Copper outlook is optimistic, see article below:
Osborne Reviews Third Quarter Asarco Developments, Discusses Market Outlook with Analysts
Business Wire - October 31, 1997 14:48
%ASARCO AR %NEW-YORK %MINING %METALS %CHEMICALS %PLASTICS V%BW P%BW
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NEW YORK--(BUSINESS WIRE)--Oct. 31, 1997--Richard de J. Osborne, chairman, president and chief executive officer of ASARCO Incorporated (NYSE:AR), today reviewed major developments at the Company during the third quarter, discussed Asarco's plans for the future and provided the Company's current view of the copper market for security analysts here.
Program Completed
Osborne said that Asarco's long-term strategic program has included:
-- Integrating its mining, smelting and refining businesses; -- Growing its copper business; -- Selling off underperforming minority investments; -- Paying down debt, and -- Buying back Asarco shares.
Most of this program has been accomplished, according to Osborne, while maintaining the Company's excellent financial condition. Consolidated capitalization is over $3 billion and the debt to capital ratio, net of cash, is a low 17.9%. The Company's book value is over $42 per share and growing, due to continuing earnings and the Company's share repurchase program.
Future Strategic Goals
Osborne said that Asarco will continue to focus in the future on its core business of mining, smelting and refining base metals, principally copper. "Our strategic goals now," he said, "include investing in the further growth of low-cost copper production and development of a portfolio of new precious metals projects which are in the early feasibility stage. We also intend to continue our active exploration program and maintain our strong financial position."
Sale of Minority Investments
Osborne said that in the second and third quarters of this year, Asarco sold all of its available-for-sale shares in Grupo Mexico for $323 million. Asarco still owns 56 million B shares in Grupo Mexico subject to a fixed price option with a value of $79 million. Asarco sold its holdings in MIM Holdings Ltd. in 1996 and used the $326 million in proceeds from the sale to reduce debt.
Share Repurchase Program
In June Asarco announced a $100 million program to repurchase Asarco shares. Through October 27th, the Company has purchased 2.5 million shares or 5.9% of the Company's outstanding shares for a total of $80 million. Osborne said Asarco plans to complete its current share repurchase program in the fourth quarter.
"At current prices," he said, "the remaining $20 million will enable us to acquire an additional 725,000 shares. When completed, the share repurchase program will have reduced shares outstanding from 43 million shares to 39.7 million shares, a 7.6% reduction. We believe that Asarco shares are undervalued and that this repurchase program will benefit present and future shareholders."
Expansion of Low-Cost Copper
Asarco will continue to expand its production of low-cost copper at Asarco and at 54.1% owned Southern Peru Copper Corporation (SPCC) over the next several years, according to Osborne. Expansion projects include the Company's recently completed Silver Bell SX/EW operation near Tucson, which began production in July, and the Minto Mine, a modest sized copper/gold property in Canada's Yukon Territory which will start up in early 1999.
Silver Bell has annual capacity to produce 36 million pounds of copper cathode and Minto will produce 27 million pounds of copper annually. Minto also will produce 10,000 ounces of gold and the property has excellent potential for further ore reserve increases.
"These new operations will increase Asarco's beneficial interest in mined copper production by about 50 million pounds on an annual basis at an estimated cash cost of 52 cents a pound," Osborne said.
The Company's largest expansion program is at SPCC. The first stage of that program, expansion of SPCC's Cuajone mine, is expected to be completed in early 1999 and will increase SPCC's mined output of low-cost copper by 130 million pounds per year, or by 19%. The cost of this first stage is $245 million. Engineering and construction are now underway and on schedule.
The second stage involves modernization and expansion of the Ilo smelter where a new Outokumpu flash furnace and associated environmental control equipment will be installed by 2001. Prior to that installation, a decision will be made to use either new flash converting technology or large conventional Peirce Smith converters and installation of the converting section at the smelter will be completed in 2003. During construction and start-up of both the flash furnace and the converters, the existing units will continue to operate until the new equipment reaches design rates. Cost of the smelter project is $787 million.
