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IC ^^ 
 
 Bureau of Mines Information Circular/1980 
 
 The U.S. Copper Mining Industry 
 
 A Perspective on Financial Health 
 
 By T. T. Tomimatsu 
 
 i UNITED STATES DEPARTMENT OF THE INTERIOR 
 
Information Circular 8836 
 
 The U.S. Copper Mining Industry 
 
 A Perspective on Financial Health 
 By T. T. Tomimatsu 
 
 UNITED STATES DEPARTMENT OF THE INTERIOR 
 Cecil D. Andrus, Secretary 
 
 BUREAU OF MINES 
 
 Lindsay D. Norman, Acting Director 
 

 This publication has been cataloged as follows: 
 
 Tomimatsu, T T 
 
 The U.S. copper mining industry: A perspective on financial 
 health. 
 
 (Information circular - U.S. Bureau of Mines ; 8836) 
 Bibliography: p. 
 
 1. Copper industry and trade— United States— Finance^ 2- Copper 
 mines and mining— United States— Finance. I. Title. II. United States. 
 Bureau of Mines. Information circular : 8836. 
 
 -HD9539^€5UJS36- 
 
 338.2'3 
 
 80-607792 
 
 For sale by the Superintendent of Documents^ U.S. Government Printing Office 
 
 Washington, D.C. 2040 2 
 
CONTENTS 
 
 PoRf 
 
 Abstract 1 
 
 Introduction — 1 
 
 Quality and reliability of corporate data and 
 
 information - — 3 
 
 Overview of the U.S. copper mining industry 5 
 
 Consumption 5 
 
 Production 5 
 
 Other important factors 6 
 
 Outlook --- 7 
 
 National security aspects - 8 
 
 Financial economic analysis and assessment — 14. 
 
 largest U.S. copper producers 9 
 
 Definitions and quantitative performance 
 
 measurements --.- 9 
 
 PnfTf 
 
 Financial investigation of 14 largest U.S copper 
 
 companies 10 
 
 Environmental policy and its impact 11 
 
 Corporate taxation and its impact - 12 
 
 Dynamics of corporate structure and behavior 14 
 
 Diversification and merger 14 
 
 Interconnections among copper firms 15 
 
 Copper investment strategy-domestic versus 
 
 foreign 16 
 
 New financing methods 17 
 
 Summary of trends in the U.S. copper mining 
 
 industry and conclusions 19 
 
 References 20 
 
 ILLUSTRATIONS 
 
 Puffe 
 
 1. U.S copper mine production compared with rest-of-world production for 1969, 1978, and 2000 (forecast) 8 
 
 2. Comparison of estimated rates of return on stockholder's equity, 1969-78 12 
 
 3. Leading U.S copper producers foreign investment fiows 17 
 
 TABLES 
 
 1. Fourteen leading U.S. copper producers' U.S. production contrasted to total U.S. and rest-of-world copper 
 
 production, 1969-78 6 
 
 2. Percent of U.S. copper production by top copper producing companies in 1936 and 1978 7 
 
 3. Primary copper production, 1978 and 2000 (forecast) 8 
 
 4. Fourteen leading U.S. copper producers, return on stockholder's equity, 1969-78 9 
 
 5. Fourteen leading U.S. copper producers, return on invested capital, 1969-78 10 
 
 6. Long-term debt-equity ratios for each of 14 leading U.S. copper producers 11 
 
 7. Fourteen leading U.S. copper producers, capital expenditures, 1969-78 12 
 
 8. Fourteen leading U.S. copper producers, effective income lax rates, 1969-78 13 
 
 9. Fourteen leading U.S copper producers, shift in corporate business composition, 1969-78 14 
 
 10. Industry affiliation of selected copper producing groups in 1978 15 
 
 11. Petroleum companies connections with the copper industry, yearend 1979 16 
 
 12. Composition of boards of directors of copper producers, 1978 16 
 
 
 
 4^ 
 
THE U.S. COPPER MINING INDUSTRY 
 
 A PERSPECTIVE ON FINANCIAL HEALTH 
 
 by 
 T.T. Tomimatsu* 
 
 ABSTRACT 
 
 This Bureau of Mines paper investigates, explores, and analyzes the corporate 
 structure dynamics and financial ratios to evaluate the economic health of the U.S. 
 copper producers. It highlights the corporate policy options and measures of cor- 
 porate profitability and suggests that a competitive domestic copper industry will 
 exist in the future. 
 
 The study highlights the activities of 14 selected major copper-producing com- 
 panies, including their subsidiaries or affiliates, that were responsible for more 
 than 95 percent of the total U.S. production in each of the years since 1969. The 
 selected firms are not all primarily in the business of producing copper. Several 
 of the large producers are classified by the financial institutions as integrated oil 
 and gas enterprises. 
 
 INTRODUCTION 
 
 One of the responsibilities of the Bureau of 
 Mines is to investigate the economic conditions 
 affecting the mineral industries. This is in con- 
 cert with the Mining and Minerals Policy Act of 
 1970, one of the requirements of which is as- 
 sessment of the state of the domestic mining 
 industry {29y'^. This paper pursues this mission 
 through financial economic investigation and 
 analysis to interpret the economic well-being of 
 the U.S. copper industry. Large quantities of 
 corporate information and data have been col- 
 lected and analyzed to provide new insights into 
 corporate dynamics, and to assess the copper 
 industry's capability of generating the huge 
 amount of capital required for exploration, de- 
 velopment of new mines, improvement of ex- 
 
 ' Cerlified Public Accountant, financial economist. Branch of Technical Analy- 
 sis, Bureau of Mines, Washington. D.C. 
 
 ^ Italic numbers in parentheses refer to items in the list of references at the end 
 of this report. 
 
 isting mines, and effecting technological im- 
 provements in productivity. 
 
 Fourteen U.S. copper companies were se- 
 lected on the basis of their U.S. copper output. 
 Each year, since 1969, the selected companies' 
 production represented more than 95 percent 
 of the total national copper production. These 
 companies' share of the total U.S. copper pro- 
 duction rose to 98 percent in 1978. The financial 
 actions, policies, decisions, and trends of these 
 copper companies provide the key indicators to 
 the state of the U.S. copper industry. 
 
 This Bureau of Mines report presents a 10- 
 year copper industry analysis, covering a period 
 in which, in addition to the prevalent unstable 
 copper prices, the industry was subject to peri- 
 odic strikes, price controls (1973-74), and huge 
 capital expenditures for environmental and pol- 
 lution control facilities (societal expenditures). 
 
 Within the past 10-year period (1969-78), the 
 copper end-use pattern has not changed mate- 
 
 1 
 
2 
 
 rially, except the very small offsetting percent- 
 age increases and decreases among the five cat- 
 egories. It is important to note, however, that 
 net imports of copper have more than doubled 
 during the past 10 years. 
 
 Copper prices are extremely sensitive to 
 changes in supply and demand, and they are set 
 under several different pricing mechanisms. A 
 capacity-demand imbalance together with the 
 slowdown in the U.S. economy depressed cop- 
 per prices for an unusually long period of time 
 (1974—78), during which some producers shipped 
 copper on a consignment basis. The largest do- 
 mestic copper mining company relinquished its 
 
 rights to set prices and adopted the pricing basis 
 of the New York Commodity Exchange 
 (COMEX), the organized marketplace for con- 
 tracts for future delivery of copper. Subse- 
 quently, other major copper producers followed 
 this pricing mechanism. In the last half of 1978, 
 excess inventories of copper were reduced. 
 Since then, prices have moved upward. Accord- 
 ingly, the economic health has improved for sev- 
 eral copper mining firms. For example, an in- 
 crease of only 1 cent per pound in copper prices 
 generates improvements in cash flow and prof- 
 its. Currently, the basic copper price is exempt 
 from the price guidelines of the Council on 
 Wage and Price Stability (COWPS). 
 
QUALITY AND RELIABILITY OF BUSINESS DATA AND INFORMATION 
 
 The U.S. Government requires all publicly 
 held companies to register with the Securities 
 and Exchange Commission and to file reports 
 on their business operations. The following re- 
 quired documents and other optional materials 
 were used in this investigation: 
 
 • Annual and Quarterly Reports to Share- 
 holders. 
 
 • Annual Report Form 10-K, the authorita- 
 tive report of the company; 10-Q quarterly 
 reports; monthly reports of significant 
 events; Proxy Statements; Securities Reg- 
 istration, S-1; and Prospectuses to the Se- 
 curities and Exchange Commission. These 
 reports are company information filed with 
 and made public by the Securities and Ex- 
 change Commission. This research study 
 considers these reports as final informa- 
 tion. 
 
 • Special reports for security analyst meet- 
 ings, companies' news releases, and general 
 reports released to equity holders. 
 
 • Testimony before selected Congressional 
 special committees by the selected compa- 
 nies and their subsidiaries. 
 
 These sources have been supplemented by 
 personal conversations with executive officers 
 
 of the involved companies and by information 
 developed from other sources as well as by lit- 
 erature reviews of many technical periodicals 
 and reports. 
 
 The current required disclosures have im- 
 proved the quality and quantity of financial and 
 economic data and were helpful in this research 
 effort. However, because of nonstandardization 
 in reporting, the investigation required critical 
 in-depth analysis in the selection of relevant in- 
 formation. These data were specifically gath- 
 ered, analyzed, interpreted, developed, and 
 published for this purpose and are not frag- 
 mented with gaps, omissions, or duplications. 
 Every attempt has been made to utilize data sup- 
 plied by the companies pursuant to law. 
 
 No attempt was made to show the impact on 
 profitability of such variables as application of 
 alternative methods of accounting; that is, in in- 
 ventory accounting — LIFO (last-in, first-out) 
 versus FIFO (first-in, flrst-out), capitalizing fi- 
 nance costs during construction, expensing cur- 
 rently to operations, deferrable costs, etc. How- 
 ever, sufficient relevant data on a vast array of 
 economic information were collected, analyzed, 
 documented, and evaluated to develop an eco- 
 nomic-financial conclusion. 
 
OVERVIEW OF THE U.S. COPPER MINING INDUSTRY 
 
 Copper has been used for more than 6,000 
 years and is one of the world's oldest known 
 metals. Early uses of copper were in tools, weap- 
 ons, and ornaments. Bronze — an alloy of copper 
 and tin — and brass — an alloy of copper and 
 zinc — have also been used extensively. In the 
 nineteenth and twentieth centuries, copper has 
 been used heavily in electrical equipment and 
 power distribution systems. Although substitute 
 materials have been developed, the production 
 and use of copper have increased steadily, and 
 this trend is projected to continue beyond the 
 year 2000 (22). 
 
 CONSUMPTION 
 
 U.S. copper consumption has grown by about 
 9.1 percent to 2.478 million tons in 1978 from 
 2.271 million tons in 1969 (22). This low growth 
 probably reflects the maturity of the U.S. copper 
 market compared with that of other countries 
 and the fact that the United States now imports 
 a much greater amount of manufactured goods 
 that probably contain finished copper. Exclud- 
 ing scrap, U.S. consumption of primary copper 
 accounted for less than one-fourth of total world 
 use in 1978, down from about 27 percent in 
 1969. 
 
