BHP Copper Forward Contract Losses Spell Gloom For Others

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SYDNEY -(Dow Jones)- Copper forward contract losses at BHP Billiton Ltd.'s (
BHP) Escondida mine in Chile of up to US$333 million are bad news for other
unhedged miners, analysts said Wednesday.


Many miners use provisional pricing for long-term copper, zinc and to some
extent nickel sales contracts, adjusting final prices at the end of the contract
period.


BHP reported a loss of US$111 million in its base metals division during the
first half of the 2008-09 financial year starting June 30, down 103.3% from the
corresponding period, due mainly to plunging base metals prices but also to
adjustments to provisional pricing for copper.


"Due to the significant fluctuations in copper prices and unplanned
interruptions at Escondida, this reduced underlying earnings before interest and
tax by US$333 million for the period," BHP said in a statement.


"Provisional pricing has already claimed the scalps of a few smaller
companies. Every company is affected, and particularly the base metals sector,"
said Fat Prophets Analyst Gavin Wendt, adding that Australian copper-zinc miner
OZ Minerals Ltd. (OZL.AU) was also likely hit. OZ Minerals does not hedge.


Melbourne-based BHP - which also doesn't hedge - has used forward contracts
with provisional pricing for copper metal delivery at Escondida, the world's
largest copper mine, since 2005.


Customers such as cable producers agree to pay upfront, taking the London
Metal Exchange prices as a benchmark for a set amount of metal.


At the end of a contract period, such as six months, the eventual sales price
is calculated based on the average LME price, often the final three months of
the contract, and producer and consumer adjust the price paid.


But unlike previous years, when prices went up almost continually, copper
staged a vicious downturn in price during the last six months of the year,
falling 68% from US$8,850 a metric ton for three-month delivery to US$2,817/ton,
the lowest level since November 2004.


Zinc prices were down as much as 46% over the same period, and nickel prices
down as much as 59%.


That means miners have to give back a significant portion of payment already
received.


And while large diversified miners such as BHP and Rio Tinto Ltd. (RTP) can
absorb this, it comes at a crucial time for smaller companies already struggling
with low prices and other issues such as tough refinancing negotiations and
concerns over their cash position, analysts said.


"A lot of companies would have taken a hit over the last three to six months.
If prices are rising, then consumers need to top up their payments. But if
prices are falling rapidly, it favors end-users," said Michael Dixon, executive
general manager at Ausralia-based consultancy AME.



-By Elisabeth Behrmann, Dow Jones Newswires;