Asarco, Cyprus announce merger

The boards of Asarco (AR-N) and Cyprus Amax Minerals (CYM-N) have unanimously approved a merger proposal that would create the world’s largest publicly traded copper company and second-largest copper producer.

The merged company will be known as Asarco Cyprus. Cyprus shareholders will receive 0.765 share of Asarco Cyprus, whereas Asarco shareholders will trade in their shares on a 1-to-1 basis. Ultimately, Cyprus shareholders will hold 63.5% of the 109 million outstanding shares of the merged company.

With annual production of 2 billion lbs. copper, Asarco Cyprus would be second only to Chilean state-owned producer Codelco in terms of production.

Total assets of the merged company stand at US$8 billion, with US$1.4 billion in cash. The market capitalization of Asarco Cyprus would be US$2 billion.

Copper reserves of the new company stand at 62 billion lbs. It would also become the world’s largest producer of molybdenum as a result of Cyprus’ interests.

Asarco Cyprus would operate 12 mines in the U.S. and Latin America, including seven mines in Arizona, and own a 51% interest in the El Abra open-pit mine in Chile, one of the largest in the world.

In addition, Cyprus will contribute its 30% interest in Kinross Gold (K-T), while Asarco will table a 54% ownership in Southern Peru Copper (PCU-N) and a 19% interest in Coeur d’Alene Mines (CDE-N).

The proposed merger follows recent sales and restructuring of secondary assests by both companies. In May, Cyprus sold most of its coal assets to a German firm for US$1.1 billion. It also sold its lithium unit and merged subsidiary Amax Gold with Kinross. Asarco transferred its 50% interest in Silver Valley Resources to Coeur d’Alene Mines.

According to the companies, the merger should result in savings of US$150 million per year, better positioning it to ride out low copper prices.

According to Asarco Chairman Frank McAllister, the new company will enjoy a non-cash benefit in the reduction of the book value of his company. Purchase accounting will enable the company to slow depreciation by US$50 million per year.

Cyprus Amax will shut down its Englewood, Colo., office and reduce staff in New York City in order to trim costs further. McAllister says the companies have no immediate plans to cut production, as has been common among copper producers in the past few months, but adds an impending review of operations could change that.

However, Asarco has recently been down that road, cutting production at its Mission mine in Arizona by 50 million lbs. in the week preceding the merger announcement.

The cuts come on the heels of similar announcements made by Phelps Dodge (PD-N) and Australia’s Broken Hill Proprietary (BHP-N). Despite these cuts, however, warehouse stocks of copper remain high throughout the world.

McAllister says that Asarco Cyprus has no plans to buy the San Manuel smelter complex in Arizona, which was put on the auction block after being closed by owner BHP.

Asarco Cyprus will continue exploration, as each party brings to the table its own budget. Cyprus planned to spend up to US$45 million in 1999, but spending will now be scaled back. Asarco planned to spend US$10 million for the year.

As a result of low copper prices, Asarco Cyprus intends to lower cash operating costs to US50 cents per lb. by the end of 2001. Currently, Asarco produces at US57 cents per lb. and Cyprus at US49 cents per lb. Asarco Cyprus calculates that copper must rise to US65 cents per lb. before it will break even on its net earnings. Every 1 cents increase in the price of copper will result in after-tax earnings of US14 cents.

The market, however, is not enthusiastic about the merger, possibly because of copper overstocks worldwide. Asarco dipped 68 cents to US$18.56 and Cyprus dropped 63 cents in heavy trading to US$14 following the announcement of the proposal.

The transaction, still subject to the approval of both Asarco and Cyprus shareholders, is expected to close by the fourth quarter of the year. The completion of the merger also hinges on anti-trust clearance under the Hart-Scott-Rodino Act, but the companies say they expect no obstacles.

Cyprus Chairman Milton Ward will become chairman and co-chief executive officer of the new company until his retirement in April 2000. McAllister will become chairman, president and CEO by the end of 2000. Ward will stay on as a director of the company after he steps down.

Cyprus Vice-President Jeffrey Clevenger will become vice president and chief operating officer of the new company. He will run the copper and moly business. Asarco President Kevin Morano will become vice president and chief financial officer in charge of administrative functions and non-copper businesses.

In all, Asarco Cyprus will field 16 directors; eight from Asarco and eight from Cyprus. The company will be based in New York City, with operations run out of Tempe, Ariz.