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The Arizona Daily Star, Tucson, Richard Ducote Column

Posted on: Monday, 15 May 2006, 12:05 CDT

By Richard Ducote, The Arizona Daily Star, Tucson

May 14--COPPER'S SHINING MOMENT: If I had predicted a year ago that we would see copper selling for $4 a pound by May 2006, you might have suggested that I check myself in for a thorough psychological evaluation.

Heck, six months ago people thought $2 copper was pretty heady.

The daily spot price of the metal essential to our electrified, amplified existence jumped almost 25 cents a pound Thursday to $4.03.

The reasons given for the soaring prices are thin global inventories depleted by booming demand, supplies crimped by things like labor disputes in Mexico and some good, old-fashioned speculation.

Copper, the first metal put to use by mankind, is very up to date in the modern world. Arizona still produces nearly two-thirds of the nation's copper and most of that comes from Southern Arizona.

New homes need 440 pounds for electrical wiring and plumbing fixtures. Even "wireless" communications use lots of copper in ground systems and the regular phone lines that carry portions of the traffic.

The healthy U.S. economy uses plenty of copper, and the booming economies of China and India are becoming voracious consumers.

Still, "four-dollar copper" is difficult to even pronounce for some of us old-timers who remember when copper selling for 75 cents was a bonanza for mining companies. Today, any price over $1 a pound should keep a modern copper producer in the black. Even the best annual average prices of the past 50 years, adjusted for inflation, fall below $3 a pound.

The most recent runup is nothing short of breathtaking. Copper averaged $1.47 in the first quarter 2005, $2.03 in the fourth quarter 2005, and $2.25 in the first quarter this year.

Arizona's two major copper producers are working to get the metal to market.

Phoenix-based Phelps Dodge Corp. expects to produce 2.1 billion pounds of copper this year for its customers. Tucson-based Asarco LLC says it is on target to produce 407 million pounds.

Both companies have shackles that keep them from cashing in to the fullest on these high prices.

Phelps Dodge is hampered by a hedging strategy put in place a few years ago that actually costs the company money as prices for its product rise.

After years of low copper prices, PD began to plan for some ambitious and costly new mining projects such as the planned $550 million Safford mine. The company decided to buy hedge protection against copper prices falling below 95 cents a pound. In doing so, it took the risk that at very high prices, the hedge protection would cost more money.

Since the fourth quarter, the company has booked $526 million as the estimated cost of the bad bet on copper's future price through next year. But Phelps Dodge won't be standing in a corporate bread line anytime soon.

The company still made $1.56 billion last year and $333.8 million in the first quarter.

Hedging covers 25 percent of the company's production this year and it enjoys the full impact of the hefty commodity price on the remaining three-quarters of its production.

PD reports being up to full production all its facilities, including the Sierrita mine near Green Valley and the flagship Morenci mine about 120 miles northeast of Tucson. "There is nothing we could do right now to increase production," says company spokesman Peter Faur in Phoenix. The company reported more than 4,100 employees in Southern Arizona at year-end 2005 and has hired another 200 this year.

At Tucson-based Asarco LLC, production of copper is crimped somewhat by personnel shortages as the company works back up to full steam from a four-month strike last year.

CEO Doug McAllister says the company, still operating under bankruptcy protection, is generating cash and benefitting from high copper prices. "This is really unprecedented, and we are happy to see it." The company could make more copper but it can't find qualified workers in some areas.

McAllister says the company could use about 70 salaried personnel, including engineers, and 150 hourly workers like electricians and maintenance mechanics at its operations -- the Mission Mine near Sahuarita, the Silver Bell Mine west of Marana, and the Ray Mine and the Hayden smelter about 60 miles north of Tucson.

Total company staffing is at about 2,100 employees, he says, up slightly from last summer when a strike hit company operations.

Copper is riding high now, and jobs in the industry pay well. PD's average employee pay exceeded $45,000 in Southern Arizona last year.

There is talk that speculation by investors has boosted the price for the metal. Now, general inflation anxiety is starting to creep into economic analyses.

Nobody expects $4 copper to last.

The question is -- will the next milestone be $3 or $5? Either way, Southern Arizona stands to benefit.

Contact Richard Ducote at 573-4178 or rducote@azstarnet.com.

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Copyright (c) 2006, The Arizona Daily Star, Tucson

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PD,

Source: The Arizona Daily Star

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