Shares of Phelps Dodge Corp., the world's third-largest copper producer, may continue to surge as metal prices remain higher than many investors anticipate, Lehman Brothers Inc. said.
Lehman analyst Peter D. Ward raised his 12-month price target on the stock by 58 percent to $150 after the shares breached a target of $95. Phelps Dodge reached $102.80 on May 11 and has more than doubled in the past year. Copper prices fell today after topping $4 a pound yesterday for the first time ever. They have doubled in the past six months.
``The copper market in the next few years will play out much like the energy markets of the past five years,'' Ward said in a note to clients. ``With mature mines encountering tougher conditions and facing shortages of skilled labor, machinery and tires, `unexpected' production disappointments should be expected.''
Ward, 39, was ranked the top metals and mining analyst in the 2005 Institutional Investor All-America Research poll. He affirmed his ``overweight'' rating on Phoenix-based Phelps Dodge.
Morgan Stanley also raised its target on Phelps Dodge stock to $115 from $100. Supply disruptions and sustained growth in China will continue to boost metal prices, Morgan Stanley said.
Phelps Dodge's stock, adjusted today for a special dividend, rose 93 cents, or 1 percent, to $95.40 in New York Stock Exchange composite trading. Copper futures on the Comex division of the New York Mercantile Exchange dropped 5.9 cents, or 1.5 percent, to $3.864 a pound. Prices reached a record $4.04 yesterday.
Copper may average $3 a pound for the rest of 2006, $2.75 in 2007 and $2.25 in 2008 amid strong demand, low inventories and limited production, Ward said. Copper has averaged $2.52 this year.
World production may fall short of consumption by 118,000 metric tons in 2006 and 20,000 tons in 2007, Ward said. A production surplus in 2008 might reach 311,000 tons, he said.
Higher productivity and more capital will be required just to maintain output at many of the world's largest copper mines as ore- grades decline and transportation routes lengthen, Ward said. Phelps Dodge's mines produced less copper in 2005 than 2004, despite a higher mining rate, he said.
``As in energy, many copper producers are running just to stand still,'' Ward said.
Indonesia's Grasberg mine, the world's second-largest copper mine owned by Freeport-McMoRan Copper & Gold Inc. (FCX:US), will produce lower grades in 2006 and 2007, Ward said. Output is expected to fall 112,000 tons this year from 2005 and an additional 79,000 tons in 2007, he said.
Rio de Janeiro-based Cia. Vale do Rio Doce's Sossego mine produced 107,000 tons in 2005, compared with a design capacity of 140,000 tons, Ward said. Output may drop this year as miners encounter harder ore, he said.
Phelps Dodge's Candelaria mine and Anglo American Plc (AAL)'s Collahuasi mine, both in Chile, may contain harder ore, Ward said.
Antofagasta Plc (ANTO) produced 467,000 tons last year, down from 498,000 in 2004. The company projects that output will fall to 440,000 tons this year.
Southern Copper Corp. (SCCO:US) canceled some sales in May after a strike that started in late March at its La Caridad mine in Mexico reduced production, Ward said.
Newmont Mining Corp. (NEM:US) said in March that about 39,000 tons of 2006 copper production at the Batu Hijau mine in Indonesia will be ``deferred into subsequent years'' because of ``recurring geotechnical instability in the operation's east pit wall.''
World copper production may rise 5.5 percent to 17.6 million tons this year from 2005, while demand may climb 4.6 percent to 17.7 million tons, Ward said. Chile, Peru, and Indonesia account for about 50 percent of global mine supply.
Bolivian President Evo Morales on May 1 seized oil and natural-gas fields and gave foreign companies 180 days to agree to new government contracts. That has implications for the copper market, Ward said.
``It casts a pall over investment as leftist candidates are gaining power in several Latin American countries, such as Chile and Peru,'' Ward said. ``In Peru, Ollanta Humala is a front-runner in the presidential election. He has stated that he will place a windfall-profit tax on mining companies.''
Mines in Chile also rely on energy supplies from the region, Ward said.
With adverse political environments in areas of the world with the best copper geology, supplies may lag behind demand for most of the decade, Ward said. He forecast a world production shortfall of 178,000 tons in 2009 and 190,000 in 2010.
Chile's state-owned Codelco is the world's biggest copper producer by 2005 output, followed by BHP Billiton Ltd. of Australia.
A futures contract is an obligation to buy or sell a commodity at a set price for delivery by a specific date.
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