Copperbank Resource Corp (CNSX:CBK) Executive Chairman on Inevitability of Copper Price Rise
Copperbank Resource Corp (CNSX:CBK) (OTCMKTS:CPPKF) (FRA:9CP) Executive Chairman Gianni Kovacevic tells the story of energy and the market place, from the first discovery of oil in Texas at Spindletop in 1901, to the surge in Chinese oil usage in the 2000s. Kovacevic points out that oil and copper have typically had a 90 percent correlation but suggests that with copper’s falling grades and a lack of new discoveries, the metal will separate from oil. He predicts copper will need to get to the $5-$6 range as a result of the copper deficit and notes that 45 percent of the world’s primary copper comes from Peru and Chile. In anticipation of this inevitable surge, Copperbank’s portfolio is heavily invested in the copper market.
James West: My guest now is Gianni Kovacevic, author of My Electrician Drives a Porsche and he’s the executive chairman of Copperbank. Gianni, welcome back.
Gianni Kovacevic: So nice to be back here. We were very busy today up at the Empire Club, the economic outlook for 2019.
James West: Wasn’t that great? I thought it was fantastic, because Pierre was like completely bullish saying that we’re on the cusp of a new secular bull market, and then David Rosenberg gets up there and says ‘No we’re not, we’re in a recession and it’s going to get worse!’
Gianni Kovacevic: Exactly, and I’m talking about the hinge of history that’s taking place in the global energy mix. Nothing you can trade on in one day there, but if you understand that fundamentally from a historical perspective, which is what I did today – I was gleaning sort of some of the data that was there. And as I say, it was hiding in plain sight.
James West: Sure. So that has been your theme for growing on three years, and the problem, I know, of sort of being a visionary of the longer term is that it can take a while for reality to prove you right, and in the meantime, everybody says, I don’t know what this guy’s talking about; it hasn’t happened yet.
But I understand it innately what you’re saying, because there are several sort of financial constructs that are all ultimately flipping over into a new mode now.
So elaborate for a moment, if you will – I mean, I remember our conversations of three times over the last three years, but probably the audience doesn’t. so elaborate, if you will, on that concept.
Gianni Kovacevic: Let’s tell a series of vignettes, and I’ll start with a piece of Ben Graham wisdom and I’ll end with a piece of Ben Graham wisdom. So the first one is, markets in the short term are voting machines. And that’s what we have. And then in the long run, of course, they’re weighing machines; the real value comes out.
So I told the story of the hinge of history in the global energy mix, and you’ve got to go back to the most important date in the history of energy, which was the discovery of oil in Texas at Spindletop on January 10, 1901. I think your listeners don’t want to be promoted, so let me tell you some stories. We’re not going to sit here and talk geology, but what I want to do is romanticize this history so it resonates. If you’re a 12 year old schoolgirl or a retired petroleum engineer, this should matter. And so why is that date the last tinge of history?
Thomas Edison would invent the light bulb in October of 1879, and his patron was Jean-Pierre Pont Morgan, and I don’t think that the king of oil at the time, John D. Rockefeller, really cared; because the oil was Luminant of the economy, but not the actual – we didn’t get, we’re still in the animal age, we weren’t in the age of motorization yet.
About two years later, he finally throws a party, JP Morgan, and he invites the who’s who of New York, 400 people come to his house – this is about 1882, he’s about 44 at the time, and all the important people of finance and society, and Thomas Edison: welcome to the age of electricity. They all leave, and his father of the famed Morgan Bank looks at his son and says How can you possibly embarrass yourself in front of all those important people? He thought it was a circus trick.
He says, what are you doing?
Twenty years before that, it was whale oil that was the lubricant and the illuminant of the American economy, and when they find oil in Titusville, Pennsylvania, next thing you know, they start refining it, and in that process, you would throw the gasoline away and they would work their way to the kerosene.
