from the new america column - for all you copper heads.
SOUTHERN COPPER CORP. Phoenix, Arizona
High Prices Have Copper Miner Digging Deep Into Its Bag Of Tricks
BY MIKE ANGELL INVESTOR'S BUSINESS DAILY
In the world of commodities, crude oil grabs all the headlines and gold gets all the glamour. It’s easy to forget about copper.
But consider: Copper is in every piece of electronics, and it’s also used widely in construction, plumbing and wiring.
Global demand, especially in India and China, is rising faster than production, according to the U.S. Geological Survey. Copper inventories are having to be drawn down to satisfy demand.
Given all that, it’s no wonder copper prices have risen to an average of $2.31 a pound from last year’s average of $1.69 a pound — a 36% increase. This follows a 31% gain from 2004 to 2005.
The trend naturally benefits mining firms such as Southern Copper
PCU . As one of the largest copper miners, Southern is experiencing a boom, thanks to increased commodity prices and its expansion into Mexico.
Heavy Metal
With global production going down, copper prices should remain high for the near future.
Southern Copper has benefited from strong copper prices as well as prices for other metals it mines, including silver, zinc and molybdenum.
The company’s fourth-quarter sales hit $1.18 billion, up from $1.03 billion the prior year and slightly better than analysts’ estimates. It reported earnings of $2.86 a share, 2 cents ahead of Wall Street views.
The amount of copper mined rose 2% to 400 million pounds in the fourth quarter. But full-year mine production fell 4% to 1.52 million pounds.
Southern Copper officials couldn’t be reached for comment. In statements, they blamed the production shortfall on lower-quality ore from one of its main mines in Peru, the Cuajone.
The company’s newest mines in Mexico help offset the shortfall in Peru. The Mexican mines came through Southern Copper’s 2004 acquisition of Minera Mexico.
As for the direction of copper prices this year: Most forecasts point to continued strength. The U.S. Geological Survey says new copper mines and better use of smelting plants should reverse the inventory drawdown.
Either Ore
Finding high-quality ore is one of the challenges of the industry, says analyst Jorge Beristain of Deutsche Bank Securities.
“The quality of the ore in big mines is declining a little bit,” Beristain said. “It’s a problem with many big mines.”
Southern Copper also will have to account for costs of digging in poor ground differently than it has in the past. The company used to put these costs on the balance sheet, under “net capitalized mine stripping costs.” The costs were slowly subtracted over time.
Putting costs on the balance sheet instead of the income statement has the effect of lowering production costs — and boosting earnings. At the end of last year, Southern Copper had $289 million in net capitalized mine stripping costs.
In its last annual report, however, Southern Copper said the Securities & Exchange Commission “expressed unfavorable views” on this kind of accounting.
The company recently said it will no longer list the costs on the balance sheet. Instead, they’ll go on the income statement — where earnings could be negatively impacted.
Indeed, First Call analysts expect annual earnings to decline this year, next year and in 2008.
Analyst Beristain says his main concern is political. Much of Southern Copper’s work is done in Peru. Upcoming presidential elections in the country include a candidate who campaigns on bringing more state control over resources.
In 2004, Peru imposed new royalty agreements on mining firms. Southern Copper currently pays the Peruvian government about $1 million a year for its concession, but the government wants to charge a royalty rate of 3% on revenue.
Southern Copper is fighting the law, though it has set aside $17 million to cover the costs of the new royalty rate if it’s upheld by Peru’s Supreme Court.
“Southern Copper is still dependent on politics in emerging countries,” Beristain said. “There’s been a trend of left-leaning politicians in the region which could affect mining stocks.”
Government regulation also has forced Southern Copper to update its facilities. The largest project involves reducing sulfur dioxide emissions from a smelter plant in Ilo, Peru. The project will cost $500 million.
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