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In praise of bronze

Paul Sullivan

Everyone who has watched the Olympics over the last few weeks is familiar with bronze, the medal awarded for third prize in any Olympic event.

I wonder how many Olympic spectators know — or care — that bronze is an alloy of copper, typically 88 per cent copper and 12 per cent tin, and while the falloff in value from gold and silver to bronze clearly reflects the value of third place in any competition, no one who trades in metals would ever undervalue copper.

Because knowledge of copper is more than 10,000 years old, we have discovered a staggering array of applications. Copper reached its peak as an influential metal in the Bronze Age, from 2500 to 600 BC, but 95 per cent of all copper mined and refined has been extracted since 1900.

Bronze Olympic medals are just one current use of copper. It's a great conductor of heat and electricity, which extends its use. You use copper to make saxophones and cymbals, water pipes, wire, electronic, circuit boards, pots and pans, roofing, doorknobs, bathtubs and bullets. The Statue of Liberty contains 81.3 tonnes of copper.

If we keep finding purposes for copper, we're going to run out. For example, hybrid vehicles may lessen our dependence on petroleum products, but do nothing to help our dependency on copper — hybrids use three times as much copper as regular automobiles.

Analysts began talking about peak copper in 1999-2000 when it became clear that as China and India developed their economies, the demand for copper would continue to escalate, and we would run out of copper in around 60 years.

Demand for copper has primarily been driven by China, the new economic superpower. According to the International Copper Study Group, while world usage outside of China declined by 1.5 per cent in 2007, China's usage of refined copper rose by 36 per cent. But demand from China is expected to slow in 2008 and that has led to a falloff in copper prices from the May 5 record high of $4.26.

The current price of copper is $3.4885 US a pound, but a little historical perspective shows that less than 10 years ago, the price of a pound of copper was 60 cents, and the price is 300 per cent higher than it was 5 years ago.

If you're intrigued by copper as an investment prospect, you may want to wait a while before entering the market as 12 or 23 analysts surveyed by Bloomberg news on August 13-14 predicted that copper will decline, although 10 disagreed and predicted the price will increase.

Right now, it looks as if the bears are more perceptive, as inventories are up and prices are down. The $3.4885 price for December futures is down 1.5 per cent, while inventories are at their highest level since February.

While the US economic slowdown captures most of the headlines, don't forget that the rest of the world's economies are also in decline. Hong Kong, for instance, is growing at the slowest pace in five years, while the European GDP has declined for the first time since the 15-nation common currency was introduced in 1999.

Against the economic slowdown is the fact that it's getting harder to mine copper. Just ask Robert Friedland, the Vancouver-based entrepreneur who has been trying to develop the Oyu Tolgoi deposit in Mongolia for the past five years through Ivanhoe Mines Ltd (TSX:IVN). The $3-billion US Oyu Tolgoi is projected to see an annual production of 800,000 tonnes of copper and 900,000 ounces of gold when it comes on stream, hopefully in 2012, but its development has been plagued by social unrest in Mongolia.

At least five people died in rioting in June elections as many Mongolians demanded more than the 34 per cent share Ivanhoe and its partner Rio Tinto Alcan have negotiated with the state. It looks as if the Mongolian People's Revolutionary Party is back in control for the next four years, which means that Oyu Tolgoi is on track, but obviously the situation is unstable.

Despite the instability in Mongolia, Desjardins Securities analyst John Redstone thinks Ivanhoe shares are undervalued at $11.16, the current trading price on the TSX. He has targeted the price at $13.90, telling the National Post that because there are few new mine projects due to historic low prices and demand while continue to rise while supply will have trouble keeping up.

Mongolia isn't the only nation flexing its national mining muscles: Zambia and Argentina have raised taxes; Ecuador has frozen mining projects while it reviews its mineral code and the Democratic Republic of the Congo is reviewing the terms of its agreements with foreign mining companies.

In an effort to meet demand and avoid rising nationalist sentiment, some mining companies are looking closer to home than the Gobi desert — back in good old North America. Polymet Mining Corp. (TSX:POM), for example, is planning to revive a copper and nickel mine near Duluth that was abandoned in 2001. Despite the fact that it has yet to generate any production revenue, PolyMet has tripled in value over the past three years, although that value is still less than 1/300th that of BHP Billiton Ltd.

PolyMet is part of a trend that has seen a renaissance in North America: the total value of planned projects has increased from $7.47 billion in 2004 to $34.1 billion in 2007.

Nearby Franconia Minerals Corp. (TSX:FRA) of Spokane, Washington, has a site at Birch Lake, 13 kilometres from PolyMet's, that it believes is the world's largest deposit of undeveloped copper, nickel and platinum-group metal.

The old iron belt is the new copper belt, as PolyMet is ripping out old iron-refining machinery and installing new copper refining tools while it waits for the environmental assessment to go though. It expects to start production at the end of next year at 35,000 tonnes of copper and 7,200 tonnes of nickel. It's not on Oyu Tolgoi's scale, but it has the extra benefit of being feasible in light of Minnesota's environmental legislation.

Paul Sullivan is a longtime Vancouver journalist and president of Sullivan Media. He also writes for The Globe and Mail.

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