Falling copper prices taking toll on stocks

2012-04-22T00:00:00Z 2014-07-15T17:50:50Z Falling copper prices taking toll on stocksTony Davis Arizona Daily Star Arizona Daily Star
April 22, 2012 12:00 am  • 

With copper prices dropping this year following a boom, copper company stock prices are taking a hit.

Most such stock prices have sagged this spring compared to 52-week peaks in spring and summer 2011, when the copper price crested in the $4.25-per-pound range. Today, global copper prices are about $3.60 to $3.70 per pound.

Companies with the biggest stock price declines are smaller ones trying to develop new mines, as opposed to established giants that produce copper from existing mines.

In Arizona, the stock price drops are affecting companies as established as Freeport McMoRan Copper and Gold, Asarco and smaller companies including Augusta Resource Corp. That's the British Columbia-based parent company of Rosemont Copper, which is seeking to develop the Rosemont Mine in the Santa Rita Mountains.

Other smaller companies affected by lower stock prices are seeking to develop copper mines in the Oracle, Dragoon, Florence and Miami areas. As of Thursday, stock price declines since spring and summer 2011 ranged from 34 to 85 percent for those companies, compared to 33 percent for Freeport and 17 percent for Grupo Mexico, Asarco's Mexico-based parent.

Officials with four of those companies, including Augusta, said they remain upbeat about long-term prospects, given what they say are low expected production costs and bullish outlooks for copper over the next few years. Industry analysts generally agree.

China slowdown

The major reason copper prices are declining is that growth is slowing in China, which consumes 40 to 45 percent of the world's supply. Its seemingly insatiable appetite for copper had rapidly pushed up prices.

Now, "It's pretty clear to a lot of traders and certainly analysts with investment banks that the global demand for copper is slowing down pretty significantly," said Nick Johnson, editor of Platts Metals, a news and data provider for the international metals and mining industry. Recently, "I haven't seen anyone who is bullish on copper," Johnson said.

Generally, "More and more concern is starting to surface that Chinese copper demand is dropping. If that is the case, maybe that's giving some buyers of copper stock pause, and they are looking at other areas to invest," said Michael Gross, an analyst for Optionsellers.com, a Tampa, Fla., company that trades in commodity futures.

But stock investors are overreacting to declining copper prices, said Raymond Goldie, a vice president and senior mining analyst for Salman Brothers in Vancouver, British Columbia. "The stocks are priced as if the price of copper is going to go to $2, yet on the London Metal Exchange, copper price futures are $3.50," Goldie said.

"Are copper prices depressed now? No, they are not, they are at an all-time high," Goldie said. "But they're not going to stay there - the equities people are saying they are going to come down."

Given economic uncertainty, "risk averse" investors start selling off stock, said Christopher Chang, an analyst for Laurentian Bank in Toronto.

"A lot of these investors lost a lot of money in the past two years. They're just wary," said Chang.

Europe's weak economy also affects copper demand, said Charles Bradford, a longtime metals analyst in New York City. A U.S. housing market recovery would help copper, although not as much as in the past because new homes typically have plastic rather than copper pipes. They still have plenty of copper wiring, though.

Generally, stock prices of smaller companies trying to develop mines have dropped more than those of larger companies. That's because the larger companies are at least producing and selling metals, said Bradford and several other analysts. Getting government permits for a new mine also is a huge issue that can affect stock price, Bradford said.

"One of the difficulties companies are having with this (Obama) administration is that they don't seem to recognize the costs of delay," said Bradford. "The previous administrations were not so good, either. If you delay something a year, it raises the costs 10 percent."

Delays hurt stock prices

For Augusta Resource in particular, delays in permitting are a big factor in its stock price, said Chang, the only one of seven analysts who follow the company who agreed to be interviewed.

In particular, delays in getting an air-quality permit and final approval of Rosemont Mine's power line, along with two critical letters from the Environmental Protection Agency, have taken their toll, said Chang. The EPA letters particularly were a meaningful setback, Chang said.

Permitting aside, "the project is great. It has a low capital cost intensity and there is great infrastructure in the area," Chang said. "The asset - the copper resource - is great.

