Re. Repost from Reuters on copper outlook for '98
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US copper producers seen vulnerable to price falls
Reuters Story - December 08, 1997 09:45
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By Derek J. Caney
NEW YORK, Dec 8 (Reuters) - With copper prices falling 35
percent over the last six months, the higher cost copper mines
around the world will be forced to make a painful choice
between operating at a loss or shuttering production, U.S.
analysts said.
With most analysts calling for a supply surplus in the
copper market moving into 1998, and demand in Asia evaporating
in the wake of that region's economic woes, COMEX copper spot
prices have fell 43 cents to a four-year low of 79.50 cents
last week.
"The most vulnerable operations are going to be in Zaire,
Zambia and the Philippenes," said Andrew O'Conor, equity
analyst with Deutsche Morgan Grenfell.
"Most of the U.S. operations are in the middle of the cost
curve. And Latin America is pretty well positioned."
The last time prices were this low was in late 1993 and
early 1994.
At that time, the large integrated North American copper
producers emerged from the price slump without having to
curtail significant production, with the help of put option
hedge programs.
While prices at the time were in the high 70-cent a pound
range, copper producers were realizing 90 cents a pound of
copper sold under their hedge programs.
But for most of 1998, producers are now more exposed to
declines in the copper price, analysts said.
"The premiums for put options were simply too expensive to
make price protection viable," said Thomas Foster, vice
president and treasurer with Phelps Dodge Corp .
Phelps Dodge has no options hedging on 1997 or 1998
production.
The company, however, is one of the best positioned
companies, in the event of a sustained decline in copper
prices, as the net cash costs of its operations in the U.S. and
South America are all in the high 50-cent-a-lb range.
BHP COPPER MOST VULNERABLE IN U.S.
Of the integrated U.S. producers, BHP Copper, a unit of
Broken Hill Proprietary Ltd , is the most vulnerable to
falling copper prices, analysts said.
A BHP Copper spokeswoman pegged its U.S. operations as
having a net cash cost of 85 cents a lb.
The company has 16 percent of its projected copper sales
between May 31 1997 and May 31 1998 covered by put options at
an average 89-cent strike price, and 0.4 percent of sales
hedged at $1.01 a lb strikes, according to its report to
shareholders issued in September.
For the period June 1998 to May 1999, 3 percent of BHP
Copper's projected sales are covered by forward sales contracts
at an average price of 96 cents a lb.
In the year ending May 31, 1997, the company produced 1.045
million tonnes of copper.
Meanwhile, Asarco Inc has put options on 44 million
pounds of its first quarter 1998 output at average strikes of
95 cents a lb, sources said.
Its majority-owned Southern Peru Copper Co also has
puts on 44 million lbs on its first quarter output at average
strikes of 95 cents.
It is in the process of assembling synthetic puts with a
combination of call options and forward sales on 88 million
lbs, sources said.
But the synthetic puts are dependent on getting $1.00 a lb
on forward sales. It has already bought calls at $1.00 a lb.
The company produced 1.54 billion lbs of copper in 1996.
An Asarco spokesman was not available for comment.
Asarco's Arizona operations have estimated cash costs at
approximately 80 cents a lb, according to one analyst.
However, including the SPCC operations, the company's net
cash cost is 63 cents a lb, Asarco said earlier.
Cyprus Amax Minerals Co has put options on 50 percent of
its first half production in 1998 at strikes of 90 cents a lb.
Its net cash costs including its El Abra mine in Chile are
62 cents a lb, the company has said.
Its U.S. operations have net cash costs in the mid-70-cent
range.
It produced 774 million lbs of copper in 1996.
NO PLANS TO CUTBACK PRODUCTION
The impact of the latest slide in copper prices on earnings
of copper producers may be considerable, analysts said.
For every one cent a pound change in copper prices, for
example, Phelps Dodge's earnings are affected by 20 cents a
share, analysts said.
Asarco's earnings may be affected by 16.9 cents a share.
To date, none of the U.S. copper producers have any plans
to cut back production.
"One would hope that the industry would individually make
those decisions to curtail production based on sound economics,
not on emotion," said Phelps Dodge's Foster.
"Because of continued investment in technology and
productivity, our mines are, for the most part, cost
competitive," he said.
"If we did have cases where the cost of production is above
the price of copper, we would have to look at that
possibility."
The company wouldn't curtail production before that point,
he added.
A BHP copper spokeswoman said that the company was
"actually ramping up production," to take advantage of
economies of scale.
"We have a number of intense cost cutting intiatives that
we plan to have in place by the end of our fiscal year in May
1998," she said.
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