EDITORIAL & OPINION — An industry in transition — Chasing the copper crown

Experts have been talking about mining industry consolidation for so long that the arrival of those aspiring to be king of their respective mountains seems almost anti-climactic. The pace of consolidation has been slow, but that doesn’t mean it hasn’t been traumatic.

The global copper industry has been in a tizzy since Asarco and Cyprus Amax Minerals announced plans for a two-way merger to create the world’s second-largest producer. Chile’s state-owned Codelco, which cranks out roughly two billion pounds of the red metal annually, would still be king of Copper Mountain if the merger is successful.

However, American copper giant Phelps Dodge is aiming to topple Codelco from the throne. It wants to become king through a newly announced takeover bid for Asarco and Cyprus Amax. If successful, the resulting entity would then wear the copper crown, with annual production projected at 3.8 billion pounds.

As might be expected, Asarco and Cyprus Amax aren’t taking kindly to the idea, though they are willing to negotiate a “merger of equals” with Phelps Dodge after they complete their own two-way merger. No thanks, says Phelps Dodge, which believes the price of a “merger of equals” is too high. How these battles in the global copper war shake out remains to be seen. What is certain, however, is that not all copper producers in business today will be around tomorrow.

Copper, like nickel and gold, is an industry in transition. Too much supply and too little demand have pushed prices downward and high-cost producers out of the game. Strategies have changed. Geographically, more new mines are being built in the south than in the north. Technically, sulphide mills are being replaced by solvent extraction-electrowinning (SX-EW) plants. And at the corporate level, the sharks are swallowing the minnows.

That the big want to get bigger is nothing new. The mining game is as much about mining for opportunity as it is about mining for ore. But while size matters, it isn’t everything. Growth through acquisition has pitfalls, and mining history is fraught with mega-takeovers that didn’t exactly work as planned.

Australia’s BHP Minerals learned this the hard way in early 1996 when it acquired Magma Copper in order to become a bigger name in the copper business. The company, already a huge player with its massive Escondida mine in Chile, was looking to diversify and expand. It shelled out US$1.8 billion for Magma shares and assumed Magma’s debts, which brought its total investment to US$2.4 billion.

The sad story of that investment is recounted in the company’s latest annual report, appropriated titled Under Pressure. The sulphide operations at Magma’s San Manuel and Pinto Valley mining operations in Arizona have ceased operations, unable to compete in the current price environment; so, for the same reason, have Magma’s Robinson mining operations, west of Ely, Nev. Clearly, this is not the company’s finest hour, as evidenced by a series of recent management changes.

Highland Valley Copper, Canada’s largest base metal mine, has always had size on its side. But everyone knows it is on its last legs, unable to compete with higher-grade mines in Chile and SX-EW plants in other parts of the world.

In the past, size has mattered in the base metal sector because the major players had milling, smelting and refining complexes that require a steady supply of feed. But it matters less to producers with SX-EW operations, as these do not require such infrastructure.

This doesn’t mean sulphide deposits cannot compete. They can even undercut the cash costs of SX-EW operations, provided the grade is high enough. Grasberg in Indonesia is by far the most impressive case in point.

Copper, like nickel and gold, is an industry in which size no longer matters as much as it used to. Controlling production costs is more important, and that isn’t likely to change, notwithstanding the latest flurry of favourable investor sentiment for the base metal sector.

Despite all this, it would be a mistake for investors to think that today’s major sulphide producers are yesterday’s news. Almost all have developed SX-EW plants in Chile and elsewhere. Nickel producers are following suit, shifting from sulphide mines in the north to laterites and pressure-acid-leach plants in southern climes.

And it’s also important not to forget that the big producers making the transition from sulphide operations to SX-EW plants have three advantages a lot of newcomers don’t have: customers, a strong marketing presence, and research-and-development teams at the cutting edge of new technology.