 The major end-use of copper in the United 
 States is for electrical equipment and supplies, 
 which accounted for about 58 percent of total 
 U.S. consumption in 1978. Copper is used in 
 electric motors, power generators, power distri- 
 bution systems, and other wiring. Copper is also 
 used in construction materials (about 19 percent 
 of 1978 use) for roofing, plumbing, and bronze 
 and brass hardware for buildings and homes. 
 Use of copper is important in nonelectrical ma- 
 chinery (9 percent of 1978 consumption), such 
 as commercial air conditioning, and in trans- 
 portation equipment (9 percent of 1978 con- 
 sumption), such as automotive and marine parts. 
 Consumption in ordnance and miscellaneous 
 products accounted for the remainder of U.S 
 copper use in 1978. 
 
 The most notable substitute for copper is alu- 
 minum, particularly in power transmission ca- 
 bles. In the future, fiber optics may replace cop- 
 per in some telephone transmission lines (22). 
 
 PRODUCTION 
 
 U.S. copper production has stagnated over 
 the 1969-78 period; high costs of meeting U.S. 
 environmental standards and the availability of 
 lower priced imported copper has led to a sig- 
 nificant amount of excess capacity in the United 
 States. In 1978, U.S. copper mine production 
 was about 1.5 million tons out of total mine ca- 
 pacity of 2 million tons. As a result, U.S. pro- 
 duction was above 1.7 million tons in only 2 of 
 these 10 years. On the other hand, estimated 
 annual world production increased significantly 
 during the 1969-78 period, rising from about 
 6.2 million tons to 8.2 million tons. 
 
 Table 1 shows that of the 14 major U.S. cop- 
 per producers {1-4, 6, 10-12, 15, 18-21, 41), 
 only five have increased copper output over the 
 1969—78 period and that their increased pro- 
 duction resulted in lower production by the rest 
 of U.S. copper mining firms. Coupled with in- 
 creased competition from foreign producers, 
 this trend may indicate that the five companies 
 with increased output over the decade — New- 
 mont, Pennzoil, Asarco, Amax, and Cities Serv- 
 ice — were able to produce copper at a lower cost 
 than other U.S firms. Kennecott appeared to 
 lose the most during the decade, with its U.S. 
 production dropping by about 178,000 tons, or 
 almost 36 percent. 
 
 The largest copper companies in the United 
 States are vertically integrated; that is, they op- 
 erate in all major phases of the industry — min- 
 ing (removal of ore from the earth), concentra- 
 tion, smelting (processing of ore for the metal), 
 and refining (purification of the metal). Some 
 even have operations that fabricate part of their 
 output into tubing, wire, and other end-use 
 products. This vertical integration resulted from 
 the significant economies of scale gained from 
 the operation of very large mining and proc- 
 essing operations. 
 
 Despite this tendency towards vertical inte- 
 gration, the domestic copper market has become 
 more competitive. Table 2 shows that the con- 
 centration of U.S. copper production in the larg- 
 est firms has declined over the last 40 years from 
 about 75 percent to about 63 percent because 
 of new entrants into copper mining {14). Fur- 
 
Table 1. — Fourteen leading U.S. copper producers' U.S. production contrasted to total U.S. and 
 
 rest-of-world copper production, 1969—78 
 
 (l^ousand short tons) 
 
 Companies 
 
 1969 
 
 1970 
 
 1971 
 
 1972 
 
 1973 
 
 1974 
 
 1975 
 
 1976 
 
 1977 
 
 1978 
 
 Kennecott Copper Corp.' 
 
 Phelps Dodge Corp 
 
 AUantic Richfield Co.^ 
 
 Newmont Mining Corp 
 
 Pennzoil Co - - 
 
 ASARCO Inc.' 
 
 Inspiration Consolidated Copper Co.'' 
 
 Amax Inc.^ __. 
 
 Cities Service Co ,-. 
 
 Cyprus Mines Corp."' 
 
 Louisiana Land and Exploration Co.*^ _. 
 
 Hecia Mining Co.' 
 
 Ranchers Exploration and Development Corp. 
 UV Industries Inc."' — 
 
 Toul 14 companies' production 
 
 Total U.S. production 
 
 Percent of total U.S. production by 14 
 
 companies __. 
 
 Total world copper production _ 
 
 Percent of total world production by 14 
 companies --. 
 
 496.0 
 
 284.2 
 
 155.9 
 
 116.0 
 
 65.0 
 
 78.5 
 
 66.0 
 
 (^) 
 
 36.8 
 
 86.2 
 
 78.4 
 
 1.9 
 
 4.4 
 
 14.2 
 
 1,483.5 
 
 1,544.6 
 
 96.0 
 6,547.3 
 
 518,9 
 
 313.5 
 
 242.1 
 
 114.6 
 
 77.0 
 
 76.3 
 
 69.9 
 
 (^) 
 
 43.5 
 
 86.3 
 
 67.8 
 
 1.9 
 
 8.7 
 
 13.8 
 
 1,634.3 
 
 1,719.7 
 
 95.0 
 6,993.7 
 
 456.1 
 281.2 
 182.0 
 103.6 
 94.0 
 67.7 
 58.8 
 
 39,4 
 
 91.1 
 
 58.4 
 
 2.2 
 
 11.6 
 
 17.0 
 
 1,463.1 
 
 1,522.2 
 
 96.1 
 7,100.8 
 
 460,6 
 
 305,4 
 
 233,5 
 
 151.8 
 
 137.0 
 
 74.4 
 
 65.8 
 
 (•*) 
 
 33.4 
 
 113.9 
 
 70.4 
 
 1.9 
 
 7,4 
 
 14.9 
 
 1,670.4 
 
 1,664.8 
 
 100.3 
 7,758.8 
 
 471.7 
 
 319.6 
 
 200.5 
 
 160.0 
 
 127.0 
 
 76.2 
 
 65.2 
 
 32,1 
 
 33.3 
 
 119.6 
 
 78.2 
 
 .4 
 
 9.4 
 
 20.4 
 
 1,713.6 
 
 1,717.9 
 
 99.8 
 8,269.3 
 
 20,7 
 
 402.2 
 
 281.3 
 
 190.1 
 
 151,6 
 
 128,0 
 
 83.2 
 
 61.2 
 
 22.7 
 
 33.9 
 
 108.5 
 
 66.6 
 
 ,5 
 
 11,1 
 
 24,2 
 
 1,565.1 
 
 1,597.0 
 
 98.0 
 8,453.6 
 
 288.1 
 
 249.7 
 
 149.6 
 
 133,9 
 
 134,0 
 
 80.4 
 
 55.8 
 
 7.6 
 
 76.7 
 
 99.3 
 
 70.8 
 
 .5 
 
 7.8 
 
 17.6 
 
 1.371,8 
 
 1,413.4 
 
 97.1 
 8,099.9 
 
 346.4 
 
 331.0 
 
 164.1 
 
 150.7 
 
 140.0 
 
 94.4 
 
 47.0 
 
 47.8 
 
 84.5 
 
 98.7 
 
 46.1 
 
 14.5 
 
 9.0 
 
 23.1 
 
 1,597.3 
 
 1,605,6 
 
 99.5 
 8,670.9 
 
 358.2 
 
 276.7 
 
 170.6 
 
 154,5 
 
 123.0 
 
 73.6 
 
 27.6 
 
 59.7 
 
 72.3 
 
 83.0 
 
 43.0 
 
 18.4 
 
 9.3 
 
 21.5 
 
 1,491.4 
 
 1,504.0 
 
 99.2 
 8,796.8 
 
 17,0 
 
 318,2 
 
 319.0 
 
 142.8 
 
 156.9 
 
 118.0 
 
 100.9 
 
 39.7 
 
 52.1 
 
 90.8 
 
 70.7 
 
 40.7 
 
 .6 
 
 8.2 
 
 5.4 
 
 1,464.0 
 
 PI, 490. 3 
 
 98,2 
 ^8,524. 5 
 
 17.2 
 
 P Preliminary. 
 
 ' Includes Carborundum Co. acquired Dec. 31, 1977. 
 
 ^ Anaconda Co, acquired Jan. 12, 1977. All data prior to Jan. 12, 1977, cover Anaconda Co, only. 
 
 ' Bendix Corp. interest about 20 percent with limitation of 21 percent to Jan. 1, 1985. 
 
 ■* Owned by 2 Canadian companies (Hudson Bay Mining and Smelting Co., Ltd., and Minerals and Resources Corp. Ltd.), Mar. 30, 1979; Anglo American Corp. 
 
 of South Africa Ltd. controls more than 40 percent of the outstanding common stock of both companies. Anaconda Co., unit of Atlantic Richfield, owns 93 percent 
 
 of class A preferred stock. 
 
 ^ Standard Oil Co. of California interest 20.6 percent; and Selection Trust Ltd. (United Kingdom) interest 8.3 percent. 
 
 ^ Anamax Mining Co, was formed June 1973 through equal partnership with Anaconda Co., a unit of Atlantic Richfield Co. 
 
 ' Sept. 21, 1979, became a wholly owned subsidiary of Standard Oil Co. of Indiana. 
 
 ' Copper Range Co. acquired May 24, 1977. All data prior to this date cover Copper Range Co. only. 
 
 ' Lakeshore mine leases jointly terminated with El Paso Natural Gas Co, and property returned to Papago Iribe, October 1978. Noranda Exploration Inc, a U.S. 
 
 subsidiary of Noranda Mines Ltd., (Canada), has entered into an agreement with the Papago Tribe to develop and operate the Lakeshore copper mine. 
 
 '" Company in process of liquidation. Mar. 26, 1979. 
 
 Sources; Bureau of Mines, based on analysis of annual reports and form lO-K data submitted to Securities and Exchange Commission; Non-Ferrous Metal Data, 
 American Bureau of Metal Statistics, Inc.,; and annual data 1979, Copper Supply and Consumption, Copper Development Association Inc. 
 
 thermore, the large expansion of production in 
 less developed countries (LDC's) and the expro- 
 priation and nationalization of copper produc- 
 tion facilities by some of these LDC's has led to 
 greater price competition in the both worldwide 
 and U.S. copper markets. 
 
 As stated previously, U.S. copper production 
 has remained fairly level over the past decade. 
 There are several major reasons for this stag- 
 nation. One factor is that U.S. copper ore grades 
 generally declined over the 1969-78 period. 
 Also, production costs are generally lower for 
 the major foreign copper producers (12). Fur- 
 thermore, inflation in the United States has not 
 only raised production costs but has also sharply 
 increased the capital costs of opening new 
 mines. To meet U.S. environmental standards, 
 copper producers have had to divert funds that 
 would have gone for exploration or capacity ex- 
 pansion into outlays for pollution-control equip- 
 ment (2, 33, 36-39). Last, but certainly not the 
 least important, significant increases in energy 
 costs resulting from OPEC actions and declining 
 
 ore quality have added to production costs; cop- 
 per mining and refining are very energy-inten- 
 sive processes. 
 
 OTHER IMPORTANT FACTORS 
 
 In addition to the above reasons for stagnant 
 copper production over the 1969-78 period, the 
 U.S. copper mining industry has faced a set of 
 additional factors that have affected its financial 
 health. First of all, some foreign producers — 
 now owned by their governments — respond to 
 lower copper prices by maximizing copper pro- 
 duction to earn needed foreign exchange and 
 to maintain employment in their countries. This 
 forces copper prices even lower than they nor- 
 mally might have fallen. Another important fac- 
 tor affecting the U.S. copper industry is the vol- 
 atility of copper prices. This volatility is caused 
 by several factors: 
 
 • The sensitivity of copper use to the state of 
 the economy. 
 
