July 18, 2008

Skyrocketing Prices Make Metal Solid Investment

By Tom Gibbons

The main driver behind the price increase for metals is increasing demand in emerging economies in the world. Even as the U.S. economy slows, demand for commodities remains strong worldwide.

"Commodities offer an opportunity that's non-correlating to the stock market," says Mike Bowen of WealthTrust Arizona in Scottsdale.

In early July, the Dow Jones Industrial Average entered bear territory--indicated by the index falling 20 percent below its recent high. The stock markets have been sluggish at best since last summer when the mortgage crisis first hit.

Bowen says his company has a futures-contract investment vehicle that was up 15 percent for the year in early July.

While commodities represent a chance for investors to diversify, like any other investment, they come with risk.

"You have to be able to go long and short with them," says Bowen. With futures contracts, investors or their money managers are able to bet whether commodities will go up or down.

Part of the reason prices for copper and other metals are high may be because speculators have invested heavily in them. Just as investors bid up stocks in the late 1990s and real estate for much of this decade, money is pouring into commodities.

"A bubble could be forming," Bowen says.

Still, the underlying demand looks like it will remain strong, which is increasing exploration and development in Arizona.

"This wasn't the case a few years ago," says Nyal J. Niemuth, chief mining engineer for the Arizona Department of Mines and Mineral Resources.

Companies ramping up efforts

Mining companies are again plunging into the ground looking for pay dirt. Recent ventures include:

Resolution Copper Co., a joint venture of Rio Tinto and BHP- Billiton, is drilling in order to find more information about the size of a huge deposit near Superior. The operation is predicated on a federal land swap that is pending before Congress. Indian tribes and environmental groups heavily oppose the land swap.

BHP-Billiton reopened the Pinto Valley mine--idle since 1998--in October.

Freeport-McMoRan Copper & Gold plans to resume operations in Miami in 2010.

Freeport-McMoRan Copper & Gold's predecessor company, Phelps- Dodge, rode the price run-up in copper to prosperity.

In 2002, Phelps Dodge lost $338 million. But when athe price of copper started its ascent in 2003, the company returned to profitability. The stock soared, and the Phoenix-based company proposed a three-way merger with two Canadian companies in 2006.

After that deal fell apart, rival Freeport-McMoRan Copper & Gold swooped in and acquired Phelps Dodge for $26 billion. The deal was completed in March 2007.

Freeport-McMoRan then moved its headquarters from New Orleans to Phoenix. Freeport-McMoRan employs 8,700 in Arizona. At the time of the merger, Phelps Dodge had approximately 5,525 employees in Arizona.

"The increase since then is largely attributable to increases in employment at our mining operations," Eric E. Kinneberg, director of external communications for Freeport-McMoRan, wrote in an e-mail.

Besides the Miami mine, Freeport-McMoRan plans to invest approximately $370 million in capital in its Morenci, Bagdad and Sierrita operations, Kinneberg said.

The rise in commodities is a bit of a double-edged sword for the mining company.

"Mining is an energy-intensive industry, so we are impacted by the increasing cost of fuel and power," says Kinneberg. "We also use significant amounts of steel products and reagents, the prices of which have also been increasing.

"However, the increases in the prices of our products have more than offset these cost pressures."

Freeport-McMoRan reported earnings of $2.64 per share in first quarter of 2008, compared to per-share earnings of $2.02 in the same quarter of 2007.

The company benefitted from increased copper prices and production, specifically noting a reopened mine in Safford.

"Copper sales in North America totaled 339 million pounds in the first quarter of 2008, 32 million pounds higher than the pro forma first-quarter 2007 principally because of the commencement of production at the recently commissioned Safford mine," the company reported.

Consolidated sales from mines for the first quarter totaled 911 million pounds of copper, 280,000 ounces of gold and 20 million pounds of molybdenum, compared with 520 million pounds of copper, 956,000 ounces of gold and 2 million pounds of molybdenum for first- quarter 2007.

And overall production is expected to increase substantially this year compared to 2007. Consolidated sales from mines are expected to approximate 4.2 billion pounds of copper, 1.4 million ounces of gold and 75 million pounds of molybdenum in 2008, the company reported.

Originally published by Tom Gibbons.

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