Falling base metal prices may hinder Amax

Much depends on the outlook for base metal prices. Falconbridge had a record profit of $341 million in 1988 due in large part to a nickel price that climbed to more than $6(US) per lb. As the western world’s second largest nickel producer, Falconbridge’s future is inextricably tied to that metal.

If the economy slides into a full- blown recession, base metal demand will plummet and drag down prices with it. Then, Amax would be saddled with huge debt that it would be financing with reduced earnings from Falconbridge’s base metal properties.

Analyst Brian Felske, president of Felske and Associates and an independent consultant for Wood Gundy, foresees softer prices for nickel, particularly if the European and Japanese economies stumble.

“I would suggest that we’ve seen the peak of the base metals cycle and that we’re on the way down,” Felske told The Northern Miner.

“The U.S. stainless steel market has gone soft, but the export market for nickel scrap is saving the nickel producers. If Japan and Europe (the main buyers of nickel scrap) slow down as we expect they will, then the price of nickel will drop more quickly than anyone expects.”

But despite the bleak outlook, Felske added: “If I had to invest in base metals for the ’90s, I would invest in two: nickel first and zinc second.”

“Our feeling is that nickel prices will trail off, but not too much further,” said Yorkton Securities base metal analysts Eric Zaunscherb. “Amax is buying into Falconbridge clearly past the peak of the (base metals price) cycle,” he said.

Zaunscherb predicted that a slowdown of the U.S. economy will soften prices for zinc, nickel and lead, but that they will stabilize at a price plateau. But he added, “That depends on whether the U.S. economy is going to have the fabled soft landing.”

But it is the recent strong performances by senior mining companies that make takeover deals possible at all, said Merrill Lynch analyst Catherine Gignac.

“We feel that metal prices are at their highest level,” said Gignac. “But keep in mind that when prices are very low, most of the companies suffer, so it’s very tough to have one financially strong company that would be capable of taking over another.

“You’ve seen the profits, you’ve seen the earnings, you’ve seen the cash-flow — by the senior companies in particular. Now they have more flexibility and they’re looking three, four or five years down the road into the next cycle and they feel they are well positioned to make some acquisitions,” she said.

But Amax will likely have to ride out a slump in prices until the next upturn.

Metals analysts at Shearson Lehman Hutton of London, England, are not optimistic about the base metal market. A Shearson report says that “the party is over” for base metals producers, adding that “without exception, base metals prices have peaked. Irrespective of the fundamentals, the downturn will continue.”

Shearson calls for a drop in nickel prices from its present $6 per lb to below $4 in 1990. But other analysts do not share the same pessimism. Marathon Securities sees a continued shortfall of nickel supply and calls for prices above $5. Nesbitt Research also sees continued demand for nickel predicts prices will remain strong.

Perhaps the most coveted of Falconbridge’s assets is the Kidd Creek mine and its huge reserves of copper, zinc, lead and silver.

While most analysts see zinc and lead prices declining then stabilizing, they are bearish on copper.

“Copper we’re quite negative on,” said Zaunscherb. “Despite a reasonably healthy demand for copper, there’s going to be a lot of production coming on stream.”

Shearson also predicts falling copper prices that only supply disruptions could salvage. Labor troubles in the U.S. or Chile or continued disruption of Bougainville mine production in Papua New Guinea could boost prices.

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