• The fact that production costs are lowest 
 when operations are running at close to full 
 capacity. This puts downward pressure on 
 prices during recessions. 
 
 • Inventory control problems, which stem 
 from the difficulty in forecasting copper 
 sales and from the desire to keep operations 
 running at close to full capacity. 
 
 • The fact that new mines and refineries are 
 very large can lead to sharp price declines 
 when the new supplies reach the market. 
 
 Also, price controls in the early 1970's prob- 
 ably kept copper producer earnings from being 
 greater. In addition, the relative stagnation of 
 the U.S. stock market during 1969-78 has prob- 
 ably made it difficult to raise needed funds for 
 sellng new stock, and, as a result, some firms 
 have had to raise funds through long-term bor- 
 rowing at high interest rates. 
 
 There are several positive factors that help 
 U.S. copper firms. Although some other metal 
 producers are subject to the Federal price guide- 
 lines of the Council on Wage and Price Stability, 
 copper producers are now exempt because cop- 
 per prices closely follow prices set on the New 
 York Commodity Exchange (COMEX) and the 
 London Metal Exchange (LME). Another posi- 
 tive factor is the revenue from the sale of by- 
 products. Byproducts of copper operations in- 
 clude gold, silver, molybdenum, and sometimes 
 platinum-group metals. Although the prices of 
 these metals generally follow the trend of cop- 
 per prices over the course of the business cycle, 
 byproduct revenues can cut losses or improve 
 profits significantly. For instance, in 1978, sales 
 of byproducts of copper mining added about 
 
 Table 2. — Percent of U.S. copper production 
 
 by top producing companies in 1936 and 
 
 1978 
 
 
 rcrceiil ol tol.il L S. producMori 
 ol toppc't 
 
 Ckmipaiu 
 
 Hl.Sli 
 
 1978 
 
 Keniieccui (Copper (iorp. ___ 
 
 Phelps Dodf^e Corp. 
 
 Anaconda Copper Cio. (now a unit of Allan- 
 tic Richfield Co.) _ 
 
 211. () 
 17.4 
 
 5.9 
 
 ('1 
 
 21.:i 
 21.4 
 
 9 (i 
 
 Columet and Hecla Corp. (now a unit of 
 
 (') 
 
 
 10 5 
 
 
 
 Total - 
 
 74.4 
 
 '■()2 H 
 
 
 
 *■' Estimated. 
 
 ' Not among the first 4 major producers. 
 
 Sources: Bureau of Mines, based on analysis of annual reports and Imni 10-K 
 data submitted to Securities and Exchange (Commission; Nori-Ferrous Metal 
 Data. American Bureau of Metal Statistics. Inc. 
 
 $100 million to Kennecott Corp/s total revenues 
 (12). 
 
 OUTLOOK 
 
 The Bureau of Mines forecasts a significant 
 increase in world and U.S. consumption and 
 production of copper by the year 2000 (22-23). 
 Domestic primary copper production is forecast 
 to be 3.15 million short tons by the year 2000; 
 this maintains approximately the same ratio of 
 U.S. production to the total world production 
 (forecast to be 19.5 million short tons in 2000) 
 as in 1978. (See figure 1 and table 3.) In order 
 to reach projected production, U.S. producers 
 (and particularly the 14 largest companies) must 
 more than double their 1978 production capac- 
 ities. However, analysis of the producers' com- 
 mitments for capital outlay and future plans (as 
 reported in the annual 10-K reports to the Se- 
 curities and Exchange Commission (SEC^)) and 
 information from responsible officials in the 
 private sector do not yet indicate any thrust for 
 doubling the 1978 production by the year 2000. 
 Because of the long time period necessary for 
 exploration and the opening of new mines and 
 processing plants, U.S. firms would soon need 
 to be starting plans to expand capacity. 
 
 The alternative to the opening of new mines 
 and refining plants is the expansion of present 
 capacity by applying technological innovations. 
 Major technological innovations in mining have 
 occurred during the past 30 years. Examples are 
 increasing truck capacity from 25 tons to 150-200 
 tons and using mining equipment that nearly 
 tripled worker productivity. However, this will 
 be difficult to match during the next 20 years. 
 During 1977, some 33,200 copper miners were 
 employed in producing nearly 1,500,000 short 
 tons of copper. By 2000, producers may face a 
 labor shortage, since barring major advances in 
 technology, 30,000 additional miners would be 
 needed to meet projected production (16—17). 
 Based on analysis of quarterly and annual re- 
 ports of copper-producing companies, the cur- 
 rent major thrust of capital outlays to meet man- 
 datory societal expenses leaves a small balance 
 of funds available for technological innovation 
 to increase productivity. As a result, a review 
 may be necessary to assess the differences be- 
 tween private commitment of funds and Cov- 
 ernment forecasts so that consideration may be 
 
1969 
 
 1978 
 
 2000 (forecast) 
 
 Figure 1. Comparison of U.S. copper mining production with rest-of-world production in 1969, 
 1978, and 2000 (forecast). 
 
 Sources: Non-Ferrous Metal Data, American Bureau of Metal Statistics, Inc.; annual data 1979, 
 Copper Study and Consumption; Copper Development Association Inc. 
 
 given to policies that would sustain the U.S. cop- 
 per industry's competitive position. 
 
 NATIONAL SECURITY ASPECTS 
 
 Copper has and will continue to be indispen- 
 sable to U.S. national security (40). In 1941, cop- 
 per was included as a strategic material in order 
 
 Table 3. — Primary copper production, 1978 
 and 2000 (forecast) 
 
 
 1978 
 
 2(MHI 
 
 
 Thousand 
 short tons 
 
 Percent 
 
 riioiisand 
 short tons 
 
 Percent 
 
 
 '1,464.(1 
 ' 2ti.:! 
 
 17.2 
 .3 
 
 3,(193 ' 
 ^57 
 
 15 9 
 
 Other U.S. companies 
 
 .3 
 
 Tola! Uniled Stales 
 
 Rest of the world .- 
 
 1.4911.:) 
 7.(134.2 
 
 17.5 
 82.5 
 
 3,15(1 ■ 
 Hi, 35(1 
 
 l(i.2 
 
 83.8 
 
 World total 
 
 8,524.5 
 
 1(1(1.(1 
 
 19,5(1(1 
 
 1(1(1 (1 
 
 
 
 ' Preliminary. 
 
 ''Bureau of Mines Mineral Commodiiv Profiles, 1979. 
 
 .Source: Bureau of Mines, based on analysis of annual data 1979, from (ittpper 
 Development Association Inc. 
 
 to control inventories of materials under the 
 provisions of the Strategic Materials Act of 1939 
 (52). It was classified as a "critical material" and 
 became subject to allocation and conservation 
 during World War II. Later copper was in- 
 cluded again after the enactment of the Strategic 
 and Critical Materials Stock Piling Act of 1946. 
 {30). The initial copper stockpile objective was 
 in excess of 1 million short tons. By August 1973 
 this objective had been reduced to zero. On May 
 2, 1980, the Federal Emergency Management 
 Agency set the current stockpile goal at 1 million 
 tons of refined copper (31). 
 
 Copper has been subject to Federal Govern- 
 ment assistance to stimulate production. During 
 the Korean conflict, the Defense Production Act 
 of 195p provided the mechanism for favorable 
 loans, purchase contracts, floor prices, and ac- 
 celerated depreciation guidelines for Federal 
 taxation purposes (24). 
 
FINANCIAL ECONOMIC ANALYSIS AND ASSESSMENT— 14 LARGEST 
 
 U.S. COPPER PRODUCERS 
 
 There are many kinds of quantitative meas- 
 ures of the financial health of a company and 
 its success in operations. Company profitability 
 is the choice for this study because of its impact 
 on the generation of capital, both internally (re- 
 tained earnings plus nonfund items) and exter- 
 nally (public offerings of stock and bonds and 
 special money market borrowing). One set of 
 widely accepted measures of profitability is the 
 rate of return on average shareholders' equity 
 and on average total invested capital. Tables 4 
 and 5 show these rates of return over the 
 1969—78 period for the 14 major copper pro- 
 ducers, and figure 2 compares the average re- 
 turn on equity of these firms to the return on 
 equity of all U.S. manufacturing firms. 
 
 DEFINITIONS AND QUANTITATIVE 
 PERFORMANCE MEASUREMENTS 
 
 There are many factors that contribute to the 
 profitability of the copper industry, many of 
 which are subject to quantitative and qualitative 
 analysis. For example, companies have various 
 accounting options, including the capitalization 
 of financial costs during mine development, the 
 treatment of revenues from coproducts or by- 
 products of copper, and the method of report- 
 ing returns from overseas joint ventures (5). 
 Treatment of foreign exchange gains and losses 
 is also a complicating factor (8). Although the 
 impact of these and many other variations in 
 
 accounting methods are reflected in the prof- 
 itability of the various copper companies, long- 
 term trends in the profitability of U.S. copper 
 companies have not been distorted. As a result, 
 no attempt has been made to adjust reported 
 earnings for differences in accounting proce- 
 dures. 
 
 Two classic measures of return on investment 
 have been employed in this analysis — the rates 
 of return on both average shareholders' equity 
 and average total invested capital. Averages on 
 shareholders' equity and total invested capital 
 were utilized to avoid the extreme rate variance 
 that is due to very large profits or losses in any 
 one year. The definitions of the terms used in 
 this investigation are as follows: 
 
 Net income or earnings (P) — Company profits 
 after taxes, after extraordinary charges or cred- 
 its, and available to shareholders. 
 
 Interest cost (I,) — Interest and financing 
 charges on long-term indebtedness (bonds, de- 
 bentures, etc.). 
 
 Shareholders' equity (E) — Common stock plus 
 surplus (retained earnings), surplus reserves, 
 unamortized debt premium, capital stock pre- 
 mium, less treasury stock plus convertible pre-' 
 ferred stock; E, — beginning of year; E^ — end of 
 year. 
 
 Total invested capital (V) — Long-term debt 
 plus preferred stock and shareholders' equity 
 (E); V| — beginning of year, V.^ — end of year. 
 
 Table 4. — Fourteen leading U.S. copper producers, return on shareholders' equity, 1969—78' 
 
 (I'tTccnt) 
 
 CA)mpanies 
 
 HIIW 
 
 1970 
 
 1971 
 
 1972 
 
 I97;i 
 
 1974 
 
 1975 
 
 1976 
 
 1977 
 
 1978 
 
 Kennecoll Chopper Corp. 
 
 Phelps Dodge Corp. 
 
 Atlanlic Richfield Co 
 
 Newinonl Mining C^orp. 
 
 Pennzoil C^o. -- - 
 
 ASARCO Inc 
 
 Inspiration Consolidated Copper Co. 
 
 Amax Inc. - 
 
 Cities Service Co. 
 
 Cyprus Mines Corp. 
 
 Louisiana Land and Exploration Co. -. 
 
 Hecia Mining Co. 
 
