Replying:Reply:
You are correct in that the fall was precipiated by the analyst at Salman Partners who stated that ARG's costs are much higher than other copper producers and put a SELL rating and target of $2.25.
His analysis was at best "Mickey Mouse". It never ceases to amaze how these so-called "market experts" do such flawed work. His analysis was hardly worthly of a layman's guess.
ARG issued a press release stating two things (and in response to its share price decline, but indirectly targeting the analyst's comments):
1) That moly production was abnormally low for the quarter; and
2) Electricity prices were abnormally high
Lower moly production reduces valuable by-product credits thus boosting costs/pound in the quarter. but only an idiot would take the worse moly grades in several quarters and assume that is the normalized run-rate.
Chile is facing a serious electricity situation. Chile has relied on Argentinian gas to fulfill its growing heating and electricity generation needs. However, Argentina will have problems supplying gas to Chile unless something drastically is fixed. Argentina has frozen commodity rates thus there has been limited new investment. Yet its economy is growing and is using more of its own gas. Chile already sees this, but will take time to rectify the problem. The biggest will be its first LNG plant (in 2009), but that's 2009. they are also trying to built (in some cases fast track) electricity generation based on diesel (quick) and coal (not as quick). But its LNG that is the answer. So electricity rates will be high in 2007 and 2008 for sure. In Q1, ARG's electricity rates were about US$0.10/kwH. A more normal rate would be US0.05-US0.06/kwH. Although rates likely to be high until 2009 it may moderate beginning in Q3 (say down to US$0.08/kwH). That's because gas prices have a seasonal factor as well (just think us here in North America). Its winter down there and apparently it is one of the coldest winters on record, which has excerbated the crisis. In addition, rainfall has been abnormally low, thus constraining hydroelectric capability. Hopefully rainfall levels will catch up in the coming months. (see Economist Article I posted a few days ago)
Two Other Factors:
1) It is apparent to me that the analyst at Salman Partners may not have taken an Economics 101 course. I think all of you guys here know what "Economies of Scale" is? I mean..duh...the higher the production means a greater number of units to spread your fixed costs; thus reducing unit costs. ARG was operating at only 80% of throughput due to final bridge repairs and summer maintenance shutdown.
2) In 2007, copper producers no longer pay copper price participation to the smelters anymore. Last year ARG's smelter and refinery charges were in the US$0.55/lb. range. This year it'll be around US$0.25-US$0.30/lb. You will notice that in Q2. You didn't see that in Q1 - that's important to know! That's because ARG had to call Force Majeure on copper deliveries last year. So it agreed to deliver the bulk of its quota to its copper smelter based on Q4 copper prices and Q4 smelter charge rates. The amount of copper delivered in Q1 was close to its remaining quota. so Q2 is a fresh start with the new agreements.
ARG's costs will be "way down" in Q2 over Q1.
What the Salman analyst wrote was factually flawed and irresponsible as there was no depth at all in coming to his conclusions. How he makes a living is unimaginable. Guaranteed he is not aware of most of the things I've posted. Mind boggling.....