Lower copper prices will affect Asarco

The belief that copper prices will continue their downward slide leads New York-based investment firm J.P. Morgan to predict sharply lower earnings for Asarco (NYSE).

Morgan revised its forecast for copper prices, projecting an average price of US$1.10 per lb. for 1996, US90 cents for 1997 and US85 cents for 1998. The estimates represent downgrades from previous projections of US$1.20 per lb. this year, US$1 for 1997 and US95 cents for 1998.

Asarco had a phenomenal year in 1995, reporting record earnings of US$5.87 per share before extraordinary items, based on an average copper price of US$1.33 per lb.

J.P. Morgan points out that Asarco is highly leveraged to copper prices and predicts sharply lower earnings for this year and losses in 1997 and 1998, as copper prices track even lower.

Earnings for 1996 are projected at US$1.86 per share, while losses in 1997 and 1998 are expected to reach US$1.10 and US$2.39 per share, respectively.

Copper production during the same period is expected to increase marginally, to 1.29 billion lb. from 1.27 billion lb., with costs in the region of US63 cents per lb.

Consequently, J.P. Morgan ranks Asarco as a “market performer” and has reduced its target price to US$32 per share, compared with the issue’s recent trading level of US$30.

Conversely, and despite the dour predictions for copper prices, the investment firm offers a better outlook for Phelps Dodge (NYSE).

Phelps is also rated as a “market performer,” but its target price has been increased by US$2 per share to US$75, compared with the stock’s recent market price of US$60.

Among the major copper producers, Morgan believes Phelps Dodge is the company to own, based on its quality assets, liquidity and low price leverage.

Phelps produced some 1.4 billion lb. of the red metal in 1995 at an estimated net cash cost of US54 cents per lb., helping it earn US$10.42 per share before extraordinary items. PD Industries, a subsidiary, contributed US$243.3 million (22% of operating profit), thanks to growing carbon black production and higher sales volumes for its wire and cable operations.

J.P. Morgan projects Phelps’ earnings in 1996, 1997 and 1998 at US$8.39, US$5.62 and US$5.11 per share, respectively.

Morgan also believes that Phelps will continue buying back its shares in 1996, giving the company’s share price a solid base.

Phelps has a strong balance sheet, with an estimated working capital position at the end of 1995 of US$1 billion, a figure roughly equivalent to its long-term debt.

Phelps Dodge has 70 million shares outstanding.