United States Control Technology EPA-450/3-90-001
Environmental Protection Center October 1989
Agency Research Triangle Park NC 27711
Affordability Analysis of
Lead Emission Controls
for a Smelter-Refinery
control ^ technology center
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EPA 450/3-90-001
AFFORDABILITY ANALYSIS OF LEAD EMISSION CONTROLS
FOR A SMELTER-REFINERY
CONTROL TECHNOLOGY CENTER
SPONSORED BY:
Emission Standards and Engineering Division
Office of Air Quality Planning and Standards
U.S. Environmental Protection Agency
Research Triangle Park, North Carolina 27711
Air and Energy Engineering Research Laboratory
Office of Research and Development
U.S. Environmental Protection Agency
Research Triangle Park, North Carolina 27711
Center for Environmental Research Information
Office of Research and Development
U.S. Environmental Protection Agency
Cincinnati, Ohio 45268
October 1989
U.S. Environmental Protection Agency
Region 5 Library (PL-12J)
77 West Jackson Blvd., 12th Floor
Chicago, IL 60604-3590
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EPA 450/3-90-001
October 1989
AFFORDABILITY ANALYSIS OF LEAD EMISSION CONTROLS
FOR A SMELTER-REFINERY
by:
Thomas M. Scherer
JACA Corporation
550 Pinetown Road
Fort Washington, Pennsylvania 19034
EPA Contract No. 68D80072
Project Officer
Donald G. Gillette
Office of Air Quality Planning and Standards
U.S. Environmental Protection Agency
Research Triangle Park, North Carolina 27711
Prepared for:
Control Technology Center
U.S. Environmental Protection Agency
Research Triangle Park, North Carolina 27711
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ACKNOWLEDGMENTS
This report was prepared for EPA's Control Technology Center
(CTC) by Thomas M. Scherer of JACA Corporation, Fort Washington, PA.
The project officer was Don Gillette of EPA's Office of Air Quality Planning
and Standards (OAQPS). The author gratefully acknowledges Don Gillette,
Al Wehe and Robert Blaszczak of OAQPS, Charles Darvin of EPA's Air and
Energy Engineering Research Laboratory, and Chuck Marshall of JACA for
their helpful suggestions and for their comments on the draft; and Roger
Ellefson, P.E. of JACA for reviewing and analyzing the compliance cost
estimates. Special thanks are also due to Carl DiFrancesco and Gary
Peterson of the Bureau of Mines' Minerals Availability Field Office in Denver,
CO for running their lead smelter cost model and for supplying the terms of
a recent lead concentrate contract between a smelter and a mine.
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PREFACE
This project was funded by EPA's Control Technology Center (CTC)
in response to a request for assistance from EPA Regional Office VII.
The CTC was established by EPA's Office of Research and Devel-
opment (ORD) and Office of Air Quality Planning and Standards (OAQPS)
to provide technical assistance to State and Local air pollution control
agencies. Three levels of assistance can be accessed through the CTC.
First, a CTC HOTLINE has been established to provide telephone assis-
tance on matters relating to air pollution control technology. Second, more
in-depth engineering assistance can be provided when appropriate. Third,
the CTC can provide technical guidance through publication of technical
guidance documents, development of personal computer software, and
presentation of workshops on control technology matters.
Engineering assistance projects such as this one focus on specific
problems or concerns that are identified through contact with State and
Local agencies. In this case, the CTC became involved as a result of a
request by EPA Region VII to evaluate the affordability and economic im-
pact of additional control measures deemed necessary for a smelter-refin-
ery to meet the lead emissions standard. The emphasis in the analysis is
on the impact of control costs on the smelter-refinery's profitability. The
analysis was performed using control cost data from two different lead
smelter studies in conjunction with existing firm and industry data.
IV
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Introduction
This report examines the economic impacts of EPA's ambient air lead
standard of 1.5 yg/m3 on The Doe Run Company primary lead smelter-refinery
in Herculaneum, Missouri. The Herculaneum facility is currently not in
compliance with the standard.
The economic impacts of the lead standard are evaluated in this
report by assessing whether Herculaneum can afford to invest 1n pollution
controls. The report begins with background information on Herculaneum and
the U.S. primary lead industry. Then, two alternative representations of
the costs necessary for Herculaneum to achieve compliance with the lead
standard are presented. Next, the impact of the control costs on
Herculaneum's profitability is evaluated. This will depend on the extent
to which compliance costs must be absorbed. Lead 1s an internationally-
traded commodity whose price is determined by global market factors. In a
global context, the lead market is competitive, and Herculaneum acts as a
price taker. Therefore, 1t is recognized that Herculaneum will not be able
to recover compliance costs by increasing prices. However, because
Herculaneum and its mines are interdependent, Herculaneum may be able to
pass some of its compliance costs back to the mines. Finally, the ability
of Herculaneum to finance the initial capital outlay required for
compliance is examined.