Next thing you know, in the late 1890s, all of a sudden, electricity was a big deal. Then Nicola Tesla invents the A/C induction motor, so that would be one of the workforces as we went from the animal age to the motor age. So I come back to that date: all of a sudden, this guy, this Croatian immigrant, Anton Lucic, he renamed himself Anthony Lucas of Lucas oil, he finds Spindletop. Oh no, now what? The first airplane doesn’t fly until December ’03; the assembly line, the first part of Henry Ford’s assembly line, doesn’t start working till October of ’08.
They needed something new, something to take the demand of this gasoline; of course, it was the internal combustion engine. But this date is also important for another reason: 12 days later, on January 22nd of 1901, Queen Victoria dies. The grandmother of Europe, she ran the British Empire for 63 years. She gave birth to 9 children and they married through the royal families of all Europe, and on that day, she dies in the arms of her grandson, the German Kaiser Wilhelm the 2nd.
This is totally forgotten to history.
James West: The seeds of World War I are born!
Gianni Kovacevic: Exactly. So by the time you get to 1910, all of a sudden, commodities are so important, the Industrial Age is in our midst, it’s taken flight. We are now in the motor age, and in Europe, the 66 million people of the reunified Germany – and there’s 33 million people in England – Germany, so powerful as an industrial nation, they would generate and utilize more electricity than Italy, France and England combined.
By 1914, if you did not have the commodities to grow, you were stuck. How could it be that the most powerful industrial nation, because they did not have the naval fleets that colonized the world, and then was the cousins went to war. War, you could say it was the haves versus the have-nots. Germany, Austro-Hungary, of course the Ottoman Empire did have access to commodities, an they went to war. Czar Nicholas of Russia, King George of England, and Kaiser Wilhelm.
Fast-forward 100 years, up and down commodity cycles boom, bust. The Economist Magazine, on March 6th of 1999: Drowning in Oil. And their prognostication was, oil was about $11 or $12 a barrel. They thought, they even prognosticated that it would go to $5, and the logic was that Saudi Arabia could produce a barrel of oil for less than $2, it was a marginal producer. But they forgot about one thing: all their models, all their analysts, all their figures, all their calculations are wrong. They were totally wrong, James, why? Because it was all based on the OECD: A few countries in the West plus Japan, but they forgot about the dragon, the 1.3 billion people of China.
And at that time, in 2000, you could recall, remember how it was as they say lower than a snake’s belly in a wagon wheel rut in the commodity trade, but then slowly, slowly, China goes from a $1.5 trillion output, today $13 trillion. Nobody saw that coming.
So then if you have a graph, and I shared this with your friends, if your correlate copper to oil, over that run from 2000, 90 percent of the time, 90 percent of the time, copper is directly correlated to oil. But that has broken down, and that will break down, because when you have energy without fossil fuels that is only possible through the magnificence of the electrification, and that electrification is enabled through copper. Only 19 percent of final energy usage today is electrification. It was the same 10, 20, 30 years ago, because energy has grown roughly 2 percent; but now, now we pivot. In the next 30 years, approximately 50 percent of final energy is going to be electrification, so it’s logical, because the kegger growth rate from copper for the last 20 years has been 3, 3.5 percent. I think it’s going to be more, it has to be. You have three times more electrification coming.
James West: Sure, and that’s just China.
Gianni Kovacevic: The world, that’s global.
James West: Oh, okay, that’s global.
Gianni Kovacevic: And then the kegger growth rate for oil, all these prognosticators, they’re arguing about 1 percent growth. Well, the real question now is, when do we have terminal decline? It’s no longer 2040; maybe it’s 2030, maybe it’s 2025. I don’t care. It’s not a growth business from a demand perspective. So copper will grow at about 4 or 5 percent, oil is going to grow at 1 percent and then be muted and then start to go in decline, but then where does it come from? There’s been a renaissance in the way we extract oil. So if you take a cubic square kilometer of rock, and you go to a lot of formations that were already drilled before, we now do it horizontally as far as two miles, 20 or 30 directions, and they frack it. So the effort to get the hydrocarbon out of that square kilometre, and the pay, the value of it, has changed.
