Wednesday, January 03, 2007

Resource related: copper & uranium

We've seen the copper price breaking down a bit over the past couple of weeks. Now Reuters reports that the ongoing slide in copper prices is, predictably, showing its effect on the shares of copper producers.

The price of copper in New York has erased nearly 16.5 percent of its value since the start of December as steady builds in stock levels, coupled with softer demand in the United States and China, and receding threats of supply disruptions out of Chile, have all contributed to the market's bearish tone, analysts said.

The lower copper price, coupled with higher inventories, predictably sent copper mining company stocks down when the markets opened again after four days.

In morning trading on the New York Stock Exchange, Freeport stock was down $4.92, or 8.83 percent, at $50.81. Phelps Dodge Corp. (PD.N: Quote, Profile , Research), another U.S. copper producer, which Freeport is in the process of acquiring in a $25.8 billion deal, saw its stock fall 2.9 percent to $116.25.

Is the big Freeport-Phelps Dodge deal a sign of a top in the copper market? The deal was announced in November, just as copper prices began breaking down towards the lows of last spring/summer.

Plus, some metals watchers and newsletter writers are very skeptical about the merits of such a deal. From Resource Investor:

John Doody, Editor of Gold Stock Analyst, said the deal changes the basic nature of FCX, from gold being approximately 30% of total revenues to just about 6%.

“FCX’s significant free cash flow will no longer be used to pay extra dividends and buyback stock - it will now be used to payback debt,” said Doody.

He added that although the new FCX said it will not hedge copper, the company implied during the conference call it might monetize gold by selling a “gold preferred” as it had done in the past.

Szabo said his main concern was that the deal will give new company an estimated total debt of approximately $17.6 billion, or $15 billion net of cash, owed to financiers JPMorgan and Merrill Lynch.

“I'm not sure it is prudent to be taking two essentially debt free companies near the possible top of the base metals cycle and combining them to create a debt-laden giant copper producer,” said Szabo, adding “this looks to me like a bet on high copper prices.”

He said that this is a lot of debt to worry about should copper prices collapse, which is “something which more than one ‘metal guru’ views as a distinct possibility.”

Update: January 4th commentary from Andrew Cole of Metal Bulletin Research who suggests that copper may enjoy a continued bullish outlook following this ongoing near-term correction. See also, the accompanying video clip, courtesy of Moneycontrol India.

So there you have it. Have a look and come to your own conclusions.

Now onto the white-hot uranium market and some news we've been wanting to discuss since the new year.

Australian Prime Minister John Howard has asked his nation's state governments to withdraw restrictions on uranium mining, in an effort to capitalize on the country's mineable resources and the ongoing uranium boom.

From Bloomberg:

Australia, with 40 percent of the world's uranium's reserves, contributes just 23 percent of global output because miners such as BHP Billiton have been prevented from opening new pits. The bans were introduced in 1983 by the Labor Party, which lost office in 1996 to Howard's coalition government. Labor controls all eight state and territory governments and the party's policy will be reconsidered at a conference in April.

``I call upon state governments to end their bans on uranium mining and exploration, which stand in the way of investment, jobs and exports,'' Howard said in a statement e-mailed to Bloomberg News.

Prices for uranium, which is used to power plants that supply 16 percent of the world's electricity, have surged almost fourfold in the past three years. Higher coal, gas and oil prices and pressure to cut greenhouse gas emissions, blamed for global warming, are driving increased use of nuclear power.

Australia's federal government controls the sale of uranium while state and territory governments administer mining permits. Mining of the metal is limited to three sites: BHP Billiton's Olympic Dam mine in South Australia; Energy Resources of Australia Ltd.'s Ranger mine in the Northern Territory; and Heathgate Resources' Beverley mine in South Australia. Heathgate is owned by San Diego-based General Atomics.

Australia's "three mines" policy had limited mining to the sites mentioned above in the article. Many uranium share investors and nuclear energy proponents had been hoping for an eventual withdrawal of that policy and mindset. Looks like we're well on the way toward seeing that come about.

And on that note, we should mention that Mineweb is reporting on a hot IPO in the junior uranium maket.

The latest junior uranium explorer to hit the market is Perth-based uranium resource company Prime Minerals (ASX: PIM), which today has listed on the ASX, closing at a 190 per cent premium to its issue price, after its Initial Public Offer (IPO) was oversubscribed and raised A$2.2m.

Prime shares traded as high as 59 cents, a 195% premium of to the issue price of 20 cents, before closing at 58 cents, with more than 1.3 million shares traded.

See also, Sydney Morning Herald's story, "Hanging out for big uranium numbers" for more on the potential of some new Australian discoveries.