 Ranchers Exploration and Development (^orp. 
 UV Industries Inc. _- 
 
 I5.fi2 
 1.5.73 
 8.88 
 18.18 
 l(j.2.') 
 16.41 
 25.21 
 15.27 
 10.71 
 18.16 
 17.22 
 12.37 
 11.48 
 23.96 
 
 13.28 
 17.9(> 
 
 5.72 
 19.05 
 15.78 
 15.60 
 28.98 
 11.69 
 
 9,10 
 16.88 
 
 9.23 
 1 1 .25 
 16.00 
 
 5.73 
 
 7.26 
 11.04 
 (34.7(1) 
 11.75 
 7.12 
 5.45 
 12.73 
 7.85 
 7.75 
 13.74 
 (5.33) 
 7.93 
 9,10 
 4,20 
 
 3.99 
 11.26 
 14.60 
 9.29 
 12.119 
 6.89 
 16.41 
 9.77 
 8.00 
 13.01 
 (7.06) 
 5,13 
 8,41 
 9.31 
 
 12,72 
 13.93 
 
 8.(>4 
 19.60 
 14.82 
 15.46 
 17.60 
 14.21 
 
 9.91 
 
 15.41 
 
 (10.56) 
 
 8.14 
 
 5.80 
 15.50 
 
 15.32 
 14.25 
 21.40 
 18.90 
 19.20 
 1 5.36 
 10.57 
 15.95 
 12.72 
 16.84 
 15.94 
 14.46 
 17.28 
 19.23 
 
 1.52 
 
 5.19 
 (3.21) 
 
 8.22 
 19.70 
 
 2.99 
 (3.79) 
 11.59 
 
 8.17 
 
 3.50 
 (12.17) 
 
 9.09 
 13.87 
 13.91 
 
 0.62 
 
 4.60 
 
 1.37 
 
 7.50 
 
 27.43 
 
 5.00 
 
 .11 
 
 10.24 
 
 12.03 
 
 3.65 
 
 (2.31) 
 
 (8.29) 
 
 5.28 
 
 17.43 
 
 0.52 
 
 2.02 
 
 15.51 
 
 .79 
 
 16.93 
 
 (3.54) 
 
 (10.38) 
 
 4.20 
 
 10.74 
 
 (3.56) 
 
 22.14 
 
 (24.21) 
 
 7.55 
 
 16.91 
 
 0.36 
 3.41 
 
 15.37 
 5.41 
 
 20.07 
 5.67 
 
 (7.97) 
 8.88 
 6.03 
 
 16.33 
 
 19.2] 
 (8.931.73) 
 
 17.39 
 
 16.37 
 
 All 14 companies'^ 
 
 13.97 
 
 11.77 
 
 1.76 
 
 8.98 
 
 12.92 
 
 16.19 
 
 ..39 
 
 7.35 
 
 9.85 
 
 9.74 
 
 ' Return on equity is defined as ratio of net income (after taxes) to average shareholders" iiiveslinent. 
 '^ Weighted average. 
 
 Note: Amount in parentheses indicates minus. 
 
 Source: Bureau of Mines, based on anahsis of annual reports and htrin 10-K data submitted to Securities and Exchange Commission. 
 
10 
 
 Table 5. — Fourteen leading U.S. copper producers, return on invested capital, 1969-78' 
 
 (IVrceiu) 
 
 Companies 
 
 I96;i 
 
 H)7(l 
 
 1971 
 
 197:! 
 
 1974 
 
 1975 
 
 197ti 
 
 1977 
 
 1978 
 
 Kennecoll Copper Corp. 
 Phelps Dodge Corp. 
 
 Atlantic Rithfield Co. 
 
 Newtnont Mining Co. 
 
 Pennzoil Co. - 
 
 ASARCO Int. 
 
 Inspiration Consolidated Copper Cio. 
 
 Amax Inc. 
 
 Cities Service Co. — 
 
 Cyprus Mines Corp, 
 
 Louisiana Land and Exploration Co. 
 
 Hecia Mining Co. 
 
 Ranchers Exploration and Development Corp. 
 UV Industries Inc. 
 
 H.7-) 
 15.13 
 
 HAH 
 17.68 
 
 9,82 
 15,(i8 
 24,t)5 
 11,22 
 
 4,78 
 15,95 
 14,62 
 12.37 
 H).92 
 12.71 
 
 1,3.1)5 
 16.82 
 
 5.88 
 16.58 
 10.23 
 15.24 
 28.38 
 
 8.87 
 
 8.41 
 16.08 
 
 8.76 
 1 1 .25 
 13,19 
 
 4,81 
 
 7,71 
 10,40 
 (23.49) 
 9.54 
 6. 78 
 5.46 
 12.51 
 6.12 
 7.87 
 13.50 
 (2.32) 
 7,93 
 10,14 
 5.24 
 
 12 12 
 
 12.30 
 8.66 
 
 16.32 
 9,83 
 
 15,11 
 
 12.44 
 9.40 
 9.27 
 
 15.58 
 9.84 
 6.81 
 6.09 
 
 10,98 
 
 14.41 
 12.61 
 I9..52 
 16.10 
 1 1 .02 
 14.87 
 9.12 
 10.53 
 11.74 
 17,24 
 14,08 
 1 1 .35 
 17,43 
 13,55 
 
 3.23 
 6.36 
 (.50) 
 8.37 
 
 10.15 
 4.38 
 
 (1.25) 
 9.03 
 K,25 
 4.90 
 
 (7,74) 
 6,25 
 
 I4,3ti 
 
 11.13 
 
 2.90 
 6.01 
 3,65 
 7,46 
 
 14,34 
 6,19 
 111 
 8.34 
 
 11.78 
 
 4.06 
 
 .04 
 
 (2.21) 
 6,63 
 
 13.57 
 
 All 14 companies'^ 
 
 12.05 
 
 10,4(i 
 
 3.01 
 
 11.12 
 
 13.68 
 
 .97 
 
 7,54 
 
 2,76 
 4.59 
 
 13.21 
 2.95 
 
 10,58 
 
 (7.09) 
 5,lil 
 10,47 
 (1,15) 
 19.47 
 8.57 
 8.56 
 13.48 
 
 '1.78 
 
 3.54 
 5.59 
 4.93 
 6.72 
 3.27 
 7.05 
 5.02) 
 9.81 
 6.83 
 3.57 
 7.15 
 5.99) 
 8.33 
 2.66 
 
 10.22 
 
 a\cl,im' lul.il i,i|)iuil, 1 ol.il i.ipilal is (U'fincd ,is llu' Mini (il sli.irchulilcrs' ei|uilv 
 
 ' Return on capital is defined as ratio ol net income (alter taxes) plus interest i 
 and subordinated borrowings. 
 If Weighted average. 
 
 Note: Amount in parentheses indicates minus. 
 
 Source: Bureau of Mines, based on analvsis ttt annual reports and lO-K data subinitied itt Seturiiies and Kxtlianjfe (.(niiinission. 
 
 Rate of return (R,) — Average shareholders' 
 equity. 
 
 Rate of return (R.^) — Average total invested 
 capital. 
 
 R. = 
 
 2P 
 
 = Return on (1) 
 
 E, + E, E, + E., average 
 
 2 share- 
 
 holder's 
 equity 
 
 R., = P + I| = 2(P + I|) = Return on (2) 
 Vi + V, V, + V,, average 
 2 total in- 
 
 vested 
 capital 
 
 Equation 1 , often referred to as the financial 
 ratio, measures the earning power of the cor- 
 poration from the proprietary (equity) point of 
 view. Equation 2, which provides an indication 
 of the economic productivity of capital, is a cri- 
 terion of the earning power of the corporation 
 (operating efficiency from the standpoint of the 
 suppliers of both borrowed and equity capital). 
 
 FINANCIAL ASSESSMENT OF 14 
 LARGEST U.S. COPPER COMPANIES 
 
 The rates of return of the copper companies 
 (tables 4 and 5) indicate a general deterioration 
 in industry profitability since 1969. The excep- 
 tion to this trend is noted for copper concerns 
 that have merged with oil companies and where 
 copper has been replaced as the principal line 
 
 of business. The actual copper unit results are 
 masked by the performance of the oil segment 
 of the corporate structure. 
 
 From 1969 to 1976, just before several large 
 copper producers merged with oil companies, 
 the shareholders' equity of the 14 copper com- 
 panies increased by less than 50 percent, which 
 indicates the lean profitability and low internal 
 cash fiow. Concurrently, the indebtedness of 
 these selected companies increased nearly 130 
 percent, or more than 25/4 times the increase for 
 shareholders' equity. Several previously debt- 
 free copper companies borrowed heavily during 
 the 1968-79 period. This is partly indicated by 
 the fact that the long-term debt of these firms 
 increased over twice as fast as shareholders' 
 equity. Table 6 lists the ratios of long-term debt 
 to equity for the 14 companies. Although such 
 data must be interpreted carefully because of 
 the different ability of each firm to carry long- 
 term debt, the weaker financial health of the 
 U.S. copper industry was generally refiected in 
 higher long-term debt-equity ratios. 
 
 By 1977, the deteriorated financial position 
 of several companies made them attractive ac- 
 quisition targets. Despite the sagging profits 
 other resource-based companies, especially ma- 
 jor oil firms, saw a future potential in financially 
 troubled copper resource companies. Anaconda 
 was acquired by Atlantic Richfield, and Copper 
 Range was bought out by Louisiana Land and 
 Exploration. On the other hand, Kennecott, 
 which was forced to sell its Peabody Coal Co. 
 subsidiary by Federal Government order, di- 
 
11 
 
 Table 6. — Fourteen leading U.S. copper producers, long-term debt-equity ratios, 1969—78 
 
 Companies 
 
 1970 
 
 1972 
 
 1974 
 
 1975 
 
 1977 
 
 1978 
 
 Kennecott Copper Corp. 
 
 Phelps Dodge Corp. — 
 
 Atlantic Richfield Co 
 
 Newmont Mining Corp. 
 
 Pennzoil Co. 
 
 ASARCO Inc. .— 
 
 Inspiration Consolidated Copper Co _-. 
 
 Amax Inc. 
 
 Cities Service Co. - --. 
 
 Cyprus Mines Corp. 
 
 Louisiana Land and Exploration Co. 
 
 Hecia Mining Co — 
 
 Ranchers Exploration and Development Corp. 
 UV Industries Inc. 
 
 17 
 
 . 12 
 
 25 
 
 11 
 
 137 
 3 
 2 
 33 
 34 
 30 
 27 
 
 NA 
 34 
 
 118 
 
 15 
 13 
 30 
 24 
 
 138 
 3 
 I 
 38 
 31 
 21 
 22 
 
 NA 
 52 
 
 114 
 
 26 
 23 
 46 
 42 
 
 121 
 5 
 1 
 56 
 42 
 14 
 35 
 
 NA 
 21 
 
 169 
 
 22 
 24 
 
 28 
 45 
 
 137 
 7 
 24 
 63 
 40 
 8 
 3(j 
 18 
 18 
 
 129 
 
 16 
 34 
 24 
 38 
 
 103 
 11 
 56 
 50 
 38 
 6 
 31 
 20 
 17 
 
 115 
 
 15 
 36 
 
 21 
 32 
 188 
 13 
 50 
 41 
 32 
 3 
 27 
 32 
 14 
 95 
 
 28 
 
 58 
 27 
 38 
 178 
 40 
 35 
 39 
 43 
 35 
 29 
 56 
 III 
 79 
 
 38 
 62 
 30 
 44 
 143 
 46 
 30 
 40 
 37 
 67 
 27 
 73 
 15 
 
 36 
 62 
 54 
 51 
 
 142 
 48 
 28 
 41 
 41 
 76 
 25 
 
 100 
 12 
 90 
 
 44 
 74 
 47 
 47 
 117 
 36 
 24 
 33 
 48 
 66 
 23 
 (107) 
 14 
 72 
 
 NA Not available. 
 