During the second quarter of 1997, financing was completed to support the expansion and modernization program. Osborne said, "SPCC now has cash and marketable securities of $400 million and an undrawn committed bank facility of $600 million. The $1 billion investment program at SPCC is fully financed on favorable terms, with no recourse to Asarco's balance sheet."
"An optional third stage expansion project at SPCC appears to be very attractive," Osborne said. The third stage involves a second, larger expansion at the Cuajone mine and a further expansion of the Ilo smelter. New mining equipment and a new SAG mill would be added at Cuajone to increase annual copper production by another 30% or 240 million pounds. The smelter expansion involves modifying the existing Teniente Converter to increase concentrate processing capacity to 1.75 million tons per year. Current estimated cost of the third stage expansion is $750 million.
"When we are finished," Osborne said, "SPCC will produce at a rate of 930 million pounds of mined copper per year, or 1.6 times the 1996 production level. At that time, the Ilo smelter will be the largest, and probably one of the most efficient, modern copper smelters in the world."
Exploration Program
Asarco has an active exploration program, focused on copper and precious metals, principally outside of the United States, and Southern Peru has an active exploration program for copper and gold in Peru. Asarco is active in Chile and recently announced an agreement with Codelco on El Loa, a copper property in Northern Chile. Osborne said the Company is conservative about announcing new projects until proven reserves, feasibility studies and required permits are in hand but commented that several of the projects now look as if they may lead to the development of new mines.
Current Copper Market
Noting continued volatility in the copper market this year, Osborne said, "Excellent demand in the first half of the year kept inventories at low levels. Since late June, however, stocks have increased by 261,000 tons. Some of the more recent stock increases appear to reflect the impact of foreign exchange volatility on economic growth in Southeast Asia. Recent stock increases may involve deliveries of metal by companies which were overbought or by producers whose orders were cancelled. It also appears that China has drawn down its strategic stockpile by at least 100,000 tons in the first half of this year.
"However, we have begun to hear reports of Chinese buying recently. We believe that, as in the past, the drawdowns of the strategic stockpile will be replenished.
"Overall, with the exception of the lower than expected growth in Southeast Asia, and a weak recovery in Japan, worldwide growth in copper consumption has been good. The economy in the U.S. has been robust and there has been stronger economic growth in Europe than originally anticipated. Growth in copper consumption in the rest of the world, particularly Latin America, has been much stronger than expected.
"With about 1.9 weeks of supply currently held in LME and Comex warehouses, renewed industrial production appears to have brought the market back into balance."
Looking forward to the year 2000, Osborne said new copper supply has been growing rapidly since 1993 and that a substantial amount of new copper supply is being developed. In total, Asarco expects to see copper available to the West increasing from 12.6 million tons in 1997 to 14.5 million tons in the year 2000, a compound growth rate of 4.7%. In East-West trade, Asarco expects exports from the CIS and Poland to remain flat at about 950,000 tons per year through 2000.
Asarco has adjusted its Western World copper consumption forecast recently to reflect the lower growth rates that began to appear in Southeast Asia in the third quarter. "This has reduced our consumption growth by about 140,000 metric tons, or 154,000 short tons, in Southeast Asia in 1997, and about 110,000 metric tons, or 121,000 short tons, in 1998," he said. Asarco now expects Western World copper consumption to grow at 2.9% this year and 3.0% next year.
"In 1999 and 2000 we estimate consumption growth rates of 3% for each year, based mainly on continued modest worldwide economic growth and increasing intensity of use for copper. This estimate is significantly below the 3.8% growth in Western World copper consumption over the last 5 years and 3.4% growth in the last 10 years."
Importance of East-West Trade
A great deal of investment attention has been focused recently on Southeast Asian countries. Asarco has recently reduced its consumption estimates in 1997 and 1998 for this region.
