Copper Miners Looking at a Tough Year (FCX, RIO, SCCO, BHP)

From a high of around $4.60/pound in February of 2011, copper prices have fallen around $3.60/pound today, which is actually better than the price of around $3.40/pound at the beginning of the year. Copper miners Freeport-McMoRan Copper & Gold Inc. (NYSE: FCX), Rio Tinto plc (NYSE: RIO), Southern Copper Corp. (NYSE: SCCO), and BHP Billiton plc (NYSE: BHP) have all seen production declines recently, some on purpose and some due to other factors.

Freeport-McMoRan reported first quarter earnings this morning, and revenues are down nearly -20% from the same period a year ago, $4.6 billion this year versus $5.7 billion a year ago. Copper production is down from 950 million pounds a year ago to 833 million pounds this year and unit net costs have risen from $0.79 to $1.26.

In the earnings report, the CEO said that the company plans to increase copper production by 25% in the next 3 or 4 years, and he noted Freeport’s longer-term prospects:

We are highly positive about the long-term prospects of our business and markets. 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.

EPS for the quarter came in at $0.80, versus a consensus estimate of $0.86 and year-ago EPS of $1.57. Gold production was down by -46% although the average realized price per ounce was 21% higher.

Labor problems in Indonesia get some of the blame for the production declines and for higher unit costs. But the company did face higher labor costs in the Americas, and that will likely turn out to be a drag for some time to come.

Southern Copper’s unit costs in 2011 were just $0.41/pound and the company has said nothing yet about first quarter production, nor has it announced a date on which it plans to report earnings. The consensus estimate for EPS is $0.59 on revenue of $1.6 billion. That’s above last year’s actual EPS of $0.55, and is very likely wishful thinking. Southern Copper gets nearly 77% of total sales from copper.

Rio Tinto published its operational review earlier this week, noting that copper production at its Kennecott mine is down -18%, due to the lower grade ores being mined. The company expects the low-grade ores to persist through the first half of the year, but is planning to mine a higher grade area later in the year. The company also plans to shut down its smelter for 26 days in order to switch to equipment to handle the higher grade ores. The company did not say anything about costs or sales in its operations review.

BHP Billiton released an operational review yesterday, showing copper production down -10% for the first nine months of its 2012 fiscal year compared to the first nine months of 2011. The March quarter showed a boost of 3% compared with the same period a year ago, and sequential production was flat. Copper is less important to BHP, which is the world’s largest iron ore miner, but the company is expanding its copper production.

A recovery in copper prices depends almost entirely on demand from China, which takes about 40% of the world’s copper and is currently constrained by near-record inventories of around 3 million metric tons.

Warehouses at the London Metals Exchange, conversely, are more than half empty, which gives some hope for price rises. The bad news, though, is that prices for copper deliveries are higher for immediate delivery than they are for July delivery, a commodities market condition known as ‘backwardation’. Usually this market supports higher prices, but this time a lot depends on how fast and by how much China uses its stockpiles.

Freeport shares are up about 2% at $39.05 in a 52-week range of $28.85-$56.78.

Paul Ausick