Bear Stearns' Copper Analyst had this note this morning.
COPPER – PRODUCTION CUTS BEGINNING TO BITE
The copper market is experiencing a new paradigm of discipline and rationalization the likes of which the
metals industry has all too rarely seen over the past few decades. When BHP Billiton recently extended its
production cuts (an additional 80,000 tons) at the Escondida mine in Chile, we believe the reaffirmation that
returns on capital are the prominent driver of decisions is extremely positive for the copper industry. With a
total of approximately 700,000 metric tons idled, or approximately 5% of world capacity, the price has reacted
favorably and supply is now no worse than in balance with demand. As consumption gradually recovers, the
LME exchange inventories have decreased by nearly 90,000 metric tons since the peak in early May. While
U.S. demand has shown some modest improvement, mainly for brass mill products, the real driver of demand
thus far in 2002, has been Asia, with China, S. Korea, and Taiwan leading the way.
Overall, copper remains our most favored metal, given our outlook for supply/demand trends over the next two
to three years as we project large supply deficits and substantial inventory drawdowns over that time period.
We remain comfortable with our current copper price forecast of $0.76 and $0.90 per lb. (COMEX spot basis)
for 2002 and 2003, respectively.
Earnings Estimates and Valuations – The COMEX spot copper price has averaged approximately $0.741 per
pound in the second quarter, versus $0.722 and $0.752 in the prior and year ago quarters, respectively. LME
spot price has averaged slightly lower at about $0.73 per pound this quarter, versus $0.706 and $0.749 in the
prior and year ago quarters, respectively.
Phelps Dodge – Thanks to a secondary equity offering on 6/7, Phelps Dodge (PD – Buy) managed to shore up
its maligned balance sheet, lowering debt to capital ratio to an estimated 37% (after PD uses the proceeds to pay
down debt) and likely solidifying its position as an investment grade company. While we were mildly surprised
by the timing of the offering, we view it as a prudent move by management that has helped to remove any
market doubt concerning PD’s formally stretched balance sheet. However, we do not think that the much
improved balance sheet will remove the sense of urgency that has motivated Phelps management to drive costs
lower through their QFZ initiatives. |
