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Copper in the Ground: what's it worth


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How Much Is Copper Worth In The Ground?

By Rob Davies


Metal prices might have eased off a little last week, but it hasn’t stopped corporate financiers from putting together mining deals. The most recent one is the takeover of Phelps Dodge by Freeport-McMoRan for US$37billion in cash and shares. Phelps was vulnerable after it failed to rescue Inco from being bought by CVRD in the summer and it hasn’t made the most of this bull market because of poor hedging.

These deals are always interesting, apart from the potential to make money, because they put a definitive valuation on assets which do not come on the market very often. Here, the key assets are mines and the reserves that go with them. Valuing mines, particularly producing ones, is a combination of valuing the cash flow and the ore reserve. But you can’t get one without the other. In the case of Phelps Dodge it last published its ore reserves in its 2005 accounts and, on a quick calculation, amounted to 25 million metric tonnes.


Taking a copper price of US$6,000 a tonne, a slight discount to current prices, that gives a gross value of US$150,000 million to that metal in the ground. Freeport has agreed to buy Phelps Dodge for US$37,000 million in cash and shares or roughly a quarter of the gross value of the metal. Put another way, it is paying about US$1,500 a tonne, 70 cents a pound, for metal in the ground which it then has to mine, process and sell.


...MORE: http://www.minesite.com/minews/singlenews/...e-ground/1.html

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