Idled copper capacity restart announcement seen close

Tuesday, June 10, 2003

An announcement of a partial restart of idled capacity at copper mines operated by Anglo-Australian resources group BHP Billiton (NYSE: BHP) in Chile and Peru "could be imminent," according to a report produced by Barclays Capital.

In late 2001, when copper prices hit modern-time lows of under US$0.60/lb, BHP Billiton announced cutbacks at its majority-owned giant Escondida copper mine in northern Chile, and the suspension of sulfide operations at its Tintaya mine in southern Peru that had been producing 90,000t/y. The Tintaya sulfide operations remain mothballed, although cathode production has since started at a rate of 34,000t/y, and Escondida is currently operating at around 200,000t/y below its capacity which, with a recent expansion, stands at 1.25Mt.

But as the market has improved, with copper prices rising 30% since their low of November 2001, "attention now surrounds the potential restart of idled capacity, which would help the price correction we are looking for to materialize," Barclays Capital analysts Kevin Norrish and Ingrid Sternby wrote in a report released Tuesday.

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The price "correction" would see copper targeting $1,600/t, about US$100/t below current levels, they said.

The analysts said other "potential restarts" involve 85,000t of idled capacity at the Bagdad and Sierrita mines in the United States, operated by Phoenix-based Phelps Dodge (NYSE: PD).

Of the 375,000t in total, some 120,000t could come from additional output at Escondida and Tintaya this year if BHP Billiton decided "imminently" to put its two South American copper mines on full capacity, the report said. The company is due to announce its future production profile this month. The Phelps Dodge mines could add another 30,000t to this year's global production, and help further to reduce the expected market deficit of 170,000t in 2003, the analysts said.

The restarting of idled capacity in the second half of this year, as opposed to the bank's previously predicted 2004, would come despite the demand outlook for copper remaining "very fragile" in the light of a potential slowdown in China, and the still relatively high inventories, the report said. London Metal Exchange stocks stand at roughly the same level they were at in November 2001, at just under 800,000t, while there are concerns that China has built up large off-warrant stockpiles, the analysts said.

Chile's state-owned copper producer Codelco has pledged to withhold from the market 200,000t of its output this year, after abandoning last year's production cutbacks for political reasons, the report said. Some 100,000t of that has already been stockpiled and Codelco says it will not be released until global inventories return to a "normal" 800,000t.

In the meantime, treatment costs and refining charges are around all time lows, and expected to fall further in talks with smelters due to resume in July, the Barclays Capital report said.