Mines fail to fulfill global copper demand

In recently published analyses, Prudential Equity Metals Analyst John Tumazos also expressed skepticism that mega-U.S. copper miner Phelps Dodge will actually be acquired in a hostile takeover bid.

Tumazos has now raised his estimate of the increase in global copper demand to 2.2% this year. Meanwhile, he lowered global copper mine output by 0.6 mmt “owing to operational setbacks or unrest. ‘Earlier in this decade we had anticipated more output gains in geologically fertile regions than appear to be developing.”

Among the impacts to copper markets is the Mongolian windfall profits tax, which is “likely to delay new mines there as mines attempt to convince officials to reform it.” In the meantime, the decision by Freeport-McMoran Copper & Gold (FCX) to shift to underground mining at Grasberg earlier than 2015 will also generate up to a 2% dip in world copper output in its first two transition years, according to Tumazos.

He also questioned whether refined copper output gains, particularly in China, have actually occurred this year. “It is possible that Chinese government reported deliberate false large refined output gains to depress world copper prices since it imports over 80% of its copper needs and had a large futures market short that got “squeezed” in November 2005,” Tumazos asserted.

Nevertheless, Tumazos forecast that mining copper output will rebound to 15.9 million tons by 2007. ‘ Minerva.

He based his predictions on a $3/lb copper price for 2007. Prudential estimated a $2/lb copper price level in 2009 and 2010.

In the meantime, Tumazos expressed skepticism that Phelps Dodge will be acquired in a hostile takeover bid, citing the “inadequate nature of PD’s valuation, which reflects copper market uncertainty, as the major impediment to a takeover.”

Although activist hedge fund Atticus Capital has been encouraging a potential hostile takeover bid for PD, Tumazos theorized that “there is a very large likelihood of at least 50percent that PD’s shareholders reject any bid under $150 per share as inadequate or ridiculous. After all, FCX, RTP and BHP each trade much nearer to a 10 P/E or twice PD’s valuation.”

Tumazos blamed PD’s policy of maintaining overall silence on its exploration finds from “preventing its shareholder from knowing” about potential major discoveries, and “contributes to the undervaluation” of Phelps’ stock.

However, Tumazos is very bullish regarding the prospects of Phelps’ Tenke Fungurume copper/cobalt deposit in the Democratic Republic of the Congo.

“If sized for a 20 year life with 90% copper and 80% cobalt recovery, it would produce 1.35 million tons of copper and 120,000 tonnes of cobalt, which would represent 7% of world copper and 2.4 times current cobalt use,” he said. Tumazos suggested the enterprise value of the project “is more than three times that of FCX since the mineral is more than three times as rich and the byproduct is many times richer.” ‘ Mineweb.

November 2006
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