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In This List

Copper miners cite global trade tensions in shrinking Q2'19 profits

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Copper miners cite global trade tensions in shrinking Q2'19 profits

Leading North American-listed copper miners pointed to weak copper prices resulting from global trade tensions as one factor driving down profits during the second quarter.

Freeport-McMoRan Inc. President and CEO Richard Adkerson said on a July 24 conference call that the impact of trade uncertainties between the U.S. and China pulled down the price of copper and helped drive the company's US$72 million loss for the quarter. "These uncertainties are affecting the confidence level of some of our customers, and to a limited degree, short-term demand."

In a similar vein, Southern Copper Corp. dropped its copper demand growth expectations for 2019 to 2% from 2.5%, citing worries over sluggish economic growth weighing on copper prices. Still, company CFO Raul Jacob Ruisanchez said on a July 24 conference call that he expects prices to recover "in the coming months."

U.S.-China trade tensions also cropped up in Vale SA's second-quarter copper outlook. "We expect the market to remain essentially balanced with some upside risk for deficits in 2019, with macroeconomic factors, such as the trade dispute between China and the U.S., continuing to influence price as it has over this past quarter," the company said in its second-quarter earnings release.

Teck Resources Ltd. President and CEO Donald Lindsay cast media coverage of U.S. and China trade tensions as overblown, saying he expects growth in China to support commodity prices. "There will be moments of weakness that get exaggerated by media, generally U.S.-based media," Lindsay said. "But on balance, I think China is doing pretty well."

During the quarter, Grade A copper on the London Metal Exchange fell from highs exceeding US$6,500/tonne in April to under US$6,000/t in late May, where the price has largely remained. It recently traded at US$5,775/t.

Analysts pointed to copper's weakness as helping drive down profits but also saw some bright spots in demand. "While copper prices remain under pressure, and overall demand growth rates sluggish, one area of particular strength is wire and cable demand in China," BMO Capital Markets analyst Colin Hamilton said in an Aug. 6 note, pointing to infrastructure demand in particular.

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Southern Copper saw strong production growth in the second quarter, up 16.5% year over year to 256,352 short tons, while lower prices hurt the company's total sales, which fell 1% to US$1.82 billion. Net income dropped 1.8% year over year to US$402.4 million.

Freeport-McMoRan's second-quarter copper production fell to 776 million pounds, from 1.01 billion pounds the year before, amid a capital-intensive expansion of underground mining at the Grasberg copper-gold joint venture in Indonesia.

Teck Resources' profit attributable to shareholders sunk 63.6% year over year in the second quarter to C$231 million, while the company outlined plans to use 30% of cash flow to pay out additional shareholder distributions. Its copper output rose 2.7% year over year to 77,000 tonnes.

Meanwhile, top copper producer Codelco saw production fall 12.1% year over year to 769,400 tonnes in the first half, according to a Reuters report.

Capex bloat

During second-quarter earnings calls, a couple of copper miners addressed significant capital expenditure increases for major copper growth projects.

Rio Tinto recently flagged a capex surge of US$1.2 billion to US$1.9 billion for underground development at the Oyu Tolgoi copper-gold mine in Mongolia. The mine is majority-owned by Canadian-listed Turquoise Hill Resources Ltd., which is majority-owned by Rio Tinto.

The capex increase brings projected costs of the underground development to between US$6.5 billion and US$7.2 billion.

Addressing possible concerns over funding, Turquoise Hill CEO Ulf Quellmann said on an Aug. 1 earnings call that the company had about US$3 billion in liquidity at the end of the second quarter. Quellmann said that would be enough to cover operations and underground development through the end of 2020, after which the company will need to source additional funding.

Turquoise Hill has tapped external financial advisers to consider alternatives and has been in talks with existing lenders for US$1.6 billion of supplemental debt, Quellmann said. "With a project as robust as the Oyu Tolgoi underground mine, we're confident that we'll be able to secure funding on a timely basis."

First Quantum Minerals Ltd. reported a 6% capex increase at its Cobre Panama mine in Panama, with total capex expected to hit US$6.7 billion partly owing to efforts to accelerate construction of the mine. The ramp-up of Cobre Panama was ahead of schedule, and it was expected to achieve commercial production by the end of the third quarter, First Quantum President Clive Newall said on a July 30 earnings call.

The company's second-quarter copper output grew 11.6% year over year to over 168,000 tonnes, boosted by pre-commercial production from Cobre Panama.