September 11, 1999

Copper Mining Retrenches Amid Excess Capacity and Sagging Prices

By VERNE G. KOPYTOFF

 

AN MANUEL, Ariz. -- Thousands of feet below the scrub and cactus near this copper town is an unusual silence. The din of pneumatic hammers, conveyer belts and blasting that was music to the ears for many miners here in the Sonoran Desert has mostly subsided.

The San Manuel mine, one of the largest underground copper mines in the nation, has been closed. So too has the nearby smelter that in better times sent wisps of smoke from giant chimneys visible for miles along the San Pedro River valley.

A decline in copper prices has led to significant cutbacks in the industry around the world. It has hit particularly hard in the United States, where many of the mines are more played out and more costly to operate than are those abroad. Over the last few months, a string of major copper producers has announced layoffs, reductions and closures.

The sagging market has also prompted a wave of merger proposals that could significantly transform the industry. A plan announced in August by Phelps Dodge Corp. of Phoenix to consolidate with two other companies -- Asarco Inc., based in New York, and Cyprus Amax Minerals Co., based in Englewood, Colo. -- would create the largest copper producer in the world. Similar slumps in other commodities, including aluminum and paper, are forcing producers in a variety of basic industries in join together to eliminate over-capacity in the face of the decline in prices. But none has been hit harder than copper.

"Copper has supported families for generations here in the Southwest," said Dennis Duffy, a laid-off miner in San Manuel who is training for a new career in installing computer networks and, to help cope financially, has canceled satellite television service at his home. "It's sad. I hate to see jobs like mine dry up."

The slump began in 1997 with the financial panic and economic downturn in Asia, a major market for copper and copper intensive products like electrical wires, automobiles and pipes. A series of new mine openings in South America flooded the market with copper and depressed prices even further.

In two years, the price of copper has tumbled nearly 50 percent from $1.20 a pound, hitting bottom in May at 61 cents a pound, the lowest in 12 years. The price has since increased to an average of 80 cents a pound, but that is not enough to make copper producers in the United States reverse their retrenchments.

"Copper had a fairly significant run through most of the 1990s," said Chuck Shipley, president of the Arizona Mining Association. "But it really dropped over the edge in the last six months or so."

The town most affected by the decline in copper prices is San Manuel, a company town of 4,000 carved out of thorny wilderness, about 30 miles northeast of Tucson. With nearly every job and business here tied in some way to mining, its future is uncertain.

In June, Broken Hill Proprietary Co., the worldwide mining concern based in Melbourne, Australia, announced that it would close the mine and smelter in San Manuel indefinitely, putting nearly 2,200 people out of work. An additional 400 employees were laid off elsewhere in Arizona and Nevada, representing the company's nearly total withdrawal from the American copper industry.

While there are plenty of jobs elsewhere, many ex-miners are reluctant to pull up stakes. As a result, many have had to take jobs around here that pay far less than the $40,000 a year or more many made in the copper industry. Among them are Joseph Coubb, a miner for 12 years at San Manuel, who spoke recently while taking a break from truck-driving lessons in a dirt lot near a high school.

"At least I'll have a job," said Coubb, though he complained that trucking, unlike mining, would take him away from his family for days at a time.

Broken Hill spokesman Jay Rhodes said the company was forced to stop most production in the United States because it was unprofitable at such low prices. Closing mines and laying off workers, while unfortunate, he said, was hardly unusual in the industry.

"Copper is a cyclical business," Rhodes said. "It's been one where when the price increases, the players holding low-grade deposits open them for production. When the cycle is down, they have to put them on hold."

Two other producers with mines in Arizona, where much of the copper in the United States is found, have also announced reductions in their work forces. Asarco laid off 150 miners near Green Valley, south of Tucson, and Phelps Dodge dismissed 1,650 employees at mines and factories worldwide.

The problems in the industry come as copper use is growing, though not enough recently to offset new production. World copper consumption has increased in 11 of the last 13 years, according to the International Copper Study Group, with the proliferation of cars, electrical appliances, computers, telephone lines and new homes.

Low copper prices have resulted in losses for producers like Asarco and Phelps Dodge the last few quarters. But most analysts say that such losses are not especially significant as long as prices do not decline further over an extended period.

Indeed, by reducing production, some companies say they have put a stop to the losses. Thomas Foster, vice president and treasurer of Phelps Dodge, said his company was "breaking even or doing a little better" now that it had trimmed money-losing production.

 

Over the last decade, many copper producers have tried to increase efficiency by implementing new, cheaper mining and smelting techniques that require fewer workers. They have also tried to cut costs with mergers.

In July, Asarco and Cyprus Amax announced that they intended to join forces. No money would have been exchanged in the merger. But then, on Aug. 20, Phelps Dodge offered to buy Asarco and Cyprus Amax for $2.56 billion. Federal securities regulators recently approved Phelps Dodge's plan to issue stock in the transaction.

If that deal were approved by Asarco and Cyprus Amax shareholders, Phelps Dodge would replace Codelco, the government-owned mining company of Chile, as the world's largest copper producer.

(On Sept. 9, though, Asarco and Cyprus Amax rejected the Phelps offer as "inadequate and not in the best interest of their shareholders." They urged shareholders instead to approve the merger of their two companies at a meeting scheduled for Sept. 30. In the meantime, Phelps continues to lobby shareholders in favor of its plan.)

"The stronger players see the market when it is down as a time to buy," said John Dobra, professor of economics and director of the Natural Resource Industry Institute at the University of Nevada at Reno, "The weaker companies run for cover."

Though many North American mine operators have suffered in recent months, those overseas have remained relatively prosperous. Mines in Chile, Argentina, Peru and Indonesia, where much of the growth in the industry is taking place, have the advantage of higher quality ore, less stringent environmental regulations and lower labor costs.

For example, it can cost nearly 65 cents to produce a pound of copper in the United States, compared with 50 cents a pound in South America.

To stay competitive, many producers are increasingly opening their own mines overseas or forming partnerships with local companies that are already there.

But Dobra said the industry would almost certainly maintain a significant presence in the United States, at least for the next few decades. The cost of quickly transferring production overseas would be too exorbitant, he said.

Opening a mine costs hundreds of millions of dollars, no matter where it is. Closing an existing mine in the United States costs millions more and carries the potential for additional costs to cover liabilities for environmental contamination.

"There is always the hope that the price of copper will rise and these mines will be profitable again," Dobra said.

Kurt Billick, an analyst in San Francisco who follows the metals industry for the investment firm Warburg Dillon Read, predicted that the price of copper would increase modestly within the next year. With improvements in the Asian economies and the round of new mine openings in South America nearly over, the industry has survived the worst, he said. "But copper," he added emphatically, "is going nowhere near the bull market levels."