When copper bites – by Kip Keen (Mineweb.com – August 19, 2015)

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When does push become shove as prices of the commodity continue to fall.

HALIFAX – The spot price of copper continues to fall, dropping below $2.30/lb Tuesday and approaching levels that clearly puts pressure on smaller, higher cost and debt-laden producers. But the ongoing rout also raises red flags for larger producers who will feel the pinch on profits, if not mining operations, if the price falls much further.

To be sure, as the copper price stands, the majors and intermediates do not face an existential threat to their balance sheets, or to most operations, as many still produce with basic cash costs a fair bit lower than $2/lb. Glencore, an important copper producer, reported 2014 cash costs at $1.46/lb.

Freeport McMoRan Copper & Gold, one of the more leveraged major copper producers, last reported cash costs of $1.85/lb, for example. And like other miners with operations outside the U.S., they benefit from the strengthening of the dollar, weakening ex-U.S. currencies and, as the case may be, cheaper energy prices.

But there is no escaping the fact dramatically falling prices tarnish copper as a profit center. And even if it isn’t a bad money loser for the majors and intermediates it will put pressure on balance sheets. Indeed, producers such as Teck have already made dividend cuts, in its case by as much as two-thirds. And barring an improvement in other bulk and base metal prices, it seems likely that more such dividend cuts will come, or at least be seriously considered, as profits continue to wane at lower copper prices.

Low copper prices – where they are now and lower – alongside stagnant bulks ratchets up the pressure on others, including BHP and Rio Tinto to cut payouts. So far they remain adamant about maintaining or increasing payouts, despite withering free cash flow.

And if $2.30/lb copper is yet to become an excruciating pressure point for the major copper miners it does inch closer to levels that would raise red flags. BMO analyst Jessica Fung notes in an email that the current situation isn’t dire but suggests much lower prices could pose problems, especially for miners with higher debt burdens.

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