Industry Trend Analysis - Zambia Copper To Power On - OCT 2017

BMI View: We expect Zambian copper production to remain on a positive growth trajectory the coming years . Despite ongoing power shortages, governmental support for the mining sector and strong copper prices over 2017 will drive copper production growth in the coming months.

According to the Zambian central bank, Zambian copper production over H117 totalled 362kt, down slightly from 367kt in 2016. No details have been given by the Zambian authorities on this decline, yet it is likely that Zambia's ongoing power supply problems have been the key constraint on copper mining activities. Despite this setback, the Zambian government expects copper production to rise from 774kt in 2016 to 850kt in 2017, amounting to 9% y-o-y growth. While not as optimistic, we are positive on Zambian copper and maintain our forecast of 7% growth this year as Zambian President Edgar Lungu remains personally supportive of the sector and rising copper prices will incentivise domestic miners to ramp up production during H217.

Zambian Copper To Keep Growing
Zambia - Copper Production ('000 tonnes) and Growth (% y-o-y)
f = BMI forecast. Source: USGS, BMI

Presidential Support To Minimise Risks

As we have outlined in previous analysis, the ongoing power shortages resulting from the country's overdependence on hydropower and rising power tariffs is the key risk facing the Zambian mining sector moving forward ( See ' Regulatory Reforms To Boost Investment Into Mining Sector ' , April 7). In August alone, two of the country's main copper producers Glencore and First Quantum Minerals (FQM) were forced to reduce power at key operations due to tariff disputes with electricity provider Copperbelt Energy Corp. The combined copper output of mines affected, Glencore's Mopani and FQM's Kansanshi, amounted to over 400kt as of 2016. This represents more than 50% of current Zambian copper production, posing serious risks to Zambia's copper production outlook this year.

However, we expect Zambian President Edgar Lungu's strong commitment to mining sector development in the country will likely minimise any serious impact of power shortages on Zambia's copper production this year. For example, following President Lungu's intervention on August 30, Glencore announced they had reached a deal with Copperbelt Energy Corp. that will restore full power supply to the Glencore's Mopani operations. Previously in May 2017, President Lungu also resolved a court case involving FQM and the state investment company ZCCM Investment Holdings, which has a 20% stake in FQM's Kansanshi mine. ZCCM began arbitration proceedings against FQM, claiming 1.4bn from the miner over allegations it had wrongly used ZCCM's cash, but ultimately dropped the case following President Lungu's intervention.

In addition, improving rainfall and rising dam levels in the country will ease some of the power shortages which have been experienced in recent quarters. Zambia is highly dependent on hydroelectric power generation and water levels at the Kariba hydroelectric dam have already risen from 31% in May 2017 to 54% in May 2017, which should help provide miners with ample power supply in H217.

Prices Breaking Beyond USD6,000/tonne
Three-Month LME Copper Price (USD/tonne), Weekly
Source: Bloomberg, BMI

Rising Prices To Boost Production

Another key driver of Zambian strong copper production this year will be the positive trajectory of prices in 2017 relative to last year. Since touching lows of USD4,500/tonne in June 2016, copper prices have risen over 57% up to USD6,810/tonne on August 30 due to strong Chinese demand and generally tightening fundamentals. Bullish views on copper were recently confirmed in July when the metal broke above the USD6,000/tonne leading to a new trading range between USD6,000-7,000/tonne that will prompt an upside revision to BMI's price forecast in the coming weeks ( See ' Quick View: Copper Price Breakout Confirms Upside Risks ' , July 27). While it is possible that prices may unwind from current levels towards the end of the year, we think the gradual uptrend over the last 12 months will bode well for mining activity in Zambia as copper producers will likely raise production on the back of increased profitability.

Zambia - Key Mining Projects
Mine Mine Type Phase Primary Company Notes
Source: BMI Mining Projects Database
Lumwana Open Pit Operational Barrick Gold (100%) Proved Reserves - 147mnt
Konkola Underground Operational Vedanta Resources (79.4%) Reserves: 242.3mnt; Production Guidance 2017: 36kt
Mumbwa Underground New Project Intrepid Mines (100%) Estimated Production: 56kt/yr; Reserves: 31.5mnt; Mine Life: 11 years
Lubambe (Konkola North) Underground Operational African Rainbow Minerals (40%) August 2017 - EMR Capital has purchased an 80% stake in the mine from African Rainbow Minerals and Vale for USD97.1mn; Proved Reserves: 5.4mnt; Mine Life: 28years
Kalengwa Open Pit New Project RGS Trading (100%) March 2015 - Project being sold to RGS Trading - F.Z.E.
Chibuluma South Underground Operational Jinchuan Group (85%) Reserves: 1.7mnt
Chambishi Underground Operational China Nonferrous Mining Corp Ltd (85%) NFC Africa Mining, a direct 85% owned subsidiary of CNMH, operates two mines, namely the Chambishi Main Mine and the ChambishiWest Mine. The Chambishi Main Mine and West Mine of NFCA produced ore of 911kt and 935kt, respectively, during 2014
Baluba Underground Operational China Nonferrous Mining Corp Ltd (80%) CNMC Luanshya Copper Mines, a direct 80% owned subsidiary of CNMH is the operator of the mine; The mine consists of Baluba Center mine and Baluba East mine; Combined Proved Reserves - 7.75mnt
Muliashi Underground Operational China Nonferrous Mining Corp Ltd (80%) CNMC Luanshya Copper Mines, a direct 80% owned subsidiary of CNMH is the operator of the mine; The mine consists of Muliashi North Mine and Muliashi South Oxidize; Combined Measured Resources - 28.84mnt
Mashiba New Project China Nonferrous Mining Corp Ltd Measured Resources - 3.17mnt; No exploration or mining activities were carried out in 2014
Mwambashi New Project China Nonferrous Mining Corp Ltd Measured Resources - 2.5mnt; The project comprises a strip mine with designed capacity of 600kt/yr of ores and a process plant with a capacity of 2kt/yr
Munali Underground Restart Consolidated Mining and Investments Ltd February 2017 - Operations at the mine is expected to restart within 12 months; Measured & Indicated Resources: 5.7mnt
Mopani Underground Operational Glencore (73.1%) March 2016 - Glencore plans to invest USD950mn over three years to expand operations at the mine; Proved Reserves: 112mnt
Mkushi Open Pit Operational Elephant Copper (100%) Operations restarted at the new mine in mid 2010 and production is to peak at 59kt/yr once fully operational; Mineral Resources: 18.5mnt; Production values not available
Kansanshi Open Pit Expansion First Quantum Minerals (80%) February 2016 - The mine is expected to ramp up to 240kt in 2018
Sentinel Underground Operational First Quantum Minerals (100%) February 2016 - The mine will ramp up to a range of 210-240kt of copper in 2017 and to 230-260kt in 2018; Started production in August 2015; Mine is a part of the Trident project