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British HSBC bank buys stake in Chinese state bank
... But one analyst says oil won't discourage gold stocks
By Steve James
Reuters
Sunday, August 8, 2004
http://www.reuters.com/newsArticle.jhtml?type=topNews&storyID=5904223
NEW YORK -- Mining giants like Phelps Dodge Corp.
are riding the crest of a wave right now, with
sky-high metal prices bolstering their bottom line.
But with the specter of $50-per-barrel oil looming,
many companies may be only temporarily dodging
the bullet of spiraling energy costs, analysts say.
"Fifty-dollar oil? Horrible!" said Victor Lazarovici,
who covers mining companies for BMO Nesbitt Burns.
"The implications for the world are not good. It
will suck money out of every part of the economy,
including the mining and metals industry."
For the near term, more costly oil will lead to
increased expenses for miners, which will then
have to raise prices, he said.
"Some marginal producers may be forced out of
business," Lazarovici said, without naming names.
Andrew Miller, a mining specialist at Ernst &
Young in St. Louis, said miners may issue profit
warnings as high oil prices erode their margins.
"The oil price will have a detrimental effect on
the mining industry," he said. "It will create
difficulties for them."
For the mining companies, it is a case of striking
while the iron is hot, and metals are torrid. The
price of copper, for example, has nearly doubled in
the past year, helped by high demand from China. It
peaked in March at $1.40 and was trading on Friday
around $1.28, compared with about 75 cents a year
ago.
But mining is also particularly vulnerable to changes
in energy prices. Diesel is used in all aspects of
mining, from crushing rocks to trucking. The biggest
user of energy is in the smelters or mills, which
process the ores with oil, gas, or electric power.
A case in point is Phelps Dodge, which posted a
profit in the second quarter after a loss last year
as revenue rose a staggering 71 percent because of
its higher pricing.
But closer examination shows costs rose nearly 40
percent -- a fact acknowledged by Chief Executive
Officer Steven Whisler.
"Progress in reducing costs was hampered by
increased costs associated with ramping-up
production, higher direct and indirect energy
costs," he said, without elaborating.
Phelps Dodge spokesman Peter Faur said the
company is "taking all measures" to reduce the
energy consumption and costs.
But he stressed that energy accounts for less than
25 percent of Phelps Dodge's total production costs.
"We have price protection programs in place for a
substantial portion of our electricity, diesel and
natural gas needs," he said.
Charles Bradford of Bradford Research/Soleil
Securities said higher metal prices would continue
to offset energy costs for miners.
"They use a lot of diesel, but it depends on what
you're mining," he said. "For example, in copper,
the price has been very strong, so that more than
counter-balances higher oil price."
Bradford said copper prices averaged $1.27 per
pound in July and $1.31 so far in August. "I am sure
the price of oil has not gone up by the equivalent
of 4 cents," he said.
But Quebec-based Desjardins Securities said higher
energy costs are eating into profits of companies
whose recent results either missed expectations or
showed a decline from the March quarter.
Among the companies reporting higher-than-expected
operating costs that pressured net earnings were
Alcoa, Inmet, Phelps Dodge, Noranda, Inco,
Falconbridge, Aur, and Fording, Desjardins said in
a research note this week.
"A frequently quoted contributor to rising operating
costs was higher energy prices, either directly or
indirectly the result of higher oil prices, which were
up 9 percent," the firm said.
For Chip Hanlon, chief operating officer of Newport
Beach, California-based Euro Pacific Capital, the
issue is moot.
"If oil runs away, costs will rise and that cuts into
profitability," said Hanlon, whose fund has invested
10 percent of its $300 million in assets in mining
stocks. "If oil goes high is it a concern? Sure."
But he said gold and other mining company shares
tend to be sold as a proxy for the metals people
tend to buy as a safe haven when economic times
are tough.
"With gold, it's not a valuation or an earnings story,"
Hanlon said. "Gold stocks have very little to do with
fundamentals."
What does matter to investors is the price of the
metal itself rather than the oil needed to obtain and
process it, he said.
"If the price of oil comes down and gold stays where
it is, the stocks will not go up," he said. "If they
both go higher in lockstep, then the stocks will go
up."
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