My Interview With a Copper Exec

I told you last week that I would be talking with an executive at a major copper fabrication company. Now, before I get in trouble with the SEC, it's a private company, and this executive was unable to share any proprietary or secret information that would give me any kind of leg-up as an investor.

But he was able to answer a few of my questions about copper. As you know, I spend most of my time looking at producers, the folks who look for, mine and refine copper, silver, gold, coal, iron, etc.

So I thought it would be interesting to get a perspective from a direct consumer of one of those commodities.

Here's a lightly edited transcription of our conversation:

Resource Prospector: Thanks for agreeing to answer some questions.

I'm just looking for a little different perspective on copper prices.

Your company obviously has to buy copper on the open market - since you're not a producer - but rather a consumer.

Who do you buy your copper from?

Copper Company President: We are a semi fabricated product producer so we buy our input from both scrap dealers and cathode producers such as Kennecott. [ed. note: Kennecott is one of the largest American copper miners, and a subsidiary of Rio Tinto (NYSE: RIO).]

RP: How does a higher copper price affect your business? Is your company hedged at all, and if so, what kind of hedging do you do?

CCP: We do not speculate in the market so we are fully hedged while the copper is in our possession from order acceptance to delivery which results in a pass through of the basic metal cost to our customers. We use derivatives (futures contracts) as price protection during that time period. As the price of copper rises however there are significant other cost increases:

Inventory- financing interest costs in plant inventory

Accounts payable - financing cost

Melting loss - direct cost

Increased need for cash – which can be very severe
Then as the price increases our customers aggressively look for substitutes such as aluminum and coated steels.

RP: That's very interesting – I'd heard of those kinds of substitutions. Can you give me any idea of your margins? For instance do you happen to know what your margins are at, say, $8,000/ton vs. $10,000/ton copper? What would be a break even number - where you would shut down and not work with copper until prices fell?

CCP: I apologize but I have to be vague, we are privately owned and have a company policy of not sharing the margins, costs or break evens.

RP: I understand. What do you think is driving the price copper right now?

CCP: Back at the mine and refinery it costs roughly a dollar a pound to get copper out of the ground and refine it. We pay $4.22/lb per Comex . Someone is making some money.

So the cost fundamentals do not support such a high selling price. Speculators, hedge funds and ETFs all drive up the cost without adding any real value. Demand of course, especially from China has been a more fundamental driver.

Thus our business is hurt from the run up in copper price, there is really no positive at all.

So I am very biased, of course it's perfectly legal to speculate but it always hurts our business when the gap between the fundamental cost to produce and the price are so artificially out of whack.

RP: Well, thanks a lot for answering some of my questions. I'm sure my readers will appreciate the perspective.

CCP: You're welcome. And I'm sorry I couldn't share the kind of quantitative detail you are looking for.

RP: Thanks again.

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The CCP raises the point of speculation driving the price of copper. I don't know that I agree with him entirely – and I'll be discussing the impact of speculation on prices in tomorrow's issue.

Good investing,

Kevin McElroy

Editor

Resource Prospector