Weak copper market takes its toll
By: Ken Gooding
Posted: 2001/10/15 Mon 05:00 ZE2 | © Miningweb 1997-2001
LONDON - A London-based investment banker says it is hardly surprising that it is impossible at present to raise limited non-recourse finance for the Konkola Deep Project, the Anglo American [LSE:AAUK] backed copper project which was put on ice last week. This is because the venture has three strikes against it: it is in a "difficult" country as far as banks are concerned, copper market conditions are appalling, and the project is very big.
When Anglo American completed the arrangements with the Zambian government in March 2000, it estimated the project would cost $523 million. The London banker says the Konkola Deep shareholders will be looking to raise more than half of that through project finance. "The size alone, and the fact that it is in Zambia, means that nearly everybody in the business – all the banks, all the development agencies – will have to be roped in to contribute," he adds. "That's impossible right now."
Konkola was already one of the biggest headaches for Simon Thompson who in June took prime responsibility for Anglo's base metals operations after the departure of James Campbell, director in charge of base metals and coal.
In order to get its hands on Konkola Deep, which has the potential to be a world-class, low-cost copper mine eventually, Anglo had to take on the existing copper mining operations and agree to invest $208 million in them in the three years from March 2000. Analysts suggest these operations are making big losses at present. One commented: "The original idea was for the existing operations to provide some cash flow until Konkola Deep came on stream. Now Konkola Deep is delayed, how will Anglo keep some semblance of operations going in Zambia?"
Peter Davey, analyst at SG Securities in London, suggests the re-emergent Zambian copper belt – including the Konkola operations - produces about 120,000 tons of the metal a year with cash costs above 70c a pound. This compares with London Metal Exchange copper prices of about 63c at present. But SG believes that output at Konkola, or elsewhere in Zambia, is unlikely to be cut during this recession.
However, another high-cost Anglo mine, Hudson Bay in Canada, could well have production curtailed because SG estimates the 45,000 tons a year mining complex has cash costs of 73c a pound.
About 8 per cent of global production is uneconomic on a cash basis at today's copper prices, says Davey.
Already about 200,000 tons of annual capacity cuts have been announced and SG reckons it would need only a further 300,000 tons to bring the market back into balance. "These cuts are likely to be focused in countries where free-market forces operate unhindered by the hand of the state," says Davey. "Cuts in the US are likely to dominate as there is 66,000 tons of annual capacity there with cash costs above 62c." Phelps Dodge of the US and Grupo Mexico are the companies most likely to make cuts.
ZCI, the 50.9 per cent-owned subsidiary through which Anglo holds its Zambian investments, has already given a profits warning. In June it said its operations would be adversely affected by falling copper prices and operational problems at the Nkana smelter, which processes the Konkola material.
In April there was a serious pit wall failure in the Nchanga open pit mine, the only Konkola mine being operated at present, which killed ten employees and buried equipment worth tens of millions of dollars.
Anglo reported a $19 million half-year operating loss for its base metals division, mentioning the problems at Konkola and lower metals prices when giving the reasons.
One London analysts says: "There are a number of prominent banks who want to lend money to Anglo. But this is limited-recourse finance that Anglo wants for Konkola Deep and none of them are rushing to help out. Given the low level of copper prices – and the fact that they are likely to stay down for some time – the banks will keep their money in their pockets."
Gloom deepens
Anglo's announcement helped to deepen the sense of gloom in London's metals markets where depressed prices and a weakening global economic outlook is keeping trading at a very low level. Last week, there were two casualties: NM Rothschild, one of the oldest investment banks, said it is to quit base metals trading completely and move its New York precious metals operations to London. "We have been in base metals trading for nine years but, due to a downturn in the economy, we now see limited opportunities," said Geoffrey Spice, a Rothschild managing director and group treasurer.
This coincided with ScotiaMocatta, part of Canada's Bank of Nova Scotia, saying it was withdrawing as one of the 12 elite ring dealing members of the London Metal Exchange whose open-outcry trading sets base metals prices on which most of the contracts completed worldwide are based. ScotiaMocatta will continue trading base metals, however, by taking a cheaper form of LME membership. The change entails the redundancy of around 12 per cent of ScotiaMocatta's global metals staff, the bulk of these being directly related to the move from the LME ring.
The twice-daily gold "fix" in London, where five banks set the benchmark price used for the precious metal, also lost one of its five members when Credit Suisse First Boston quit. The group said it would close its London, New York and Sydney precious metals market-making and structured derivatives, clearing and vaulting business, and resign as a market-making member of the London Bullion Market Association and thereby cease to provide continuous pricing for gold bullion. |
