A Bothersome Billion

Not since the '30s has the copper industry endured such deeply depressing times. Largely because of reckless overproduction of the red metal in some strapped Third World countries, notably Chile, Peru, Zambia and Zaire, worldwide supply exceeds demand by the biggest margin ever. Copper prices, which were as high as $1.52 per lb. on the London Metal Exchange in 1974, have collapsed to 56-c- in London and 65-c- in the U.S.--well below production costs at some mines. In these circumstances, U.S. firms were not all that upset three weeks ago when 40,000 copper workers seeking higher wages shut down the mines in a strike that may drag on through Labor Day. Laments Copper Industry Analyst George Cleaver of New York's White Weld & Co.: "The U.S. industry has had three years of poverty and is entering its fourth."

What has upset coppermen more than the strike is a wage settlement made with the unions last week by Kennecott Copper Co., the world's largest producer (1976 sales: $956 million). If it sets an industry pattern, the agreement will increase production costs by at least 15-c- per lb. over the next three years--at a time when prices are still sagging.

Rear Guard. Kennecott broke ranks with the industry and settled quickly with the unions on what other coppermen see as more than generous terms. Kennecott could well afford the settlement. The company is sitting on a comfortable cushion of $1.2 billion in cash and securities--the proceeds of an enforced sale of Peabody Coal, which Kennecott acquired in 1968, to a consortium led by Newmont Mining. The Federal Trade Commission ruled in 1971 that Kennecott's Peabody purchase violated antitrust rules barring concentration in any given industry, arguing that the company could have entered the coal business by investing its own capital. After a five-year rear-guard battle against the FTC ruling in the courts, Kennecott's board, which includes such powers as John Schiff, chairman of the investment banking firm of Kuhn Loeb & Co., and Walter Page, president of Morgan Guaranty Trust, finally lopped off the coal business. Then it began considering ways to use the resulting billion-dollar bonanza. The board's conclusions: diversify into another business (possible targets: forest products and oil companies) and invest more in copper properties.

Because cash-rich companies such as IBM, Teledyne and United Technologies are either buying their own stock or making daring acquisitions, the Kennecott strategy seems uninspired to many analysts. Says one, Charles Bradford of Merrill Lynch, Pierce Fenner & Smith: "The only reason to buy that stock is because it's a takeover candidate." With the company's stock priced at about $30 a share on the New York Stock Exchange, Kennecott's market valuation is $996 million--far below its book value. At that $30 price, a buyer of the company could acquire assets worth $42 a share, use part of the Peabody proceeds to pay off Kennecott's $360 million debt and have a cool half-billion left over for lagniappe. But even though Wall Street is buzzing with rumors of possible takeover attempts, Kennecott's management and board affect an air of blue-blood phlegm.

What baffles Wall Street is Kennecott's investment fixation on the copper industry. "They've hinted that they might spend anything from $450 million to $850 million on copper," says White Weld's Cleaver, and "in my view, that would be disastrous." Kennecott's management, led by Chairman Frank Milliken, 63. who has headed the company since 1961, obviously disagrees. Yet on the New York Commodities Exchange last week, copper futures for delivery in July 1978 were selling at 62.4-c- per lb. Kennecott's current average production cost is more than 70-c- per lb.

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