Copper Near Loss-Making in Mexico

The sliding price of copper is making production unaffordable for some Mexican producers, and this may result in the least efficient ones being acquired by stronger competitors, says Rodrigo Heredia, mining analyst at Mexico’s Ixe Grupo Financiero. Heredia forecasts that in 2009 and 2010, the price per pound of copper will be $1.74-$2.18. Although this represents a rebound from $1.45 February 23, it is still close to making production unprofitable. The price of producing a pound of copper, Heredia says, is around $1.20 for the most efficient Mexican companies and $2.20 for the least efficient ones. This may cause the least efficient producers to seek a buyer as they will not be able to compete. And since valuations are so low, potential buyers will be able to pick up assets for bargain prices. “The drop in the price of copper has caused the valuation of companies to drop an average of 62% in the past year. In addition, many of these companies have a lot of debt and need to sell assets to pay down that debt,” Heredia explains, adding that there are also other producers that, although not heavily in debt, are not generating any income because they can’t afford to produce copper. Potential buyers, he says, will be efficient producers with strong balance sheets and, in most cases, no need for financing.