 Note: Amount in parentheses indicates minus. 
 
 Source; Company annual reports. 
 
 versified by purchasing Carborundum Co., a 
 manufacturer of abrasives. 
 
 A brief comparison of tables 4 and 5 shows 
 that the rate of return on shareholders' equity 
 was sometimes above the rate of return on in- 
 vested capital. This indicates that some of the 
 firms have been able to increase their return on 
 equity through financial leverage, that is, through 
 the use of fixed-interest-rate debt. Interest on 
 such debt is a tax-deductible expense, and cap- 
 ital managers can find that leverage is a good 
 way of raising the return on equity. However, 
 this financial leverage became a disadvantage to 
 some firms when the cost of additional debt in- 
 creased with the long-term debt-equity ratio. 
 Also, such a practice can be risky. If a substantial 
 downtrend in sales occurs, earnings decline 
 more rapidly, and it may become impossible for 
 a firm to meet its debt service obligations. 
 
 Figure 2, which compares the rates of return 
 on shareholders' equity of the 14 U.S. copper 
 mining firms with the average rate of return on 
 shareholders' equity of U.S. manufacturing firms, 
 also depicts deteriorated financial health of the 
 U.S. copper industry. For the 1 0-year period 
 1969—78, the 14 U.S. copper mining companies 
 earned an average of 9.8 percent on equity com- 
 pared to the average 13.4 percent earned by 
 U.S. manufacturing. This is significant because 
 copper mining is riskier than manufacturing. It 
 is subject to geologic uncertainty, long lead times 
 in development that tie up large amounts of cap- 
 ital, the vulnerability of the mining industry to 
 political decisions, and the greater volatility of 
 copper prices (and hence, earnings). These fac- 
 tors normally dictate the copper mining yield a 
 greater rate of return on shareholders' equity 
 
 than generally less risky manufacturing ven- 
 tures. For 1979, the rates of return on equity 
 for the U.S. copper companies probably in- 
 creased significantly because of higher demand 
 and prices for copper and sharply higher prices 
 for byproducts and coproducts such as silver, 
 gold, and molybdenum (9, 13). 
 
 ENVIRONMENTAL POLICY AND ITS 
 IMPACT 
 
 The profitability and financial health of the 
 U.S. copper industry has been significantly af- 
 fected by public policy actions on environmental 
 quality (33). The four steps of copper produc- 
 tion — mining, milling, smelting, and refining — 
 are all affected by Federal environmental reg- 
 ulations. Beginning in 1973, domestic copper 
 producers have directed a significant portion of 
 their yearly capital outlays to environmental 
 quality controls such as water and air pollution 
 abatement and land use. These legally man- 
 dated capital expenditures, plus the greater un- 
 certainties that are unique to the minerals in- 
 dustry, make the risk of investment much higher 
 than for many other enterprises. Because such 
 elements place considerable constraints on po- 
 tential investment returns, they discourage in- 
 vestment flows and decrease the copper com- 
 pany's ability to tap the market for capital funds 
 to update and expand plant and equipment. 
 
 Table 7 lists capital expenditures of the 14 
 leading U.S. copper producers for 1969-78. 
 From 1972 to 1976 (just prior to the merger of 
 Anaconda Co. and Copper Range Co. with oil 
 companies), capital spending nearly doubled to 
 about $2 billion. A large part of this increase 
 
12 
 
 18 
 
 16 
 
 14 
 
 ^12 
 
 0) 
 
 o 
 
 0) 
 
 a 
 
 flC 
 
 :d 
 \- 
 
 lU 
 
 DC 8 
 u. 
 
 o 
 
 UJ 
 
 U.S. manufacturing 
 
 1 0-year average, 
 percent 
 
 Manufacturing 
 Copper mining 
 
 13.4 
 9.8 
 
 1969 70 71 72 73 74 75 76 77 78 
 
 Figure 2. Comparison of estimated rates of 
 return on shareholders' equity, 
 1969-78. 
 
 Sources: First National Bank (New York), 
 Monthly Economic Letter and Bu- 
 reau of Mines analysis, table 4. 
 
 was due to the mandated environmental regu- 
 lations. During this period, inflation also took 
 its toll through increased prices for capital 
 equipment necessary to assure the continuing 
 efficiency of the mines. Expenditures for pol- 
 lution control equipment were generally fi- 
 nanced through borrowing, thus increasing the 
 long-term debt of companies and raising their 
 debt-equity ratios. 
 
 Of all the Federal antipollution regulations, 
 the ones limiting pollutant discharges from cop- 
 per smelters have had the greatest impact on 
 capital expenditures and thus on production 
 costs. Although the U.S. Environmental Protec- 
 tion Agency (EPA) has issued new proposed 
 rules for nonferrous smelter operations (35), the 
 implementation is predicated upon the financial 
 health of the copper companies. 
 
 CORPORATE TAXATION AND IIS 
 IMPACT 
 
 U.S. copper companies are subject to Federal, 
 State, and local taxes just as are other businesses. 
 These taxes have an effect on the firms' total 
 operations, from current profitability to poten- 
 tial profitability of new investments (34). 
 
 Federal tax liabilities are generally the largest 
 of all taxes. Although the primary purpose of 
 these taxes is to pay for Federal programs, var- 
 ious revisions to tax laws over the years have 
 been used to solve or ameliorate social, political, 
 and economic problems. For instance, a variety 
 of business deductions and tax credits have been 
 instituted to spur economic activity. There are 
 a number of tax benefits that help the copper 
 industry, including depreciation, depletion al- 
 lowances, and investment tax credits. 
 
 Table 7. — Fourteen leading U.S. copper producers, capital expenditures, 1969—78 
 
 (Million <i(>ll.iis 
 
 CA)mpaiiies 
 
 196;i 
 
 1971) 
 
 1971 
 
 1972 
 
 197S 
 
 1974 
 
 1975 
 
 197(i 
 
 1977 
 
 1978 
 
 Kennecou Copper Corp. -__ 
 
 Phelps Dodge Corp 
 
 AtUniic Richfield C:o. 
 
 Newmont Mining Corp 
 
 Pennzoil Co, 
 
 ASARCO Inc 
 
 Inspiration Consolidated Copper Co. 
 
 Amax Inc. — 
 
 Cities Service Co -- -- 
 
 Cyprus Mines Corp. 
 
 Louisiana Land and Exploration Co. 
 
 Hecia Mining Co - 
 
 Ranchers Exploration and Development Corp. 
 UV Industries Inc. 
 
 42. :f 
 
 11)1.8 
 
 127.1) 
 
 57.0 
 
 270.0 
 
 25.1 
 
 9.4 
 
 139.0 
 
 242.8 
 
 89.5 
 
 12.1 
 
 4.5 
 
 1.8 
 
 8.9 
 
 Total 14 companies -- - 1.131.2 
 
 48.2 
 
 94.1 
 
 97.0 
 
 1353 
 
 151.0 
 
 72.2 
 
 9.7 
 
 169.0 
 
 285.1 
 
 35.0 
 
 14(1 
 
 7.9 
 
 10.7 
 
 7.9 
 
 5(i,:i 
 
 90.2 
 
 95.1 
 
 129.1 
 
 89.0 
 
 55,4 
 
 9.8 
 
 130.0 
 
 29(j.5 
 
 43.3 
 
 11,9 
 
 11,8 
 
 5,1 
 
 15,2 
 
 3«j,li 
 107,2 
 12(i,5 
 
 44,1 
 112,0 
 
 K(i,7 
 
 27,8 
 148,0 
 261,7 
 
 28,5 
 4,1 
 
 17,9 
 ,9 
 
 20.4 
 
 63.(i 
 
 194.2 
 
 113.5 
 
 47.6 
 
 251.0 
 
 96.7 
 
 40.8 
 
 256.0 
 
 402.2 
 
 43.3 
 
 5.5 
 
 1.7 
 
 1.9 
 
 22,7 
 
 96.1 
 29(v4 
 193.9 
 
 55,8 
 237, 1 
 137,7 
 
 18,8 
 408,0 
 446,8 
 
 74,9 
 7,5 
 
 28.5 
 1.6 
 
 22.6 
 
 134.6 
 225.6 
 128.7 
 
 53.2 
 217.4 
 167 5 
 2.8 
 550.0 
 439.4 
 107.2 
 
 10.5 
 
 28.3 
 1.0 
 
 21.9 
 
 136,1 
 
 149,3 
 
 50,0 
 
 53,9 
 
 247,3 
 
 76,0 
 
 2,1 
 
 532.0 
 
 524.3 
 
 153.6 
 
 3.1 
 
 8.5 
 
 3.3 
 
 19.6 
 
 139.2 
 
 117.6 
 
 1,681 3 
 
 48.2 
 
 264.0 
 
 95.9 
 
 3,3 
 
 409.0 
 
 501.1 
 
 124.7 
 
 147.3 
 
 1.6 
 
 1.4 
 
 23.9 
 
 1,137.1 
 
 1,038.7 
 
 1,540.7 
 
 2,025.8 2,088.1 
 
 3,588.2 
 
 161.7 
 
 105.9 
 
 1,358.2 
 
 58.3 
 
 344.0 
 
 79.4 
 
 8.2 
 
 403.0 
 
 6372 
 
 49.1 
 
 191.7 
 
 1.2 
 
 9.2 
 
 23.6 
 
 3.430.7 
 
 Source: Bureau of Mines, based on analysis of annual reports and form 10-K data subinitted to Securities and Exchange Commission. 
 
13 
 
 Table 8. — Fourteen leading U.S. copper producers, effective income tax rates, 1969—78 
 
 (Percent) 
 
 Companies 
 
 1969 
 
 1970 
 
 197! 
 
 1972 
 
 1973 
 
 1974 
 
 1975 
 
 1976 
 
 1977 
 
 1978 
 
 Kennecou Copper Corp. 
 
 Phelps Dodge Corp. --- 
 
 Atlantic Richfield Co. -- 
 
 Newmont Mining Corp. --- 
 
 Pennzoil Co. --- 
 
 ASARCO Inc -- --- 
 
 Inspiration Consolidated Copper Co. 
 
 Amax Inc. 
 
 Cities Service Co. _- -. 
 
 Cyprus Mines Corp. 
 
 Louisiana Land and Exploration Cio. 
 
 Hecla Mining Co. 
 
