Looking for production cuts? Try lead not copper:
(Reuters) - As the dust settles after last week's copper capitulation, attention is inevitably turning to the implications for producers, particularly those perched precariously at the top end of the cost curve.
While many have already seen their share prices hammered, the copper market itself is now looking for production cuts.
With London benchmark copper trading below the $6,000-per tonne level for the first time since 2009, the potential exit of higher-cost mines is viewed as providing a fundamental support to counter the technical pressures still bearing down on the price.
And the very first casualties are starting to appear. Don't worry if you haven't noticed them yet. These are the market's minnows, as often as not already struggling with operational problems.
The first really significant production cutback in the base metals world has actually just been announced not in the copper market but in the lead market.
That says much about how long it can take before low prices generate a meaningful supply response.
FIRST COPPER CASUALTIES
Aura Minerals' Aranzazu mine in Mexico was struggling even before last week's brutal copper sell-off.
Cash costs in the third quarter of last year were $3.06 per pound, equivalent to just under $6,750 per tonne.
Aranzazu needed to be expanded to bring those costs down but Aura, which recorded operating income of just $776 in the quarter, was struggling to raise the finance.
The announcement that the mine was being put onto care and maintenance came on Jan. 15, one day after copper collapsed. It was probably just a matter of time but a price now starting with a "5" may well have been the final straw.
The production loss will be negligible. Aranzazu produced just over 6,600 tonnes of copper in concentrate last year.
Revett Mining's Troy mine in Montana is even smaller. Production in 2012 was around 3,400 tonnes. All operations were suspended in December that year due to instability in the mine and milling operations were only resumed in November last year.
The loss of production and associated rehabilitation costs meant Revett has been operating in the red with a net loss of $2.1 million in the third quarter and of $4.5 million in the first nine months of 2014.
As with Aura's Aranzazu, it's easy to see why Revett has been so quick to announce a move to care and maintenance at Troy.
And expect more of the same in the coming weeks. The first casualties of lower prices are always the "halt and the lame", small-scale operators with high costs, limited cash reserves and existing operational negatives.
If you're looking for a really significant casualty of lower prices, take a look at the lead market.
IVERNIA CLOSES (AGAIN)
Ivernia Inc last week announced it was placing its Paroo Station lead mine in Australia on care and maintenance.
Now, what was once called the Magellan mine has not been without its own operational problems since first coming into production in 2005.
A public outcry over lead contamination along the shipping route to and at the port of Esperance led to operations being suspended for much of the 2007-2010 period.
A first attempt to restart was stymied by low prices and the mine spent 2011-2012 on care and maintenance before being reactivated in 2013 under its new name.
It produced 44,000 tonnes of contained lead in concentrate that year and, production wise at least, was operating well all through last year and on course to hit comfortably its guidance of 80,000-85,000 tonnes of contained lead.
The only problem was the lead price. The market has been out of favor for many, many months and the benchmark three-month price on the London Metal Exchange started heading south again towards the end of the third quarter last year.
A break down through the $2,000 per tonne level in mid-December took it back to 2012 levels and that was even before last week's copper-inspired drop to $1,743 per tonne.
Ivernia has cut costs, switching its power supply from diesel to natural gas, and postponed its debt repayment schedule. All to no avail.
The mine remained cash-flow negative in the third quarter and Ivernia reported a net loss of $3.9 million for the period. Things can only have become more difficult since then, given the further decline in price.
Paroo Station is an important component of global lead mine supply, accounting for around 2 percent of world production, according to Gayle Berry, analyst at Jefferies.
Its suspension is therefore meaningful in terms of a market that was widely expected to be in small supply-demand surplus this year.
"If closed for the whole year it would be big enough to wipe out our forecast 31,000-tonne refined surplus for 2015," Berry writes ("Base Metal Insights - Lead prices bottoming", Jan. 20, 2015).
Paroo Station is something of an anomaly, though.
It is a "pure" lead producer. Most lead is mined in tandem with zinc and other minerals, silver being the most common. That complicates any assessment of where lead's own cost curve support may lie.
As Berry and other analysts warn, therefore, it may not be indicative of any broader trend in the lead mine sector.
But it does offer a useful reminder that mine closures in response to price declines can often be a slow-fuse affair.
The first casualties are often operators so small that even their combined loss of production makes only a marginal impact on the bigger picture.
It takes a prolonged attritional period of low and then falling prices to impact the bigger players.
A useful lesson for those looking for a major reconfiguration of copper's supply side after last week's events.
(Editing by Susan Thomas)