Background
The Doe Run Co. lead smelter-refinery at Herculaneum, Missouri is the
largest primary lead production facility in the U.S., with an annual capa-
city of 225,000 short tons (204,117 metric tons) of refined lead. In 1988,
Herculaneum produced at capacity, with refined lead output of 225,403 short
tons (204,482 metric tons).l In comparison, total industry output of pri-
mary refined lead in 1988 was 380,000 metric tons.2 m 1987, total output
of primary refined lead 1n the U.S. was 373,610 metric tons. This
accounted for almost 12 percent of total world output of 3,176,600 metric
tons.3 Lead is also produced from secondary sources. In 1988, total
secondary lead production in the U.S. was 635,000 metric tons.4 570,000
-1-
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metric tons, or 90 percent, of secondary production in 1988 came from scrap
batteries.
For most of 1988, only four primary lead smelters and/or refineries
were in operation in the United States. ASARCO Inc. operated a smelter-
refinery in Glover, Missouri; a smelter in E. Helena, Montana; and a refi-
nery in Omaha, Nebraska. The fourth operation was Doe Run's Herculaneum
smelter-refinery. Combined, these operations have capacity to produce
468,000 metric tons of refined lead annually.5 In late 1988, Doe Run
reopened parts of its smelter-refinery in Buick, Missouri, adding 127,000
metric tons to domestic refined lead capacity. This brought total domestic
capacity for refined lead to 595,000 metric tons.
In 1981, annual domestic refined lead capacity was 715,000 metric
tons. Capacity declined, however, as a result of the closure at the end of
1981 of Bunker Hill's smelter-refinery in Kellogg, Idaho. In addition,
ASARCO has since closed its smelter in El Paso, Texas. The domestic pri-
mary lead industry has retrenched in response to decreased lead consump-
tion, worldwide overcapacity, low prices, and environmental regulations.6
The decline in consumption can be attributed to a phase-down in the use of
lead solder, lead-based paints, and lead-based gasoline antiknock addi-
tives. Whereas tetraethyl lead, a gasoline antiknock additive, once
accounted for over 20 percent of lead demand, it accounted for only about 2
percent in 1988.7 The phase-down is considered to be complete, and demand
has stabilized. Long-term demand growth of 1-2 percent per year is
projected, 1n part from new battery applications.8
The Doe Run Co. was formed in November 1986 when St. Joe Minerals
Corp., a subsidiary of Fluor Corp., and Homestake Mining Co. combined their
lead mining, milling, and smelting-refining interests in Missouri. Fluor
has a 57.5 percent interest in the partnership, while Homestake Mining is a
42.5 percent partner. In total, Doe Run owns six mines, four mills, and
two smelter-refineries, and is the largest fully integrated producer of
primary lead in North America. In addition to the 204,482 metric tons pro-
duced at Herculaneum in 1988, Doe Run produced 9,525 metric tons of refined
lead at its Buick smelter-refinery. The combined annual capacity of
Herculaneum and Buick is approximately 331,000 metric tons of refined lead.9
-2-
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The first estimate is derived from a study of lead emission controls
at Herculaneum conducted in April 1989 by Fluor Daniel, Inc., a unit of
Fluor Corp., one of the parent companies of Doe Run.14 Based on Fluor
Daniel's study, it is estimated that the capital cost of controls is $7.7
million. The study does not assume any annual operating and maintenance
costs, possibly because new control equipment would replace existing equip-
ment. Consequently, annual ized compliance costs consist only of annual ized
capital. Capital can be annual ized through use of the Capital Recovery
Factor (CRF), which expresses a capital asset as an annuity over its useful
life:
CRF * 1
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The two estimates are widely disparate. On a per-pound basis, the
Fluor Daniel annualized cost is 0.3 cents, while the BOM annualized cost is
3.7 cents. There are two main reasons for the disparity.
First, the BOM estimate is based on reducing lead emissions to the
lowest level theoretically achievable. This may exceed what Is necessary
to meet the current lead standard. Thus, the BOM estimate may be
overstated. Information in the Fluor Daniel report on emissions reductions
is largely qualitative. Consequently, it is not possible to quantify the
emissions reduction that Fluor Daniel expects to be able to achieve.