"There is no political risk there," he said, referring to the United States' political stability compared to some unstable foreign governments where copper is mined. "A lot of times, to find a decent asset, you have to go to a very undeveloped part of the world like the Congo or Indonesia, and those are very challenging to operate."

Augusta and Rosemont Copper have said they hope to receive all permits this year and to have the open pit mine operating in 2014. An April 11 report from Chang predicted the company would receive all permits by the second quarter of 2013 and start operating by the second quarter of 2015.

Once the permits are approved, Chang predicts a $5 per share stock price, compared to $2.66 per share on Friday. Chang rates Augusta a "speculative buy" - a stock with a higher risk but typically a better return.

In an email to the Star, Augusta's vice president for investor relations, Letitia Cornacchia, wrote that the Rosemont mine would thrive even with lower copper prices because of its low operating costs compared to many mines. Because of that, the company expects to have no issues financing the mine's construction, Cornacchia said.

It has raised $500 million for the billion-dollar construction project. It expects to raise the rest in the second and third quarters of 2012, Cornacchia wrote. That's a slight delay from a company prediction last fall that the money would be raised by this month.

With Rosemont's feasibility study showing it would be very profitable at a $1.85-per-pound copper price, today's higher price of $3.60 to $3.70 "puts the project in an enviable position to provide stable jobs, business opportunities and substantial revenue to the local economy, in addition to helping bolster state and federal funds through significant tax revenue," Cornacchia wrote.

PRICE REBOUND PREDICTED

Mike McPhie, CEO for Curis Resources, a Vancouver company that's trying to develop a copper mine in Florence in Pinal County, said there's been a "pretty wide general malaise" in equity markets for copper companies. But he said that when his company gets its two main state and federal permits, releases a feasibility study and starts construction on a small-scale test operation, "We expect that will have a positive impact on the share price."

The company hopes to have all those steps finished in six months, said McPhie, noting that it's seeking amendments to existing permits previously obtained by another company. The mine proposal, like Augusta's, has drawn environmentalist opposition, as well as from some area developers who plan retirement communities nearby.

Tom Aldrich, an Asarco vice president, said company officials think copper prices will rebound fairly soon, with global copper stockpiles still relatively low and the U.S. economy slowly improving.

Likewise, Freeport said its officials are "highly positive" about the company's long-term prospects. It reported 50 percent lower first-quarter 2012 earnings last week compared to the same period a year ago. Its officials blame that largely on a three-month strike at an Indonesia copper mine and other labor disputes there that are mostly resolved.

"Our company is well-positioned with long-lived reserves and mineral resources, an attractive mid-term and longer-term organic growth profile and a strong financial position," Freeport said in a statement.

Copper analyst Gross said he expects to see the commodity's price range from $3.10 to $4 this year. He said it could return to last year's highs in 2013, if the U.S. economy, for instance, turns the corner.

But while for the longer term "We feel pretty good about copper," anyone who wants to buy copper as a commodity right now should wait a few months, Gross said:

"We think they will be able to buy at lower prices over the next three to six months."

Mining company stock values decline

Stock price declines from 52-week highs of copper companies operating or trying to develop Arizona mines. Prices as of Thursday:

Stock decline Price per share

Bell Copper of Vancouver B.C. down 85% 4 cents seeking to build a mine in the Miami area

Curis Resources of Vancouver, B.C. down 74% 83 cents seeking to build a mine in the Florence area,

Augusta Resource Corp. of Vancouver, B.C. down 54% $2.55 seeking to build the Rosemont Mine near Tucson

Excelsior Mining Corp. of Phoenix down 41% 50 cents seeking to build a mine in unincorporated Cochise County

Oracle Mining Corp. of Vancouver, B.C. down 34% $1.40 seeking to build a mine on Oracle Ridge in the Catalina Mountains

Freeport McMoRan Copper and Gold down 33% $38.03 based in Phoenix, operating five Arizona mines

Grupo Mexico down 17% $3.09. owner of Tucson-based Asarco, operating three Arizona mines and a smelter

Contact reporter Tony Davis at tdavis@azstarnet.com or 806-7746.

Copyright 2014 Arizona Daily Star. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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