"However," he said, "to put these markets in perspective, it is worth noting that while they have been important new, fast-growing markets, their individual impact is limited and this region represents only about 12% of total world consumption. In total, we now see copper consumption in these economies declining by 2.2% this year and growing by 3.1% in 1998."
Osborne observed that if western world copper supply and consumption were the only factors to consider in copper economics, Asarco would conclude, as have many analysts, that the market was headed for a period of supply surplus.
China, however, according to Osborne, has become an increasingly important factor in the western world copper market. Acknowledging that good market data is not always available from the Chinese market, Osborne detailed what is known about the Chinese situation.
"China has a remarkably robust economy and there are no indications that this level of activity is likely to diminish in the foreseeable future. This growth, especially in transportation, electrification and telecommunications, requires large amounts of copper. We believe that Chinese copper consumption will increase by over 10% per year through 2000 based on official Chinese estimates of an 8% annual GDP growth. Actual GDP growth rates have been substantially in excess of that number in recent years.
"China has a limited mine capacity and does not have the ore reserves to support any significant increase in its internal mine supply. In 1996, China produced about 480,000 short tons of copper concentrates and had smelting capacity substantially in excess of its mining capacity. In 1996, it had the capacity to smelt about 740,000 tons of contained copper. Similarly, China had refining capacity of 1,230,000 tons in 1996, substantially greater than its smelting capacity.
"Current estimates indicate that China consumed about 1,470,000 tons of refined copper in 1996. To feed this system, China needs to import at least 1 million tons of copper in concentrates, intermediates and refined forms. In fact, we see increasing evidence that China is looking to the west for ownership of minerals reserves and long-term copper concentrate commitments.
"Through the first half of 1997, there were no net imports of refined copper by China. This shortfall of approximately 100,000 tons had to have been supplied from internal sources, either from prior years inventory build-up or from the strategic reserve. In addition, we believe that refined copper may have been exported into the Southeast Asia markets in July and August in response to the very large backwardation. Current increases in the LME inventories may reflect material displaced by these earlier Chinese exports.
"Thus, when China begins to reimport this material, which it appears to have lent to the Western World market on terms which were very favorable to China, we should see a reversal of the recent terminal exchange inventory increases," Osborne said.
Price Protection Program
The Company also updated analysts on its copper price protection program. Asarco currently has puts on 90 million pounds of copper with a 95 cent strike price extending into the first quarter of 1998 and also has synthetic puts on 24 million pounds of copper at a strike price of $1.04 for the fourth quarter of 1997. As the first leg of constructing a synthetic put, the Company has also acquired calls with a $1.00 strike price on 88 million pounds of copper for 1998 at an average cost of 2 cents per pound. SPCC currently has puts covering 129 million pounds of copper at a strike price of 95 cents extending into the first quarter of 1998.
With the recent decline in copper prices, the Company took advantage of the market to lock in gains on some of its price protection resulting in pretax gains at Asarco of $2.5 million and $0.4 million at SPCC.
Outlook Summary
"As we look at the world balance," Osborne said, "we see a small supply surplus of 15,000 tons this year. This shift to a surplus in 1997 represents a net change of about 63,000 tons from Asarco's July forecast. Much of the drop in consumption in Southeast Asia has been made up by consumption increases in the U.S. and Europe and production losses in the U.S. and Chile.
"In 1998, we expect a 108,000 ton deficit; a surplus in 1999 of 77,000 tons, and a deficit again in 2000 of 10,000 tons. Overall for 1997 and the next three years, this adds up to a net deficit of 26,000 tons. We think copper's fundamentals remain strong and we are optimistic about its future."
ASARCO Incorporated is one of the world's leading integrated producers of nonferrous metals, principally copper, lead, zinc, silver and molybdenum. Asarco also produces specialty chemicals and aggregates. Asarco had 1996 sales of $2.7 billion.
CONTACT: ASARCO Incorporated
Jerry Cooper, Corporate Communications
212/510-1810
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