Asarco poised for metal price upswing

Commenting on the 1991 performance of Asarco (NYSE) at a recent meeting of the Toronto Society of Financial Analysts (TSFA), Chairman Richard de J. Osborne said it was “not a great earnings year.”

Asarco had net earnings of US$46 million compared with US$149.1 million in 1990. Reduced metal prices were the main cause. First-quarter results for 1992 show no improvement: US$6.9 million versus US$8 million in the corresponding quarter of the previous year.

Despite poor financial results, the company is well positioned to take advantage of the next upturn in prices.

Asarco’s strategy since 1985 has been changing from custom smelting and refining to integrated production of copper, lead, zinc and silver. Prior to 1985, less than 20% of the company’s production of these metals came from its own mines. In 1991 it was 76% and the objective is self-sufficiency when the present expansion in the copper division is completed in 1992. The greater part of copper production will come from major expansions of the Mission/Pima complex and the Ray mines in Arizona. Supplementary copper will originate from Silver Bell, Ariz., and the Continental mine, Butte, Mont. Asarco acquired a 49.9% interest in the latter in 1989. All are open pit mines.

Pima was acquired in 1985, giving the Mission/Pima complex a production of 59,000 tons copper that year. The physical merging of these two pits and the later inclusion of the Eisenhower and San Xavier South mines have now created a single immense pit 2.5 miles long and 1.5 miles wide. Ore reserves are 585 million tons grading 0.67% copper, and scheduled copper production for 1992 (in concentrates) is 124,000 tons.

Investment at the Ray mine is similar. Mine and smelter were purchased in 1986. Production in the year prior was not much more than 100,000 tons. When expansion is completed in 1992, annual production will be 182,000 tons copper in concentrates. Ore reserves there are 609 million tons grading 0.68%. Expansion of smelting and refining capacity has gone hand-in-hand with the increase in mine production. Total refined copper produced in 1991 was 492,800 tons (482,400 tons in 1990).

Lead is Asarco’s second volume product, registering 208,000 tons refined metal in 1991 (190,000 tons in 1990): 54% came from its own mines (one is in Peru), with the remainder coming from custom ores.

Zinc production totalled 119,400 tons in concentrates (119,800 tons in 1990). All was smelted by others. The company’s own smelters at Amarillo and Corpus Christi (both in Texas) were closed in 1975 and 1985 respectively because of obsolescence and environmental concerns.

Asarco anticipates improved prices for base metals in the near future. It also expects a significant rise in silver prices before the end of the century. Silver production has exceeded demand by a large margin since 1979 and supply and demand didn’t finally come into balance until 1990. The company is forecasting an accumulated deficiency of 972 million oz. between 1990 and 2000.

The big question is, how long will it take for the silver inventory to work down and spur an increase in price? A large part of the inventory is in private hands and cannot be quantified. Asarco has a lot riding on its production which averages more than 11 million oz. of the metal per year.