a mining investment act that is better than Saudi Arabia’s

Ines Scotland, Citadel Resources Group

The Jabal Sayid mine, located 350-kilometres northeast of Jeddah, has ore reserves of about 24.4 million tonnes with about 2.2 per cent copper. The project will produce 57,000 t/y of copper in concentrate.

The group says the project has one of the lowest capital investment costs per tonne of copper produced. “We engineered the project to be effective at $1.60 a pound [$3,555 a tonne] of copper so anything over $2 a pound is a great return for us,” says Ines Scotland, chief executive officer of Citadel.

“As long as we continue with copper prices averaging around the $3 a pound mark we will be happy and anything over that, we’d be extremely happy.”

Strong copper prices are needed to make the sizable investment requirements for copper mining projects feasible. The estimated capital investment cost in the Jabal Sayid project is $280m. So far, Bariq Mining has spent $35m.

“The capital costs to complete development will be $280m and then there is the ongoing capital and operating costs, so each year we will be spending about $140-160m in operating and capital costs to keep the project going,” says Scotland.

A project finance debt facility of about $160m is being arranged, representing a debt equity ratio of 60:40. The joint lead arrangers for the project financing are the local Riyad Bank and Germany’s WestLB, and they are expected to be joined by a small group of Saudi and international banks. “It’s a great opportunity for the local banks to diversify their loan books and also start to get exposure to and expertise in the mining industry,” says Scotland.

The second privately backed Saudi copper mine due to start up in 2011 is the Al-Masane project located about 640km southeast of Jeddah, which is being developed by the Saudi-US Al-Masane Al-Kobra Mining Company. The feasibility of the project has been based on an $2.35 a pound average copper price.

The Al-Masane project aims to open with production levels of 16,264 t/y of copper concentrate in 2011, rising to 35,235 t/y within two years. The scheme has had a long gestation period; mining activities ceased at Masane some 1,300 years ago, before the deposits were rediscovered in 1967 during aerial reconnaissance by Hatem el-Khalidi, president of the US-based Arabian Shield Development Company, which was awarded a 30-year mining permit in 1993.

The company formed Al-Kobra with eight Saudi investors in January 2008. Alongside the copper, it will produce 58,000 t/y of zinc concentrate, 7,650 ounces of gold and 375,000 ounces of silver. Al-Masane’s copper concentrate will be trucked to the Red Sea port of Jizan for export or treated locally at a refining plant in Jeddah.

The project’s economics have been improved by the development of new technology to boost metal recovery rates. The use of semi-autogenous grinding, which uses coarse ore particles to grind down finer particles to reduce the capital cost of the grinding section, coupled with improvements in metal recovery, is thought to hold the greatest potential for improving the economics of the project.

Besides favourable pricing trends and capital-cost reducing technologies, a prime reason why foreign mining groups are targeting Saudi Arabia’s untapped copper resources is the advent of a new investor-friendly mining code approved in October 2004.

“It’s difficult to get a mining investment act that is better than Saudi Arabia’s. For example, I don’t know of any other country that doesn’t require a mineral royalty,” says Scotland.

Major exports

Neighbouring Oman, where copper ore is mined at Lasail in the east of the country, overhauled its mining legislation in 2003, three years before the privately owned National Mining Company began production of copper. Copper has quickly emerged as a big export earner for the sultanate. The country earned RO25.3m ($65.8m) from copper exports in 2008, an increase of 6.7 per cent on RO23.7m in 2007, based on annual production of 39,800 tonnes for the year. 

National Mining Company, renamed Mawarid Mining at the start of 2010, operates several open-pit copper mines and processes ore at its copper concentrate facility in the Al-Batinah region. The company claims copper reserves of about 4.3m tonnes at 2.2 per cent copper and resources of 21.6m tonnes at 1.8 per cent copper.  It also owns and operates the Lasail copper concentrator, located 35 kilometres from Sohar.

In Yemen, geological surveys have identified prospects for gold, copper, iron and zinc. But authorities in the capital Sana’a have yet to tap this resource base significantly, although some foreign miners are exploring for copper. Canada’s Cantex Mine Development Corporation has completed an 11-hole drilling programme at the Wadi Qutabah prospect and started a 17-hole drill programme at the Suwar project in 2007. Cantex plans to complete a pre-feasibility study of the Suwar nickel, copper and cobalt project by mid-2010.

The Arabian Shield geological formation provides the minerals wealth in the Arabian peninsula, but it is dwarfed by copper deposits found in Iran.

The Islamic Republic’s main copper reserves – which are pure copper and not copper/gold formations as in the Arabian peninsula – are based in Kerman Province, in the southeast of the country, and in Azerbaijan province in the north, forming a copper belt that stretches across Iran.

National Iranian Copper Industries Company (Nicico) estimates Iran’s copper reserves at 1.9 billion tonnes of ore, with 14 million tonnes of copper content. This represents 3 per cent of the world’s copper reserves and ranks the country 17th in the world’s copper league table. 

