US metals industry jolted by electricity crisis

Thursday January 25, 4:46 PM EST By Zach Howard

NEW YORK, Jan 25 (Reuters) - Copper giant Phelps Dodge (PD) on Thursday seemed poised to become just the latest blue chip casualty of a U.S. power crisis that has crippled Western metal producers needful of cheap energy to operate mines and electricity guzzling smelters.

Surging energy costs, led up by demand from power-starved California, continue to force copper, aluminum, molybdenum and precious metals operations in the West to halt or scale back output.

As rising spot power prices coincide with expiring long-term electricity contracts and low metals prices, producers are finding themselves struggling to earn a profit.

Phoenix, Arizona-based Phelps Dodge, the world's No. 2 copper producer, said Thursday it warned all 2,350 workers at its Chino and Tyrone, New Mexico, and Sierrita, Arizona, operations of possible production cuts due to high energy-related costs in the Southwest.

It had previously announced that pricey power and heavy rains reduced its copper output by at least 20 million lbs in the fourth quarter, compounding third-quarter output cuts.

"The power situation and its domino impact on industrial operations in the western part of the United States has been severely understated," J. Steven Whisler, Phelps Dodge President and Chairman, said Thursday.

The Continental Pit mine and plant near Butte, Montana, owned by Nueva Group Mexico and Montana Resources Inc. (MRI), has remained shut since June 9 as its fixed-contract power supply from Enron Corp. (ENE) expired.

Continental, which mines copper, moly and silver, has no plans to restart production.

Before it closed, Continental had been paying, including transmission, about $35 a megawatt hour for electricity, according to an MRI spokesman. The spot index at that time was a whopping $600, while fixed quotes from the Mid-Columbia region were in the $80-$100 range.

"The concentrator has been completely winterized, there is no activity in the mine and our workforce had dropped from 357 down to 23," spokesman Steve Walsh told Reuters Thursday.

"All the electricity prices that we see including the forward market prices are prohibitive for the mine to resume operation," explained Walsh. "We are trying to work through the state legislature to see if we can get some help, not just for us but for the other large industrials."

Some gold mines in California have had to synchronize their operations to the terms of power contracts.

For Homestake Mining Co. (HM), temporary power outages have forced temporary closures, some as long as 10 hours, of its 120,000-ounce-per-year McLaughlin mine in Napa County, raising the cost of production there by $10 an ounce.

Homestake CEO Jack Thompson said that under the mine's power agreement, it enjoyed a lower kilowatt hour charge but gave its provider the right interrupt its electricity.

"It's just been frustrating to try and keep running and you get a phone call that says 'You've got to shut down in five minutes'," he said. "But we struggled and kept everybody on the payroll -- we've got 135 people there. We try to do maintenance and things like this until we get the power back."

Homestake, the longest continually listed stock on the New York Stock Exchange, is the fourth largest North American gold producer. McLaughlin is a very small part of the company's 2 million-plus ounce annual production. It has had no problems in mines in Nevada and other parts of the West, Thompson said.

Likewise for Denver-based Stillwater Mining Co. (SWC), the only U.S. platinum group metals producer. Stillwater operates primarily in Montana but because it has fixed power contracts has ridden out the crisis.

"We haven't had an impact from any of this," Stillwater CEO William Nettles told Reuters.

"In addition, power is not nearly as big a part of our cost as it would be for aluminum. That's very power intensive," he said of the energy-intensive aluminum potlines that convert the refined alumina into the metal aluminum.

Aluminum was the first sector of the mining industry to succumb to high power costs. As early as last spring, some smelters in the Pacific Northwest were already beginning to curtail production in the region.

As the year progressed, more and more capacity was shut in the region with electricity soaring, at times, to unprecedented rates above $1,000 a megawatt hour.

Aluminum smelters had been accustomed to paying around $18 to $22 a megawatt hour under fixed power contracts. But, for those who need to seek power above and beyond the amount allotted to them in the contract, they hit a wall.

For some aluminum companies, it has been more lucrative to sell electricity back to the power suppliers than to produce the metal.

To date all five primary aluminum producers operating in the region have had to cut production by some amount, with curtailments totaling over one million tonnes.

The latest, privately-held Columbia Falls Aluminum Co., announced on Monday that it would completely stop production at its 85,000 metric tonne smelter in Montana for the rest of 2001.

It was selling about 165 megawatts of electricity back to the Northwest power grid, it said.

Additional reporting by Alden Bentley and Carole Vaporean.

http://money.iwon.com/jsp/nw/nwdt_rt.jsp?section=news&news_id=reu-n25100974&feed=reu&date=20010125&cat=INDUSTRY

-- Martin Thompson (mthom1927@aol.com), January 26, 2001