Glencore latest to slash near-term copper production

VANCOUVER — Copper producers have seen margins come under pressure, as spot prices for the red metal hover near six-year lows well below the US$3 per lb. level over the medium-term. London-based Glencore (LSE: GLEN) is the latest miner to respond by shuttering higher-cost copper operations in an attempt to lower companywide cash costs.

On Sept. 7 the company said it would suspend work for 18 months at the Katanga copper operation in the Democratic Republic of the Congo and the Mopani copper mine in Zambia.

The shutdown is part of a business review that Glencore hopes will lower its copper cash costs to US$1.68 per lb. at both operations, which were most recently producing copper at US$2.50 per lb.

The company says the suspension will remove 400,000 tonnes of copper cathode from the market, which equates to 1.2% of forecasted copper supply in 2016 on an annualized basis.

CEO Ivan Glasenberg said on a conference call that the cuts are meant to show leadership and impact the market, while pointing out that China has seen 2–3% year-on-year growth in copper demand in 2015, and that the company’s order book is looks “stronger” for the rest of the year.

Copper is a major part of Glencore’s business, as it cranked out 663,000 tonnes of the metal in the first half of 2015. The company reported a US$676-million net loss in the first half of the year. Glencore said it would ramp up production at the African copper mines in 2017 after the suspension, with costs cut to improve profit margins.

BMO Capital Markets analyst Jessica Fung described Glencore’s decision as a “significant announcement” that affects the 545,000-tonne global copper surplus she expected in 2016.

“We still forecast strong supply growth next year, but we believe the market reaction could be positive for copper prices near-term, especially if it triggers significant short covering,” she added.

Glencore’s move follows other cuts to global copper production that could lead to tighter supply over the next two years.

In August Freeport-McMoRan (NYSE: FCX) announced “revised plans” for its North American assets, which include suspending operations at its Miami mine, a 50% reduction in mining rates at the Tyrone mine and “adjustments to rates at other U.S. mines.” The company estimates its copper sales will drop by 150 million lb. (68,000 tonnes) per year in 2016 and 2017.

Meanwhile, Grupo Mexico’s U.S. copper subsidiary Asarco also announced it would limit operations at its Ray mine and shut down its Hayden concentrator — both in Arizona.

In addition to Ray, Tucson-based Asarco operates the Silver Bell and Mission copper mines in the state, and produces 363 million lb. (164,000 tonnes) of copper per year. Asarco’s Hayden smelter has a 653,100-tonne annual capacity.

“We think this should tighten the copper market and help put a floor under prices. [Glasenberg] is putting his money where his mouth is, having often chastised fellow CEOs for oversupplying commodity markets,” Bank of America Merrill Lynch analysts noted in early September. “That said, demand in China has disappointed to the downside this year, meaning that copper is in the dangerous position of having high expectations and seeing demand disappoint.”

Glencore also announced it will join a growing list of miners looking to strengthen balance sheets. The company committed to pay down US$10.2 billion in debt to alleviate market concerns that it is over-leveraged. The plan includes up to US$2.5 billion in equity financing, suspending its final 2015 and interim 2016 dividends, and raising US$2 billion through minority asset sales.

“Recent stakeholder engagement in response to market speculation around the sustainability of our leverage highlights the desire to strengthen and protect our balance sheet amid the current market uncertainty,” Glasenberg said. “We remain positive on the long-term outlook for our business, and this is reinforced by senior management’s commitment to take up 22% of the proposed equity issuance. Copper and zinc are both supply-challenged, and an essential ingredient of future global growth.”

BMO Capital Markets analyst David Gagliano calls the financing “slightly negative,” and says “given the fall in the share price over the last six months, the raise is likely to be fairly dilutive. However, the market may well like the strengthening of the balance sheet and reduce fears around a rating downgrade.” BMO Research has an “outperform” rating on Glencore with a £2.50 price target.

Glencore has traded within a 52-week window of £1.22 to £3.72 per share, and jumped over 8% after the cost-savings news, en route to a £1.35-per-share close at press time.