 Ranchers Exploration and Development C.nrp. 
 UV Industries Inc 
 
 28.1 
 32.8 
 46.3 
 33.2 
 ('1 
 21,4 
 29,7 
 13„5 
 25.5 
 36.9 
 18.9 
 31.5- 
 5.4 
 49,9 
 
 24.2 
 37.2 
 10.6 
 31.5 
 6.1 
 22.2 
 33.2 
 25.1 
 27,8 
 34,7 
 29,4 
 31.6' 
 29.8 
 15.6 
 
 4.2 
 
 33.8 
 
 (') 
 
 19.8 
 
 2.2 
 10.0 
 27.8 
 18.8 
 14.3 
 30.7 
 (42.4) 
 30.6' 
 15.5 
 45,5 
 
 12.8 
 33.1 
 111 
 26.6 
 17.3 
 16.2 
 27.4 
 23.6 
 17.9 
 21.6 
 (40,8) 
 18,0 
 7,1 
 46.3 
 
 25.0 
 37.3 
 24.3 
 27.9 
 13.8 
 16.9 
 4.2 
 26.5 
 28.9 
 30.2 
 37.2 
 27.0 
 23.1 
 44.5 
 
 27.2 
 26.5 
 33.8 
 28.5 
 21.7 
 21.4 
 14.3 
 27.1 
 30.4 
 35.9 
 28.0 
 33.0 
 25.6 
 47,0 
 
 (74.5) 
 (29.8) 
 (') 
 29.6 
 25.4 
 (65.6) 
 (23.5) 
 15.8 
 41.9 
 23.9 
 (36.0) 
 37.0 
 32,0 
 45,0 
 
 (74,7) 
 
 9,1 
 
 28,0 
 
 30,7 
 
 30.0 
 
 21.9 
 
 (168.1) 
 
 4.2 
 
 43.9 
 
 (4.7) 
 
 (47,9) 
 
 (47.0) 
 
 41.7 
 
 42.0 
 
 (136.7) 
 21.5 
 27.6 
 
 (186.2) 
 32.0 
 22.6 
 (8.9) 
 3.9 
 44.9 
 
 (148.6) 
 44.4 
 (20.0) 
 34.9 
 46.4 
 
 62.7 
 16.9 
 42.5 
 34.2 
 33.5 
 31.1 
 (') 
 21.1 
 42.8 
 19.6 
 44.6 
 (5.0) 
 30.9 
 43.1 
 
 *■ Estimated. 
 
 ' Loss for the period or tax loss carry forward position. 
 
 Note: Amount in parentheses indicates minus (loss). 
 
 Source: Bureau of Mines, based on analvsis ol aiuuial reports and lorm 10-K data submitted to Securities and Exchange (iommission. 
 
 The 14 U.S. copper companies have utilized 
 tax benefits in different ways so that they have 
 different effective income tax rates. Table 8 lists 
 these effective tax rates, which were affected by 
 the following: 
 
 a. Percentage depletion in excess of cost 
 depletion; 
 
 b. Foreign and other income subject to 
 lower tax rates; 
 Investment tax credits; 
 State and local income tax; 
 Tax on undistributed earnings; 
 Excess of intangible development costs 
 deducted; 
 
 g. Tax loss carry forward benefits; 
 
 h. Minimum tax; and 
 
 i. Others. 
 These effective tax rates are the ones that the 
 copper companies use for operational planning, 
 for investment decisions, and for determining 
 whether to finance investments through debt or 
 equity. On the other hand, tax benefits are dis- 
 
 c. 
 d. 
 e. 
 f. 
 
 counted by credit institutions and investment 
 analysts when judging management's capability, 
 the firm's credit rating, its ability to attract cap- 
 ital, and the cost of capital. 
 
 Tax policies can be an incentive or a disin- 
 centive to investment. The inflationary economy 
 of the past 10 to 15 years has resulted in inflated 
 profits, primarily because depreciation of plant 
 and equipment is based on historical costs and 
 not inflated replacement costs. This overstates 
 profits, and thus higher effective taxes are being 
 paid. As a result, cash flows in real terms are 
 lower than they would have been in a noninfla- 
 tionary economy, and new investments and ex- 
 ploration, research, and development are hurt. 
 One modification to the tax structure currently 
 being prepared in Congress would help all busi- 
 ness, including copper companies, by allowing 
 faster depreciation of plant and equipment. If 
 passed into law this would decrease effective tax 
 rates and thus increase the profitability of po- 
 tential investments. 
 
 HB 
 
14 
 
 DYNAMICS OF CORPORATE STRUCTURE AND BEHAVIOR 
 
 Like most U.S. enterprises, copper producers 
 generally started as small companies, many as 
 groups of miners. In the early periods, the in- 
 dustry was extremely labor intensive. As de- 
 mand for copper increased, competition within 
 the industry developed and prompted the ap- 
 plication of more efficient and economical meth- 
 ods of mining to reduce costs and thus increase 
 profits. The exhaustion of more accessible and 
 richer deposits necessitated mining of ore lower 
 in copper content and lying at greater depth. 
 This stimulated technological advancement not 
 only in mining methods but also in increased 
 use of power equipment, in improvements of 
 drilling, loading, and hauling equipment, and 
 in metallurgical technology. This required huge 
 capital expenditures, which small producers 
 could not afford. Because nearly all improve- 
 ments in mining methods and technological ad- 
 vancements led to greater economies of scale, 
 the U.S. copper industry is mainly composed of 
 large, integrated producers that in some cases 
 are part of multiproduct, multinational orga- 
 nizations and joint ventures. The 1969-78 pe- 
 riod witnessed further alterations of corporate 
 structure and behavior — notably in the areas of 
 diversification, interconnections among firms, 
 copper investment strategy, and financing tech- 
 niques. 
 
 DIVERSIFICATION AND MERGER 
 During the 1960's, radical changes were being 
 
 initiated in the corporate structure and behavior 
 of business (7). It was common practice for com- 
 panies to become involved in conglomerates via 
 mergers or other methods of diversification. 
 The copper industry was no exception to this 
 trend. During the 1960's, two significant copper , 
 producers were involved in mergers. Cities Serv- 
 ice Co. acquired the Tennessee Corp. in June 
 1963 and Pennzoil Co. acquired control of Duval 
 Corp. in August 1968. The main purpose of 
 these mergers was probably to diversify revenue 
 sources (see table 9), making copper a smaller 
 source of total revenues. During this period, the 
 copper companies were generally healthy with 
 few debts and acceptable credit ratings, despite 
 major expropriation losses on foreign invest- 
 ments during the latter 1960's and early 1970's. 
 
 Beginning in the mid-1970's, the copper in- 
 dustry encountered difficult times because of 
 mandated expenses for environmental, safety, 
 and health regulations (air pollution, water pol- 
 lution, and solid wastes); steadily rising fuel 
 costs; excess capacity; and lower copper prices. 
 All of the above factors contributed to sagging 
 profits or losses. It was necessary for previously 
 debt-free copper companies to incur debt to fi-^ 
 nance the costs of required environmental con- 
 trols. This in turn created a much higher debt- 
 equity ratio, which forced credit-rating institu- 
 tions to downgrade the ratings for indebtedness. 
 These lower credit ratings made it difficult to 
 borrow further needed funds. 
 
 Table 9. — Fourteen leading U.S. copper producers, shift in corporate business composition, 
 
 1969-78 
 
 (Percent oT (-npijer and tnppci [jrndiKl s.iles [n liil.il levetuics) 
 
 Companies 
 
 i ')ti9 
 
 l')7() 
 
 hl7l 
 
 1 972 
 
 I(l7:i 
 
 1974 
 
 I97j 
 
 1977 
 
 1978 
 
 Kenneeotl Copper (^orp — 
 
 Phelps Dodge Corp. 
 
 Allanlk Rithfield Co.' 
 
 Newmonl Mining (iorp. .-_ 
 
 Pennzoil Co. -. 
 
 ASARCO Inc 
 
 Inspiraiion Consolidated Copper Co. -. 
 
 Aniax Int,^ 
 
 Cities Service Co 
 
 Cyprus Mines (^orp. _-. 
 
 Lt)uisiana I^nd and Exploration Co 
 
 Hecia Mining (>), 
 
 Ranchers Exploration and Development Corp. 
 UV Industries Inc. 
 
 77.9 
 NA 
 HD.Ii 
 7:t.2 
 
 22.:i 
 
 Sti.li 
 «ti.7 
 
 NA 
 
 6.1 
 33.2 
 99.0 
 
 5.H 
 «4.2 
 
 NA 
 
 7«.3 
 NA 
 74.4 
 (i7.4 
 24,9 
 3,"). 9 
 S7.2 
 21.0 
 
 e.i 
 
 37.4 
 9H.4 
 
 7.3 
 92.4 
 
 NA 
 
 HO. 3 
 NA 
 70.0 
 fi4.l 
 33.0 
 32.2 
 S."i.9 
 13.0 
 5.5 
 35.3 
 9H.6 
 7.2 
 H9.4 
 40.0 
 
 77.1 
 NA 
 69.3 
 71.3 
 32..". 
 32.4 
 «(>.4 
 19.0 
 5.9 
 35.7 
 97.7 
 (i.2 
 HI. 4 
 41.0 
 
 7H.0 
 NA 
 7 1 .5 
 (i9.2 
 2H.7 
 30.4 
 H5.2 
 17.0 
 
 (i.li 
 34. N 
 9H.I 
 
 1,0 
 91.5 
 42-0 
 
 74.5 
 NA 
 (i9.5 
 59.S 
 23. (> 
 2l.(i 
 84. 5 
 17.0 
 
 4.8 
 30.6 
 98.3 
 
 1.0 
 93.4 
 47.0 
 
 Ii3. 1 
 NA 
 57.5 
 42.7 
 20.0 
 10.7 
 70.0 
 11.0 
 4.4 
 27.5 
 97.4 
 .9 
 83.1 
 33.0 
 
 72.5 
 98.6 
 
 47.8 
 18.7 
 24.1 
 68.8 
 15.0 
 5.5 
 27.8 
 96.5 
 38.5 
 74.1 
 37.0 
 
 65.7 
 96.7 
 
 6.4 
 43.2 
 20.7 
 20.5 
 63.4 
 14.0 
 
 4.1 
 25.9 
 17.7 
 45.4 
 56.1 
 38.0 
 
 38.5 
 96.0 
 
 5.3 
 43.8 
 22.0 
 26.4 
 .56.0 
 16.0 
 
 5.1 
 29.2 
 20.1 
 
 6.6 
 25.3 
 36.0 
 
 NA Not available, 
 
 ' Anaconda Co, acquired Jan. 12, 1977. All data prior to Jan. 12. 1977, cover Anaconda (>». only. 
 
 ' Anamax Mining Co. was formed June 1973 through equal partnership with Anaconda Co., a unit of Atlantic Richfield Co. 
 
 ' Copper Range Co. acquired May 24. 1977. All data prior to this date cover Copper Range Co. only. 
 
 Source: Bureau of Mines, based on analysis of annual reports and form lO-K data submitted to Securities and Exchange Commission. 
 
15 
 
 The weakened financial position of some cop- 
 per firms led to several acquisitions in the post- 
 1976 period by oil companies. Anaconda was 
 acquired by Atlantic Richfield in January 1977, 
 and Copper Range was merged into Louisiana 
 Land and Exploration Co. in May 1977. Fur- 
 thermore, Standard Oil of Indiana acquired 
 Cyprus Mines in April 1979. Apparently, some 
 oil firms saw potential long-term value despite 
 the financial trouble of the copper companies, 
 and viewed copper mining as a logical extension 
 of their present resource extraction business. 
 Also, the purchase prices of several of the ac- 
 quired firms — Anaconda and Copper Range — 
 were roughly half of the book values of the firm. 
 
 Other oil companies also apparently believe 
 that the minerals industry — and copper in par- 
 ticular — offers a good potential for profit (tables 
 10 and 11). One firm. Inspiration Consolidated 
 Copper Co., is controlled by two related Cana- 
 dian firms — Hudson Bay Mining and Smelting 
 Co., Ltd., and Minerals and Resources Corp., 
 Ltd. — which have substantial oil and gas inter- 
 ests. Standard Oil of California owns a 20.6-per- 
 cent interest in Amax, the diversified minerals 
 producer, and unsuccessfully attempted to take 
 Amax over. On the other hand, Exxon has cho- 
 sen to start up its own copper company; it has 
 purchased a mine in Chile and has been eval- 
 uating a plan for opening a copper mine in 
 Wisconsin. Still others — Cetty Oil Co. and Oc- 
 
 cidental Petroleum Corp. — own undeveloped 
 copper properties in Arizona. 
 
