Tyrone: A Ghostly Reminder of a Punishing Cycle

On the southern border of the United States, a string of elaborate buildings sit faded by the sun. Built in a grand European style, the stone facades of an opera house, courtroom and general store are in a grim, crumbling condition. Only the fierce heat has stopped the town’s sun-beaten streets becoming totally overgrown.

Tyrone is a ghost town in New Mexico, a remote outpost of civilisation, where the vagaries of the copper market are visible in stone. Designed by palatial architect Bertram Goodhue and financed by the American conglomerate, Phelps Dodge Corporation, the town was originally built in 1915, costing more than $1 million.

It was originally envisaged as a cultural epicentre for the surrounding region and its bustling copper mines, which were largely owned by Phelps Dodge. But only six years later, the town was abandoned, after the copper price collapsed in 1921.

Tyrone’s Latest Blow

At the end of August this year, Tyrone silently suffered a fresh blow, after Arizona-based copper giant Freeport, the largest listed copper miner in the world, announced a halving of production at its nearby Tyrone mine and a 10 per cent cut to its headcount across the US.

The move by Freeport was one of a raft of measures hastily announced after an accelerating drop-off in its share price, which has spectacularly fallen from over $60 in 2011 to less than $8 last month. The company is ploughing ahead with a massive expansion programme at its Cerro Verde open pit mine in Peru, but has revised output lower at every single mine it operates in the US, suspending its Miami operation in Arizona completely, whilst halving throughput rates at Tyrone.

It has slashed development spending in the Democratic Republic of Congo and cut $700m from its total copper capex budget for 2016, a meaningful drop of 25 per cent. Even at its titanic Grasberg mine in Indonesia, which is co-owned by Freeport and Rio Tinto, output guidance has been trimmed.

Bellwether

Copper, a trusty bellwether for the global economy, has halved since it broke through an all-time high of over $10,000 per tonne in early 2011. Some of the sharpest falls have come in the last 3 months, wiping billions of dollars of value off the top producers, typified by Glencore, which has crashed through successive lows, down by more than 50 per cent in the last two months.

As Freeport’s moves show, copper miners have responded surprisingly swiftly to the price slide. In total, Freeport’s cutbacks will pull 150 million pounds of copper off the market each year until at least 2018, equal to around 70,000 tonnes per annum.

Superficially, the move seems modest, equivalent to less than 0.4 per cent of global mined supply. But with the copper market seen as enjoying a fairly stable balance, stocks surged on the news. Canadian analysts welcomed Freeport’s decision as “very positive” and Freeport raced 25 per cent higher on the day of the announcement in trading in New York.

Glencore

Glencore similarly enjoyed its biggest ever intraday trading gain this morning, jumping as much as 13 per cent, after announcing copper mine closures across its portfolio in Africa. The Swiss trading giant, which announced rolling shutdowns at its coal operations last Christmas, said it plans to lop a whopping 400,000 tonnes of copper off the market, by suspending its Katanga operations in the Congo and at its Mopani mines in Zambia for a minimum of 18 months.

“We, once again, like we did with coal previously, have introduced supply discipline,” chief executive Ivan Glasenberg told analysts on a conference call, rebuffing questions over whether he might take the firm private. “Taking 400,000 tonnes of copper out of the market, which people believe is oversupplied, should have an effect.”

In total, Glencore’s dramatic cuts account for nearly a fifth of its own production. The copper market is “not far away from being balanced,” Rio Tinto’s head of copper, Jean Sebastien Jacques, has said.

Diamonds or Coal?

The depth of the recent cuts starkly demonstrate how copper is different to bulk commodities, such as coal, potash or iron ore. Commodities have slumped across the board in recent months, from milk and rubber to orange juice and pork bellies, but sub-sectors of the mining industry have responded very differently to the price collapse.

In diamonds, for example, industry leaders De Beers and Russia’s Alrosa have both lowered their output guidance to balance the market and conserve the value of their own reserves. But in coal and iron ore, BHP Billiton, Rio Tinto, Japan’s Mitsubishi and Brazil’s Vale have all aggressively pumped-up tonnage, regardless of a melt-down in the market.

The twin announcements by Freeport and Glencore suggests copper is more comparable to diamonds than coal or iron ore.

Vote of Confidence

In a very public vote of confidence, several high profile contrarians are meanwhile moving quickly into the copper space, in pursuit of discounted assets. London-based hedge fund Audley Capital, which is led by deft contrarian Julian Treger and Anglo American’s former head of copper, John MacKenzie, snapped-up two copper mines in Chile last month for $300 million in cash. Among other things, a further $200 million is contingent on the forward copper price.

No less bold, Chicago-based hedge fund Harris Associates has built a 5 per cent stake in Glencore since the middle of August, equal to a holding of $800 million, whilst activist investor Carl Icahn has disclosed a thumping 8.5 per cent stake in Freeport, worth around $850 million.

In a filing, Icahn said he planned to focus on the “curtailment” of Freeport’s high-cost production, whilst Harris boss David Herro says he has no plans to seek to alter Glencore’s corporate approach. “We like their copper position, we like their trading position,” Herro said at the time. “Their other metals don’t seem to be anywhere near as impaired as iron ore.”

Punishing Cycles

The fate of Tyrone in New Mexico, however, stands as an ugly reminder as to just how deep and punishing the copper market’s cycles can be. After it was deserted in 1921, the town enjoyed something of a second life, but not until the late 1960s, when most of its buildings were flattened to make way for an open-pit copper mine, again owned by Phelps Dodge. Copper mining companies, it seems, have always been more responsive to a sharp move in prices than the copper market itself.