Chile Copper Export

Written By Luke Burgess

Posted August 8, 2006

BALTIMORE, MD — While the rest if the commodity world is focused on the 400,000 barrel per day oil shut-in at Prudhoe Bay, I’m looking over 7,000 miles away to the northern Atacama Desert of Chile.

While spectacularly beautiful, the Atacama Desert boasts more than dramatic landscapes. This desolate stretch of barren land is home to Escondida, the world’s largest copper mine.

The Escondida mine is located about 100 miles southeast of the port of Antofagasta, at an elevation of 10,000 feet above sea level.

The mine came on-stream in late 1990 and its capacity has since been increased by phased expansions.

Today Escondida is a joint venture between BHP Billiton (57.5%), Rio Tinto (30%), a Japanese consortium (10%), and the International Finance Corporation (2.5%). Escondida produces 230,000 tons of ore per day.

Now here’s what really impressed me about Escondida…

According to BHP Billiton, the combined proven and probable ore reserves of Escondida and Escondida Norte are 2.018 Billion tons of copper sulphide ore at 1.24% total copper.

That’s over 50 Billion pounds of the brownish red metal! And at today’s spot price of $3.61/lb this metal is worth over $180 Billion.

So there’s no wonder why BHP and Rio Tinto have staked such large claims in the mine.

Now, as we know, today’s copper prices haven’t always been this high. In fact, for five years between 1998 and 2003 copper prices averaged $0.75/lb. This made the future economic viability of the mine sketchy.

But now that copper prices have been trading well above $3.00/lb since late April, the Escondida mine has never looked sexier.

Until now…

A wage war between the operating companies and their workers has been brewing for weeks. And today it all came to a head…

Despite the pleas and overtures of Escondida’s major stakeholders and the Chilean Government, more than 2,000 union workers walked off the job today, demanding higher wages and more benefits from its foreign owners.

Mine workers want a new contract to replace a 2003 deal that was signed when copper prices were about a fifth of what they are now. Employees say they deserve a large increase in salary and benefits that reflect soaring copper prices. But unfortunately for the workers, neither BHP nor Rio Tinto have budged.

Union President, Luis Troncoso, said the strike will continue until the companies improve their offers. So, it looks like this one is going to be long and drawn out.

BHP and Rio Tinto reported that the strike that will affect 60% of output. The union, however, says the strike will cut production by as much as 80%!

To put that into perspective…this strike will halt production of somewhere between 4.2 and 5.6 Million pounds of copper per day!

You read that right — As a result of this strike, up to 5.6 Million pounds of copper have been taken off the market!

For copper bulls this is icing on the cake.

Consider this: If the strike lasts one month, up to 168 Million pounds could be taken off the market!

The London Metal Exchange warehouse stocks have already fell nearly 25% since mid-April. Take a look:

And over the past few years warehouse stocks have fallen even more. Take a look:

Production from Escondida accounted for 8.5% of all mined copper last year. And this strike will certainly have a significant impact on supplies.

So we can expect supplies to dip even further and copper prices to rise as a result.

– Luke Burgess

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