 Other nonoil companies have also shown an 
 interest in nonrenewable resources, including 
 copper. General Electric Co., through its Utah 
 International subsidiary, has taken a position in 
 Australian copper mining. Bendix Corp., a di- 
 versified manufacturer, has purchased a 20-per- 
 cent interest in ASARCO, one of the 14 major 
 U.S. copper producing firms. 
 
 Of the remaining copper majors, Kennecott 
 and Phelps Dodge have chosen to diversify in 
 different ways. Kennecott, which attempted an 
 earlier diversification through its purchase of 
 Peabody Coal, was forced to sell off this segment 
 of its business for antitrust reasons. With the 
 resulting spare cash, it then purchased Carbo- 
 rundum Co.— a manufacturer of abrasives — in 
 order to reduce the firm's sensitivity to swings 
 in the price of copper. Since the late 1977 ac- 
 quisition, the portion of copper sales to total 
 revenues fell to roughly 40 percent from about 
 66 percent. Phelps Dodge, although it has en- 
 tered the uranium and aluminum business, still 
 derived 96 percent of its sales from copper in 
 1978. 
 
 INTERCONNECTIONS AMONG COPPER 
 FIRMS 
 
 Another change that has apparently taken 
 place in the U.S. copper industry is the move 
 
 Table 10. — Industry 
 
 affiliation of selected copper producing groups in 
 
 1978 
 
 
 
 (!onIrolliMg coiii|).uiv 
 
 1978 coppet 
 
 production, 
 
 1, 01)0 short 
 
 tons 
 
 I'eicent ol 
 
 induslr\ 
 
 total 
 
 !iHliistr\ altlliation. percent of total 
 tiuliistrv 1978 production 
 
 Copper-producing groups subsidiary 
 or division 
 
 Copper 
 
 Petroleum 
 
 Other 
 minerals 
 
 
 Kennecott C'.opper Corp. 
 
 Hhelps Dodge (-orp. 
 
 Atlantic RichlleUI i.o. 
 
 :!1H.2 
 :il9.0 
 I42.H 
 1.56.9 
 IIH.II 
 1011.9 
 
 39.7 
 52.1 
 90.8 
 70.7 
 40.7 
 .6 
 
 S.2 
 5.4 
 
 2 1 .:! 
 
 21.4 
 9.6 
 
 10.5 
 7.9 
 6.8 
 
 2.7 
 3.5 
 6.1 
 4.7 
 2.7 
 Insig. 
 
 .6 
 .4 
 
 21.3 
 21.4 
 
 10.5 
 
 9.li 
 7,9 
 
 2.7 
 
 6.1 
 
 4.7 
 2.7 
 
 .4 
 
 
 Phelps Dodge mines 
 
 
 Magma Copper Co. and divisions 
 
 Duval and Duval Sierrita Corps. 
 
 ASARCO Mines 
 
 Newinonl Mining (iorp. 
 
 Pennzoil C!o. 
 
 
 ASARC:() Inc. - 
 
 6 8 
 
 Inspiration Consolidated Copper Co. 
 
 Hudson Bay Mining & Smelting C:o. Ltd. 
 (Clanada) Minerals & Resources Corp. I.id. 
 (Bermuda) - 
 
 
 Anamax Mining Co. {oi)7r) 
 
 Copperhill and Miami operations 
 
 Group of copper companies 
 
 
 3 5 
 
 
 
 
 
 Copper Range Co. 
 
 Lakeshore Mine (50%) and others 
 
 Louisiana Land and Exploration Co. 
 
 Insig. 
 
 
 Ranchers Exploration and Development 
 
 
 g 
 
 Continental mine .. _ 
 
 
 
 
 
 
 Total 14 companies' copper production in U.S. 
 
 1.464.(1 
 
 98.2 
 
 53.2 
 
 33.7 
 
 1 1 3 
 
 
 
 
 l'l,490.:i 
 
 
 
 
 
 
 
 
 P Preliminary. 
 
 ' Became a wholly owned subsidiary of Standard Oil Co. of Indiana on Sept. 21, 1979. 
 
 Source: Bureau of Mines, based on analysis of annual reports and form 10-K data submitted to Securities and Exchange Commission. 
 
16 
 
 Tabic 11. — Petroleum companies' connections with the copper industry — domestic and foreign 
 
 as of yearend 1979 
 
 Oil and gas companies 
 
 Interest in U.S. copper producers or copper 
 lesources (l(Kation)' 
 
 Interest in foreign copper producers or resources 
 
 
 
 
 British Petroleum Co.. Ltd. 
 
 None 
 
 Western Mining Clorp. Ltd. 
 
 
 
 
 Exxon Corp 
 
 Getty Oil Co 
 
 
 Compania Minera Disputada des Las Condes SA. 
 
 None. 
 
 
 Hudson Bay Mining and Smelting Co., Ltd.; 
 Minerals and Resources Corp., Ltd. 
 
 
 Whitehorse Copper Mines Ltd. 
 None. 
 
 
 Otcidenlal Petroleum Clorp. - _ 
 
 
 
 Duval Corp (l()(») 
 
 None 
 
 
 
 Billiion United Kingdom. 
 
 
 
 
 Cyprus Mines Corp. (lOO) . . . 
 
 
 
 
 
 Union Oil Co 
 
 
 
 
 
 
 ' Ainounls in parentheses ( ) indicate perceni of iiiieresl. 
 Source: Bureau of Mines, based on analysis oi aiuuial repoiis 
 
 ind lorin 10-K data submitted to Sctulities and Kxcli<iui{e (ioiiunissiori. 
 
 towards direct and indirect connections among 
 producers. The major vehicle for direct con- 
 nections among producers is the joint venture. 
 Generally, firms enter into joint ventures in or- 
 der to spread the risks involved in any given 
 investment project. Within the United States, 
 one example of a joint venture is Anamax Min- 
 ing Co., formed in June 1973 as a joint venture 
 of Amax, the Anaconda unit of Atlantic Rich- 
 field, Standard Oil of California, and Selection 
 Trust, Ltd. (UK). One prime example of a joint 
 overseas venture is the Southern Peru Copper 
 Corp. which is jointly owned by ASARCO, the 
 Marmon Group, Newmont Mining Corp., and 
 Phelps Dodge Overseas Capital Corp. Such joint 
 ventures enable firms to participate in the prof- 
 its from lower cost overseas operations while 
 limiting losses in case of any future expropria- 
 tion action by a host country. 
 
 Indirect connections among U.S. copper com- 
 panies — which may be described as extremely 
 indirect — occur because of the representation of 
 financial institutions on the board of directors 
 (see table 12). These directors from financial 
 institutions — many of whom are affiliated with 
 the banking industry — provide expertise in set- 
 ting company financial policies and provide ac- 
 cess to financial markets to meet short- to-long- 
 range capital requirements. Virtually all of the 
 so-called Big Six copper companies have at least 
 one representative of a major financial institu- 
 tional on their boards of directors. The indirect 
 connections between companies can occur be- 
 cause a number of banks are often involved in 
 major loans to a single firm. Often, one or more 
 
 of these banks or financial institutions might be 
 involved in loans to several firms in the same 
 industry. As a result, information on the finan- 
 cial health and plans of competing firms can 
 become broadly disseminated to those financial 
 officers serving on the boards of these compet- 
 itors. This potential for information transfer can 
 occur in the U.S. copper industry and could 
 possibly have an influence on investment deci- 
 sions. 
 
 COPPER INVESTMENT STRATEGY- 
 DOMESTIC VERSUS FOREIGN 
 
 The general financial weakness of the U.S. 
 copper industry during the 1969-78 period has 
 apparently led these firms to strike a new bal- 
 ance between domestic and foreign investment 
 in copper projects. As stated in the section on 
 
 Table 12. — Composition of boards of 
 directors of copper producers, 1978 
 
 Companies 
 
 lotal Board 
 members 
 
 Boaixl members 
 
 connected to 
 
 tinancial inslittuions 
 
 Kennetolt Copper Corp. 
 
 IH 
 17 
 
 i:i 
 u 
 
 M 
 
 1(1 
 
 18 
 14 
 15 
 10 
 
 ft 
 
 7 
 15 
 
 4 
 4 
 
 Atlantic Richfield Co --. 
 
 Newmont Mining Corp. 
 
 Pcnnzoil Co 
 
 2 
 1 
 1 
 
 ASARCO Inc - - 
 
 2 
 
 Inspiration Consolidated Copper Co. . 
 Amax Inc. _ -- . 
 
 1 
 
 Cities Service Co. .-_ 
 
 Cyprus Mines Corp 
 
 Louisiana Land and Exploration Co. . 
 Hecia Mining Co. 
 
 Ranchers Exploration and Oevelop- 
 
 2 
 2 
 
 
 1 
 
 
 II 
 
 
 
 Source: Bureau of Mines, based on analysis of annual reports atul In 
 data submitted to Securities and Exchange (Commission. 
 
17 
 
 theoverviewof the copper industry, U.S. copper 
 companies have not yet announced plans to ex- 
 pand net capacity despite the Bureau of Mines' 
 forecast for needed extra domestic mine and 
 refined output by the year 2000. Apparently, 
 the costs of meeting environmental standards, 
 the specter of futher increases in energy, labor, 
 and capital costs, and the lack of high-grade ore 
 have generally led U.S. copper companies to 
 forestall domestic capacity expansion plans. In- 
 stead most companies appear to be limiting do- 
 mestic investment to mandated antipollution 
 expenditures and to investments that cut costs 
 of present mining and refining operations. Also, 
 some of the companies are still intent on im- 
 proving their balance sheets by reducing in- 
 debtedness. 
 
 On the other hand, some U.S. firms are chan- 
 neling money into overseas copper ventures (see 
 fig. 3), which appear more profitable than do- 
 mestic ones. As mentioned previously, some of 
 the overseas ventures are — 
 
 • Compania Minera Disputada des Las 
 Condes, S.A., an Exxon subsidiary in Chile. 
 
 • Southern Peru Copper Corp. in Peru, a 
 joint venture of ASARCO, Inc. the Mar- 
 mon Group, Newmont Mining Corp., and 
 Phelps Dodge Overseas Capital Corp. 
 
 • Utah International, General Electric sub- 
 sidiary, in an Australian venture. 
 
 • Newmont Mining Corp., through various 
 subsidiaries, in Canada and the Republic of 
 South Africa. 
 
 Apparently, the higher grade (and hence 
 lower cost) deposits overseas are profitable 
 enough to offset any potential risks of overseas 
 operations. 
 
 NEW FINANCING METHODS 
 
 U.S. copper companies are also taking advan- 
 tage of new methods of financing business com- 
 pared to that of earlier years. Since copper prof- 
 its have been low, and straight debts (debentures) 
 have increased, raising the debt-equity ratio, 
 several companies have instituted equity financ- 
 ing through divided reinvestment plans to lower 
 the debt-equity ratio. This financing plan per- 
 mits quarterly investments by shareholders; in 
 addition to dividends, an amount usually from 
 $25 up to a maximum of $3,000 can be invested. 
 Although participation is stricdy voluntary, some 
 
 Figure 3. Leading U.S. copper producers, for- 
 eign investment flows. 
 