They reinvented the wheel, James, with hydraulic horizontal fracking. The same cannot be said with mining. We had the golden era of copper exploration was after Pinochet reinstated the market economy and you have a euphoria. Peru, Chile, we also went back to the Central Africa, we went to other places around the world. In fact, our industry invested $100 billion during the China super-cycle; but they didn’t find anything. Nine world-class discoveries. Look at the discoveries to the previous decades to now. We invested $100 billion.
So now, the grades have fallen. Because copper prices were dramatically higher, as they were with oil and all the other commodities, we were able to put a lot of that lower and lower grades. Global output in 2010 of the 15 largest producers was 1.2 percent copper. Now we’re running at 0.7, 0.69, and the future is 0.5 and 0.4.
So if you take the same cubic square kilometre of rock, it’s a big deal, when it used to be 1.2 percent and now it’s 0.7 and the future is 0.5. There’s only one way to alleviate that, James.
James West: Higher prices.
Gianni Kovacevic: It’s based on engineering, not hyperbole. So if you go back to that chart, we need to make that ore worth about $40 a tonne. So that tell me, as an engineer, it has to be worth $10,000 to $12,000 to correlate to a 0.4 percent grade at 4,000 meters in the Andes and all the infrastructure that we require.
So that’s telling us that this line, the copper line, has to go beyond its old all-time high and probably somewhere in the $5, $6 figure area. Now, how can that – it’s already breaking down. I don’t see oil going to $160. So either in the short run, politics, which farmers also say, more important than the weather, politics. In the oil business, politics is more important than fundamentals, because we have size or seven countries or sovereigns, including many companies, if they don’ have 100 years of reserves they have pretty close to it, or 50, 60 years.
In the copper trade, at this copper price, we have 20 years of reserves; that’s it. So think of this: you’ve got kegger growth rate, every time we de-carbonize energy it goes into something that’s electrified and it requires a magnitude more copper. Meanwhile, the product, you’ve had a renaissance in the way that it’s extracted and you have many places that have more than 50 years of reserves, and they still talk about our previous reliance on Middle East oil. 20 percent of our global supply comes from the Middle East. Wait till they find out that 45 percent of primary copper comes from two countries: Peru and Chile.
That’s the long way around of explaining that we are at a hinge of history and people are still playing by the old rule book. Yes, it’s important, the global growth in China and all these things, because copper still is a PhD to the economy. But like commodities in 2001, ’02, ’03, the invisible hand was the Chinese economy and emerging markets; the invisible hand that’s pervasive around the world, from the smallest village in Africa to right here in Toronto, three, four, five times more copper per megawatt of application. Every time you pass an electric bus, the electric car, when you see an offshore wind park, just think to yourself, this takes 10 times more copper for each one megawatt that is constructed. And they’re building these things in the gigawatt scale – tens of gigawatts.
James West: So you’re bullish on copper? [laughter]
Gianni Kovacevic: I’m bullish on this trend, which is a hinge of history. So what do I do, like Ben Graham, to finish off in another parable? I am a contrarian. I buy from pessimists and I sell to optimists. I’m able to buy high-quality copper exploration projects that, in those previous cycles, that 100 billion I’m talking about? My portfolio that we have in Copperbank, over $125 million has been invested to date: drilling, chemistry, metallurgy, procurement of property, feasibility studies and so on and so forth. We’re buying that stuff at $0.03 and $0.04 on the dollar. Buying from pessimists, and I will sell the plan to optimists when I believe, inevitably, this copper market normalizes.
Because I don’t lose any sleep at night that the kegger growth rate from copper will be something, if not healthy, it will be in above the 120-year trend at times in the coming two years, five years, 20 years.
James West: I can’t argue with you, there. I am similarly bullish on copper and buying copper from pessimists.
Gianni, we got cut it there because that’s the maximum attention span of anybody in my network, but it’s been great to have you back on the show.
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