Newcrest Mining has revamped its copper pricing system in an attempt to lift profit margins by giving it greater exposure to current high world metal prices.
The company has changed its pricing policies, cut treatment costs and ended profit participation for smelters
It is what the company should really be doing with the still highly hedged gold output.
Copper prices have jumped around 30 per cent (and a bit more at times) this year as China has ramped up purchases. That has seen world stocks fall as prices rose.
Newcrest (and other copper producers) have revamped sales and treatment agreements to provide more exposure to world prices.
Copper is a major byproduct of production at its Telfer mine in WA and the Cadia mine in NSW and the moves have already produced a small but noticeable improvement in returns on ships made since the new pricing system started on April 1.
Newcrest says it has removed the uncertainty of its ‘copper quotational period pricing’ on its revenue and cashflow.
Instead of the price being set and then reset several times, the price will now be set once, at the time of concentrate shipment.
The company said that previously, copper concentrate sales were provisionally priced at the time of shipment with final pricing not determined for between three and six months after shipment.
The new pricing method will apply to quotational periods that were not settled by April 2007, as well as all future shipments.
And the company has achieved better terms from restructuring its sales deals for copper concentrates.
“Effective from 1 January 2007 commercial terms have been agreed for copper concentrate contracts delivered in the 2007 and 2008 calendar years.
“The agreements cover approximately 300,000 DMT of concentrate from both the Cadia Valley and Telfer operations.”
The company said in a statement accompany the third quarter report yesterday that “concentrate sales are often priced on a “brick” basis, where treatment and refining charges for fifty per cent of the annual contract quantity are priced on a two-year rolling basis.
“In line with settlement terms agreed by other major mines and smelters, treatment and refining charges have been agreed at US$60 per dry metric tonne and US6.0cents/lb of copper respectively.
“The previous year’s annual settlement was made at US$95 and US9.5 cents/Ib respectively.
“In addition, price participation applying to copper has been eliminated. Traditionally, price participation applied at a rate of 10% of the copper price above a copper price trigger of US90 cents/lb.”
Copper prices are now well above that level: Comex and LME futures prices are around $US3.55 at the moment, so the savings will be significant for Newcrest on both the profit participation and the lower treatment costs.
Meanwhile a small paragraph, tucked away towards the end of the report, reveals that Newcrest is undertaking more work to cut costs at Telfer to improve margins.
“A suite of formal concept studies are being undertaken with a focus on re-engineering the cost base to increase margins.
“These currently include lower cost underground methodologies, lower cost pit materials handling (in pit crushing & conveying); increasing business returns by optimising processing strategies and on site metal production.”
That’s a big deal and it will both please analysts and worry them at the same time.
Please them because it is a sign the company is not standing still and is looking to enhance revenues: it will worry them because it is another report on a mining project that has seen plenty of similar cost statements and production problems in the past couple of years.
The general feeling is that Telfer is a good project but analysts and big shareholders want to know when it is going to be producing at its rated one million ounces a year operation. Not in 2006-07, that’s for sure.
