Copper industry all shook up

Denver — It has been an eventful year for copper — one in which many changes occurred that will affect the industry for decades to come.

Nineteen ninety-nine started where the previous year left off: with a growing surplus of metal hanging over the market. Prices dipped below US65 per lb., the lowest in more than two decades, forcing Australia’s Broken Hill Propriety (BHP-N) to shut its American operations during the first quarter. (The dip in price, unfortunately, has sealed the fate of BHP’s ill-timed US$2.4-billion takeover of Magma Copper in 1996.)

The upside is that the shutdown took copper metal out of the production line. Many other companies followed BHP’s lead by implementing cutbacks in the second quarter, helping the industry out of its depression, and moving the price above US75 per lb.

Much of the overhang still exists, though the market is anticipating a turnaround in Asian economies.

The real long-term changes in the copper industry began in July 1999, when Asarco, responding to merger mania in the aluminum industry, started a chain of events few could have predicted. Long-time Asarco president Richard de J. Osborne stepped aside, making way for new leadership under Frank McAllister. McAllister offered to merge his company with Cyprus Amax Minerals, then under the leadership of Milton Ward.

The resulting company was to be the second-largest copper producer in the world, behind Chile’s Corporacion Nacional del Cobre (Codelco). But it was not to be.

Enter Phelps Dodge (PD-N).

Not wanting competition from the combined Asarco Cyprus, Phelps Dodge offered to take over both of them in a 3-way deal aimed at creating a rival for Codelco.

The merger, however, proved much too great a trick to pull off. The three parties traded barbs in the press throughout the rest of the summer, unable to reach an agreement, until a fourth party entered the picture.

In October, Grupo Mexico, with the backing of Chase Manhattan Bank, offered to buy Asarco in a cash deal valued at US$2.4 billion, including the assumption of Asarco’s debt.

This new deal spelled the end of the Asarco Cyprus transaction, though Phelps Dodge hung in for as long as it could in hopes of capturing both Asarco and Cyprus. When Grupo Mexico upped its cash bid to US$29.75 per share, Phelps Dodge resolved to swallow up only Cyprus, leaving Asarco at the mercy of Grupo Mexico.

The roots of the Grupo Mexico transaction can be traced back 100 years, to the creation of Asarco, then known as American Smelting & Refining. The Mexican assets that were part of the original company were later stripped in a partial nationalization program in 1948. The resulting Mexican assets evolved through a series of changes into Grupo Mexico, in which, for many years, Asarco held a significant stake. The irony is that Grupo Mexico has taken over its one-time masters.

The Mexican conglomerate borrowed US$817 million from Chase Manhattan to complete the deal, whereupon it sold off Asarco’s specialty chemicals unit, Enthone OMI, for US$503 million. It now intends to liquidate the aggregate division, American Limestone, for another US$250 million, nearly wiping out its acquisition-related debt in the process.

Grupo Mexico has also made a clean sweep of Asarco management, as well as the management of the 54%-owned subsidiary, Southern Peru Copper (PCU-N). The layoffs apparently ruffled the feathers of many of the expatriates working for Asarco and Southern Peru, as well as the Peruvian government. However, Grupo Mexico says it plans to honour commitments made by Southern Peru, including modification of the Ilo smelter.

The victors say the consolidation was required because it lowered cash operating costs below US50 per lb., enabling the industry to weather this extended period of low prices. Still, it is hard to look at the copper mergers as good for the remaining junior companies.

The consolidation brings the number of large U.S.-based copper producers down to three: Phelps Dodge, Freeport-McMoRan Copper and Gold (FCX-N) and Kennecott, the last being a subsidiary of U.K.-based Rio Tinto (RTP-N).

Management, too, has a new face. Gone are the men who precipitated this last round of mergers. Milton Ward walked away from the chairmanship of Cyprus after Phelps Dodge took over the company; Asarco’s McAllister, after climbing to the top, is out now that his company has come under Mexican management; even Phelps Dodge’s Douglas Yearley has stepped down, to make room for Steven Whistler.