The Sarcheshmeh and Miduk mines in Kerman province and the Sunegoon mine in eastern Azerbaijan province are three of the most productive of Iran’s copper mines. But the country’s copper output falls far short of its potential, with its share of global production at an estimated 1 per cent, compared to its 3 per cent reserves.

Iran is, however, trying to redress this balance with a sustained expansion programme. Current copper production stands at 200,000 t/y, but output is scheduled to hit 400,000 t/y by the end of its fourth Five-Year plan in 2010.

Nicoco says it has been making significant progress towards reaching this target, announcing a 60 per cent increase in exports of copper in the first eight months period of the Iranian calendar year (ending 21 November 2009) to 315,706 tonnes, earning $688.2m in revenue – equivalent to a 15 per cent year-on-year increase.

Exploration efforts are also continuing. The largest mine, Sarcheshmeh, is known to be in a prospective province, though most of the exposed ore bodies have already been discovered. “There might be some other buried deposits under cover,” says Allan McCracken, principal geologist at the UK’s SRK Consultants. “There is good prospectivity there, with a number of deposits identified, but that needs to be drilled up to find out what the potential is. Sunegoon is another big operation, though it has been in development for an awfully long time and needs to come to fruition.”

Nicico is deploying some new techniques, looking for different styles of mineralisation. As well as the potential for significant-sized copper deposits, there is potential for smaller types of mineralisation towards the border with Armenia.

The company says it is spending $1.6bn on a second-phase expansion of its copper production capacity, which is due for completion by the end of 2010. This will include the second phase of Sarcheshmeh concentrator expansion, a second phase at Sunegoon, the expansion of the Khatoon Abad copper flash smelter and the installation of a new copper refinery at Sarcheshmeh.

The international sanctions imposed on the Iranian regime have not denied Nicico access to new technologies. In September 2009, it signed a contract with Finland’s Outotec, ordering engineering works and converter hoods for its Sarchashmeh copper smelter. A second order included basic engineering to expand the capacity of the Kahtoon Abad smelter from 80,000 t/y to 200,000 t/y, with full compliance with the latest environmental standards and lower operating costs than other smelting methods. Nicico claims to be the first Middle Eastern firm to use flash smelting and converting technology.

Iran’s challenge is not so much economic sanctions as an uninviting investment climate. “It’s the difficulty of putting realistic contracts together and getting paid,” says McCracken. “The economics would be a lot better if Iran could mine economically. But they look upon the mineral sector really in terms of job creation. That’s one reason why it’s taken so long for certain projects to get going. In mining operations, you will employ four times as many people on the project as on the operations,” says McCrakcen.

Neighbouring Iraq is also considered a potential copper mining area. The Kurdish Regional Government region claims substantial reserves of copper, which has attracted the attention of Australian mining giant Rio Tinto, though firm plans to develop the reserves have yet to be unveiled.

For other Middle Eastern copper-rich countries looking to capture the hidden value of their copper reserves, there are clear lessons to be learned from Iran’s experience.

The economics would be better if Iran could mine economically. They look at the sector in terms of job creation

Allan McCracken, SRK Consultants

Saudi Arabia looks well prepared for its 2011 launch into copper mining production; it boasts a strong infrastructure and a developed construction sector that could emerge as a significant demand centre. As yet, however, the kingdom lacks the downstream facilities to turn the concentrate into produced copper. This may change. National Industrialisation Company (Tasnee)
 has commissioned a pre-feasibility study on building an integrated copper, lead and zinc smelter at Yanbu, which would process 100,000 t/y of copper and similar amounts of zinc and lead.

“We’d really love that as it would make it a simple trucking exercise rather than trucking and shipping,” says Citadel’s Scotland. “But there is good smelting capacity in the region. India is only eight sailing days away from [Saudi Arabia] and is oversupplied with smelting capacity at the moment. European smelters, which are 12 days away, are also under supplied [with raw materials] – so there’s plenty of places that the concentrate could go.”

Exploration spending

Downstream investment, combined with the strong investment climate, and communications and infrastructure facilities, would help transform Saudi Arabia into a leading copper producer.

“Even though we like the geology in other countries such as Egypt, Sudan and Ethiopia and all through the Arabian Shield area, Saudi Arabia has definitely got the better infrastructure – fully developed roads and ports, a great banking system, along with a good investment act – so it’s hard to put a business case as to why you’d work anywhere else,” says Scotland.

But increased exploration spending will be needed to realise the potential the region’s copper reserves in full. “In the past 40 years there’s been less expenditure in the Arabian Shield than in one year in the Canadian Shield,” says Scotland.  “You only find deposits by drilling holes and spending money in the ground. And from the amount of money that has been spent today there have been some great discoveries.”

The ultimate prize is a growing global and regional market for copper. It may lack the glamour of gold, but copper is primed to win new markets as the metal that connects the world’s communications infrastructure. For the Middle East’s aspiring copper producers will need to invest more to capture a share of that lucrative market.

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