 Source: Bureau of l\/lines, based on analysis 
 of annual reports and form 10-K data 
 submitted to Securities and Ex- 
 change Commission. 
 
 shareholders take advantage of this free service 
 because they can avoid paying broker's com- 
 missions. Furthermore, U.S. copper producers 
 with multinational operations have access to in- 
 ternational money markets to finance copper 
 projects in foreign countries. The issuance of 
 debt instruments, such as Eurobonds, may be an 
 advantage when interest rates and foreign ex- 
 change rates are considered. 
 
 In some cases, domestic copper producers 
 may receive assistance from the respective State 
 and local governments by financing antipollu- 
 
18 
 
 tion facilities with tax-exempt revenue bonds. 
 Though these bonds are issued by the govern- 
 ments, the repayment and costs of funds are 
 guaranteed by the respective copper company. 
 The tax-exempt status of the bonds reduces in- 
 terest payments and thus cuts the cost of pol- 
 lution control facilities. 
 
 Another finacing vehicle used to raise im- 
 mediate working capital is to obtain a commit- 
 ment of several financial institutions for letters 
 of credit that are needed to support the com- 
 pany's issuance of commercial paper. Commer- 
 cial paper, which is virtually a corporate signa- 
 ture loan, can be used as a way of obtaining 
 short-term funds at interest rates that are often 
 less than those charged by banks. 
 
 Project financing is a way of raising funds that 
 has facilitated joint ventures for new mines. It 
 came into wide use when capital costs increased 
 sharply and leading institutions began to require 
 greater amounts of equity interest as a condition 
 for lending. This system of financing can be a 
 little more expensive than borrowing on the 
 strength of the primary companies' financial- 
 economic position, but the loan need not be re- 
 
 flected on their financial statements. Thus, a 
 project loan need not affect a firm's credit stand- 
 ing. This type of financing also reduces the total 
 capital contribution of any one company. 
 
 Similar financing instituted on an interna- 
 tional basis may involve several companies with 
 one in each of three basic categories, "investor- 
 host-market." In this instance, "investor" (sup- 
 plier) represents the financing and technological 
 capability (generally U.S.); the "host" represents 
 the mineral resource country; and the "market" 
 represents the consuming country or firm. A 
 sales contract for the project's output is com- 
 monly required before full financing can be ar- 
 ranged (26-28). The contract serves the purpose 
 of guaranteeing a market for raw material (con- 
 centrate and blister copper). The supplier's 
 credits (investor) are loans or loan guarantees 
 by agencies such as the U.S. Export-Import 
 Bank (25) for the purchase of supplies and 
 equipment by the foreign producing firm from 
 U.S. equipment manufacturers. The consuming 
 country (the U.S. copper company) may also be 
 a source of long-term funds — it may lend capital 
 against long-term supply contracts. 
 
19 
 
 SUMMARY OF TRENDS IN THE U.S. COPPER INDUSTRY AND 
 
 CONCLUSIONS 
 
 In addition to facing geologic uncertainty, 
 over the 1969-78 period the U.S. copper in- 
 dustry has faced higher production costs, lower 
 ore grades, mandated investments in pollution 
 control equipment, and greater competition 
 from lower cost foreign producers. Together, 
 these and other factors led to a deterioration in 
 the financial health of the U.S. copper industry 
 as measured by lower rates of return on share- 
 holders' equity and, in some cases, an inability 
 to raise needed funds from capital markets. 
 
 Several changes have taken place that should 
 improve the financial health of the U.S. copper 
 industry. These dynamic changes included: 
 
 • Diversification and merger. Some oil com- 
 panies acquired copper companies, and 
 others established their own copper subsi- 
 diaries, while the remaining copper com- 
 panies have diversified their product base. 
 
 • The use of joint ventures to spread the risks 
 of copper mining projects, particularly in 
 overseas operations, and the increased re- 
 liance on the financial community — with its 
 internal connections — for advice on financ- 
 ing and access to capital markets. 
 
 • The shift in investment strategy toward the 
 expansion of capacity in low-cost foreign 
 producing countries, while generally lim- 
 iting U.S. investment to mandated environ- 
 mental expenses and equipment that in- 
 crease the productivity of present operations. 
 
 • The use of new financing methods, partic- 
 ularly project financing, as a way of limiting 
 a firm's investment in foreign ventures. 
 
 These measures are likely to raise the rate of 
 return on shareholders' equity and improve the 
 financial health of the U.S. copper industry over 
 the medium term. Domestic capacity expansion, 
 which the Bureau of Mines estimates will be 
 
 needed during the next 20 years, is apparently 
 being held back until the long-term real copper 
 price rises enough to make such domestic ven- 
 tures more profitable. Without the improved 
 financial health that will result from these ac- 
 tions, the U.S. copper companies would not have 
 the financial resources to expand domestic op- 
 erations when future market conditions are fa- 
 vorable. 
 
 The Nation's future copper supply decisions 
 and policymaking processes will involve four 
 dynamic organizations: First, the Federal Gov- 
 ernment, to cover the Nation's social and eco- 
 nomic policies, placing different priorities in the 
 area of foreign exchange, revenues, and em- 
 ployment levels; second, the private banks and 
 other lending institutions, to safeguard their 
 loans to copper producers and to state-owned 
 copper companies of foreign governments; third, 
 the independent U.S. copper firms, interested 
 in the economics of copper mining, that is, an 
 adequate rate of return on capital employed 
 commensurate with the degree of risk; fourth, 
 the oil companies with copper interests, the new 
 participants with excellent financial position and 
 with top credit ratings. The oil companies' im- 
 mediate contributions should be to lower the 
 financing cost of capital for expansion and im- 
 provement of mines, possibly in the range of 
 100 to 200 basis points. The interactions of these 
 four institutions in the Nation's copper deci- 
 sionmaking process should lead to a policy for 
 a healthy and competitive U.S. copper industry. 
 
 In aggregate, the U.S. copper industry is fi- 
 nancially stronger than a few years ago. Already, 
 several copper corporations have made huge in- 
 vestments overseas in copper, individually and 
 through joint ventures to diversify geographi- 
 cally their copper production. 
 
20 
 
 REFERENCES 
 
 9. 
 
 1. Amax Inc. 1978 Form 10-K. 93 pp. 
 
 2. ASARCO Inc. 1978 Form 10-K. 112 pp. 
 Atlantic Richfield Co. 1978 Form 10-K. 73 pp. 
 Cities Service Co. 1978 Form 10-K. 65 pp. 
 Coopers &: Lybrand. Financial Reporting and Tax Prac- 
 tices in Nonferrous Mining. 1 18 pp. 
 Cyprus Mines Corp. 1978 Form 10-K. 72 pp. 
 Drucker, P.F. America's Next Twenty Years. 1957, 1 14 
 pp. 
 
 Financial Accounting Standard Board (New York). 
 Statement of Financial Accounting Standards. No. 8, 
 October 1975, 103 pp. 
 
 First National Bank (New York). Monthly Economic 
 Letter. May 1978, 12 pp. 
 
 10. Hecia Mining Co. 1978 Form 10-K. 44 pp. 
 
 11. Inspiration Consolidated (>)pper (>). 1978 Form 10-K. 
 25 pp. 
 
 12. Kennecott Copper Corp. 1978 Form 10-K. 73 pp. 
 
 13. Kennecott Copper Corp. 1979 Second Quarter Report. 
 
 Leith, C.K. Minerals Valuation of the Future. National 
 Research Project, 1938, 116 pp. 
 
 Louisiana Land and Exploration Co. 1978 Form 10-K. 
 50 pp. 
 
 National Academy of Sciences. Review of National Min- 
 eral Resource Issues and Problems. 1978, 67 pp. 
 
 Technological Innovations and Forces for (Change 
 
 14 
 
 15 
 
 16 
 
 17. 
 
 in the Mineral Industry. 1978, 74 pp. 
 
 18. Newmoni Mining Corp. 1978 Form 10-K. 149 pp. 
 
 19. Pennzoil Co. 1978 Form 10-K. 78 pp. 
 
 20. Phelps Dodge Corp. 1978 Form 10-K. 69 pp. 
 
 21. Ranchers Exploration and Development C^orp. 1978 
 Form 10-K. 25 pp. 
 
 22. Schroeder, H.J. Copper. BuMines Mineral Commodity 
 Profile, 1979, 20 pp. 
 
 23. U.S. Bureau of Mines. Mineral Facts and Problems. Bull. 
 556, 1956, 1009 pp; Bull. 650, 1970, 1029 pp.; Bull, 
 667, 1975. 1259 pp. 
 
 24. U.S. Congress. Defense Production Act of 1950. Public 
 Law 81-744, Sept. 8, 1950, 64 Stat. 798 and 800. 
 
 25. . Export-Import Bank Act of 1945. Public Law 
 
 79-173, July 31, 1945, 58 Stat. 526. 
 
 26. . Foreign Assistance Act of 1961. Public Law 87- 
 
 195. Sept. 4, 1961, 75 Stat. 424. 
 
 27. . Foreign Assistance Act of 1969. Public Law 91- 
 
 175. Dec. 30, 1969, 83 Stat. 805. 
 
 28. . Inter-American Development Bank Act. Public 
 
 Law 86-147, Aug. 7, 1959, 73 Stat. 299. 
 
 29. . Mining and Minerals Policy Act of 1970. Public 
 
 Law 91-631, Dec 31, 1970, 84 Stat. 1876. 
 
 30. . Strategic and Critical Materials Stock Piling Act 
 
 of 1946. Public Law 79-520, July 23, 1946, 60 Slat. 596. 
 
 31. . Strategic and Critical Materials Stock Piling Re- 
 vision Act of 1979. Public Law 96-41, July 30, 1979, 93 
 Stat. 319. 
 
 32. . Strategic War Materials Act of 1939. Public Law 
 
 76-1 17, June 7, 1939, 53 Stat. 811. 
 
 33. U.S. Department of (>ommerce. The Potential Economic 
 Impact of U.S. Regulations on the U.S. (Copper Indus- 
 try. April 1979, 176 pp. 
 
 34. U.S. Department of the Treasury. A Tax Analysis Re- 
 port of the U.S. Corporations' Income Tax Returns. 
 1976, 57 pp. 
 
 35. U.S. Environmental Protection Agency. Primary Non- 
 ferrous Smelter Orders. Federal Register, v. 44, No. 22, 
 |an. 31, 1979, pp. 6284-6337; v. 44, No. 40, Feb. 27, 
 1979, pp. 11096-11098. 
 
 36. U.S. General Accounting Office. The U.S. Mining and 
 Mineral Processing Industry: An Analysis of Trends and 
 Implications. Oct. 31, 1979, 87 pp. 
 
 37. U.S. International Trade (lommission. Unalloyed Un- 
 wrought Copper. Pub. 905, August 1978, 1 1 I pp. 
 
 38. U.S. National (Commission on Materials Policy. Material 
 Needs and the Environment Today and Tomorrow. 
 June 1973, 286 pp. 
 
 39. U.S. Office of the Special Representative for Trade 
 Negotiation. USITC; Sec. 201 Rep. on (Copper, TPSC 
 Doc. 78-131, Oct. 10, 1978, 61 pp. 
 
 40. U.S. President's Materials Policy Commission. Resources 
 for Freedom. June 1952, v. 1-2, 394 pp. 
 
 41. UV Industries Inc. 1978 Form 10-K. 70 pp. 
 
 *U S GOVERNMENT PRINTING OFFICE: 1980 329-043/6578 
 
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