Colorado Moly Mills and Mines Cut Costs to Better Compete in Soft Market

---

Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--As the Climax Molybdenum Mine in Colorado nears the one-year anniversary of its restarted operations, owner Freeport-McMoRan Copper & Gold Incorporated (NYSE:FCX) (Phoenix, Arizona) is looking at the continued soft global price environment for the metal. Nonetheless, the world's largest molybdenum producer has plans to continue expanding production while lowering production costs, in the hopes that prices will firm and profits will grow.

The Climax Mine reopened last May after a 17-year hiatus in production. When it reopened, it had a new mill and refurbished mining facilities and equipment, and molybdenum (moly) prices were in the $11 per pound range, down sharply from the $30-plus price range of four years earlier. Earlier this year, Freeport officials told investors they saw moly prices averaging $11 per pound this year.

Click on the image at right to view moly prices from January 2003 through January 2012.

Freeport is the world's largest moly producer. Last year, production reached about 85 million pounds, up from 83 million pounds in 2011 and 70 million pounds in 2010, Michael McDonald, general manager of Freeport's Henderson, Colorado, operations, told attendees at the annual joint meeting of the Colorado Mining Association (CMA) (Denver, Colorado) and the Society of Mining, Metallurgy & Exploration (SME) (Englewood, Colorado). "We possess capabilities to adjust to market conditions," he told conference attendees.

Freeport operates two moly mines and two moly mills in Colorado: One integrated mine and mill project is located in Climax, about 87 miles west of Denver. The company also operates a moly mine and mill in Henderson, Colorado, about 100 miles west of Denver.

The recently re-opened Climax mine has larger reserves--198 million metric tons--than Henderson, but the grade of ore is lower at 16.4%, he noted. The Climax mine was re-opened in 2012 at a cost of $700 million. For more information on the reopening of that mine, see July 24, 2012, article - Climax Molybdenum Mine Lives Again Thanks to $700 Million Capital Outlay.

McDonald discussed the company's plans to further develop the Henderson mine through 2022. That mine has reserves of about 113 million metric tons, with an average ore grade of 17.2%.

The Freeport executive detailed various productivity improvements made at Henderson. A new state-of-the-art drill and bolter fleet has been installed, he said, adding that the company has reduced maintenance downtime through better maintenance practices. The company has invested in roads and water-handling facilities.

As many employees had less than five years of experience, the Henderson mine established an employee training program that helped lower total reportable incident rates, McDonald continued. These steps have led to a 50% productivity improvement: The company now is drilling about 1,200 feet per month, compared to about 800 feet per month prior to the improvements. And these improvements have taken place without any increase in development staff.

At its Henderson mill, McDonald noted that the company is engaged in replacing its cyclone feed tanks. Freeport also is making energy efficiency upgrades at Henderson to lower costs. A "sweeping" lighting upgrade project will lower Henderson's electricity usage by 8.3 gigawatt-hours (GWh) per year. Other energy-efficiency measures, including demand-side management (DSM) programs, interruptible power agreements and the replacement of motors, will save an additional 3 GWh per year, he estimated. These measures also will lower peak electric demand at the Henderson mine and mill.

Cost-saving measures like these will be important in bolstering the Colorado mines' competitiveness. In a presentation to investors in January, Freeport executives said they assumed moly prices would average $11 per pound in 2013, near the lower edge of the $10 to $15 per pound price range they have been stuck in since prices collapsed in 2008.

Freeport executives estimated moly sales would rise over the next three years to 100 million pounds in 2015. Nearly all of those sales would come from mines in North America. Each $1 per pound change in the price of moly would have an $80 million impact on earnings before interest, taxes, depreciation and amortization (EBITDA) and a $65 million impact on annual cash flow, executives said. They also detailed for investors how changes in the price of diesel fuel and purchased power would affect the company's bottom line.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, and eight offices outside of North America, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.