AOH 0.00% 12.0¢ altona mining limited

By SCOTT PATTERSON Updated Nov. 26, 2015 1:27 p.m. ET 4 COMMENTS...

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    By SCOTT PATTERSON
    Updated Nov. 26, 2015 1:27 p.m. ET
    4 COMMENTS
    CAIMANES, Chile—The future price of copper and the growth of companies that produce it could hinge on a single precious resource: water.
    Mining the important industrial metal requires huge volumes of water to control dust and separate copper from the earth. But a seven-year drought enveloping Chile, the world’s largest producer, is forcing big mining companies to curb output and pitting them against small communities like this one high in the Andes.
    Water-related production problems are one reason some analysts say copper prices aren’t likely to lose much more ground after falling nearly 20% so far this year. Over the long term, they say, the price of copper could move higher as global production fails to keep pace with rising demand.
    ENLARGE
    Anglo American PLC of the U.K. has said water shortages could curb as much as 18,000 tons in annual production starting this year at its Los Bronces mine.
    Freeport-McMoRan Inc. is scrambling to secure water supplies for its Morenci copper mine in Arizona—a state that accounts for a third of the company’s copper output.
    And here in Caimanes, a decadelong legal fight over water has unfolded between local farmers and Chilean mining company Antofagasta PLC. The farmers say an Antofagasta tailings dam, used to create a reservoir for mine waste, has created a water shortage. Antofagasta says the drought is to blame.
    A judge this year sided with the farmers and ordered Antofagasta to demolish the dam for the nearby Los Pelambres mine, which produces 2% of the world’s copper. The mine is still operating as the company appeals.
    A view of a ruler used to measure the water levels at an empty water monitoring station at the Pupio estuary, near a tailings dam for the Los Pelambres mine. ENLARGE
    A view of a ruler used to measure the water levels at an empty water monitoring station at the Pupio estuary, near a tailings dam for the Los Pelambres mine. PHOTO: IVAN ALVARADO/REUTERS
    “We will have to stop operating if the tailings dam can’t operate,” Antofagasta’s chief of mining, Ivan Arriagada, said in an interview.
    Companies are scrambling to adapt. Anglo-Australian mining companies BHP Billiton Ltd. and Rio Tinto PLC are building a $3.4 billion desalination plant in Chile after warning that water shortfalls could crimp production at their jointly owned Escondida mine—the world’s largest, based in Chile’s Atacama region, home to the driest desert in the world.
    Still, some analysts say water-related supply disruptions, declining ore grades—the ratio of pure copper to waste products—and slowing growth of new projects will push copper production into a deficit, where demand outstrips supply by the end of the decade.
    CRU Group, which tracks commodity trends, expects copper prices to wane over the next year or two before rebounding in 2017 and topping $6,000 a ton by 2019, when it expects the market to tip into a deficit. That is below the metal’s record of $10,000 a ton reached in 2011 but still historically high.
    The slowdown is expected to be the worst in Chile, which yields nearly six million tons of the industrial metal a year—more than triple the next biggest supplier, China, and a third of global output. The five largest copper mines in the world by output are located in Chile, with Los Pelambres coming in at No. 4, according to CRU Group.
    A dry riverbed outside Caimanes, Chile, April, 17, 2015 ENLARGE
    A dry riverbed outside Caimanes, Chile, April, 17, 2015 PHOTO: SCOTT PATTERSON/THE WALL STREET JOURNAL
    Water shortages are adding to problems like high energy prices, labor costs that rival those in the U.S. and a sharp decline in ore grades that is causing mining companies to think twice about starting new projects in the country.
    After years of increases, Chile’s copper production in 2014 fell 30,000 tons from the previous year to 5.75 million tons, according to Cochilco, Chile’s state copper commission, as water constraints and poorer ore grades curbed output.
    Cochilco said in a recent report on water consumption that it expects seawater consumption by Chilean copper mines to increase by 14% a year by 2026, even as freshwater usage declines about 2% a year.
    A major uncertainty for copper prices is demand. Copper consumption in China, which uses more than 40% of the world’s total, is uncertain. Jeffrey Currie, head of commodities research at Goldman Sachs Group Inc., said in October that prices could fall an additional 20% by the end of 2016, partly due to softening China demand.
    Among the most dramatic examples of the water-resource issue is the dispute over the dam built for Los Pelambres, a flagship operation that accounts for more than 50% of Antofagasta’s mining revenue.
    “We had enough water for the whole town, the animals, the crops,” said Juan Tapia Bonilla, a local tree farmer. He added that the situation changed when Antofagasta built a dam in 2008. “This cut the water.”
    The residents were also concerned about the safety of the dam in an area known for earthquakes. Their concerns were highlighted earlier this month when a tailings dam burst at a Brazilian iron-ore mine, killing as many as 12 people and flooding a nearby village.
    Antofagasta argues that a drought that began around the same year the dam opened is largely responsible for the region’s water problems. The company also says the dam was authorized after an environmental-impact study was approved by the Chilean government and that destroying it could send waste products flowing into the valley below.
    Antofagasta says it stepped up its engagement with the community in Caimanes in August.
    The opposition persists. Residents have waged a legal battle against the dam, launched hunger strikes and staged protests that have caused operational problems resulting in an estimated loss of 8,000 tons of copper.
    Antofagasta said copper production in the first nine months of the year fell 11% from a year ago, due in part to “community actions” at Los Pelambres.
    Write to Scott Patterson at [email protected]
    Corrections & Amplifications:
    Anglo American PLC of the U.K. has said water shortages could curb as much as 18,000 tons in annual production starting this year at its Los Bronces mine. A earlier version of this article incorrectly stated Los Bronces is based in northern Chile’s Atacama region. BHP Billiton Ltd. and Rio Tinto PLC’s jointly owned Escondida mine is based in Atacama. Also, a judge ordered Antofagasta to demolish the dam for the Los Pelambres mine. An earlier version of this article incorrectly stated the judge ordered the mine to be demolished. (Nov. 26)


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