Presumably, it will reduce lead emissions to the current standard, though
such a claim is not made.
Secondly, the Fluor Daniel and BOM estimates are based on entirely
different prescriptions for what 1s necessary to reduce lead emissions.
The supposition in the Fluor Daniel estimate is that Best Available Control
Technology (BACT) is currently not in place, and that necessary reductions
in lead emissions can be achieved by improving the efficiency of controls
on point sources of emissions, and by improving housekeeping and making
minor process and equipment changes. Fluor Daniel estimated capital-costs
using internal company factors that were not specified; therefore, it is
not possible to judge the accuracy of their method. The BOM, on the other
hand, stipulates that point sources are already controlled with BACT, and
that lead emissions can only be reduced by controlling fugitive emissions
sources. This would entail enclosing the operation, installing new
baghouses, and adding workplace controls for exposures to emissions that
would be contained by an enclosure. The BOM estimated capital costs by
factoring direct materials, labor, and construction equipment usage costs.
This method is probably accurate to +30 percent.
It is not known which of the two cost estimates more accurately
reflects the changes required to bring Herculaneum into compliance with the
lead standard. It is possible that the true cost lies somewhere between
the two estimates. Therefore, in this report, the economic impacts of both
control costs will be examined.
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Revenue
As a first step in assessing the affordability of pollution controls,
Herculaneum's revenue must be estimated. Doe Run had total sales in 1988
of $230 million.16 However, as mentioned, Doe Run operates six mines, four
mills, and another smelter-refinery, in addition to Herculaneum. It is
necessary to isolate Herculaneum's revenue contribution.
Lead output at Herculaneum in 1988 was 204,482 metric tons. This can
be used as an estimate of future annual output. The average realized price
of Herculaneum's output in 1988 is not known. On July 24, 1989, Doe Run
increased its list price for lead from 40 cents to 42 cents per pound.17
At the same time, however, the London Metal Exchange (LME) cash value for
lead was only 32.1 cents per pound.18 Typically, North American producers
allow a discount off of their list price. A good estimate of the net price
is the LME cash value plus an allowance of about 5 cents per pound for
shipping costs.19 This implies a current net price of about 37 cents per
pound. This is consistent with the comment of a battery producer
(batteries accounted for 76 percent of lead consumption in the U.S. in
1987) that discounts in the last week of July were "running over 10 percent
off the 42 cent list price."20
The current net price of 37$/lb can serve as an estimate of the
future price of lead. Commodity prices are notoriously volatile, however.
Table 1 lists average annual North American producer list prices from 1970
to 1988.21»22 since 1980, the average annual North American producer price
has ranged from a high of 42.4$/lb in 1980 to a low of 19.H/lb in 1985.
As mentioned, Doe Run's list price is currently 42$/lb. Clearly, the
current price of lead is high by standards of the past couple decades. At
the moment, the lead market is strong, in part because battery producers
are replenishing inventories that fell to lower levels than expected over
the winter.23 If tn1s is temporary, the price of lead could fall in the
future. To account for uncertainty in the price of lead, two sensitivities
will be examined: 27c/lb and 47*/lb. It 1s particularly important to exa-
mine the downside sensitivity - 27
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Table 1
AVERAGE ANNUAL NORTH AMERICAN
PRODUCER LIST PRICE OF LEAD, 1970-1988
Year
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
Price (*/lb)
15.7
13.9
15.0
16.3
22.5
21.5
23.1
30.7
33.7
52.7
42.4
36.5
25.5
21.7
25.6
19.1
22.0
35.9
37.1
Source: References 21, 22.
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At 37c/lb, Herculaneum's revenue is calculated to be $166.8 million.
Revenue is $121.7 million at 27$/lb and $211.9 million at 47*/lb. It is
conceivable that Herculaneum also derives revenue from byproducts such as
zinc, copper, and silver. In Homestake Mining's 1988 annual report, pro-
duction of zinc and copper concentrates are specifically mentioned.
However, these are mill products. No mention is made in the annual report
of smelting byproducts. Therefore, it is conservatively assumed that
Herculaneum's revenue derives solely from the sale of refined lead.
Profitability
Lead is an internationally-traded commodity whose price is determined
by global market factors. In a global context, the lead market is com-
petitive, and domestic producers are price takers. They are constrained to
set prices that are in line with the international exchange price, relative
tariffs and quotas, and transportation cost differentials. Already, 15
percent of domestic lead consumption is accounted for by imported lead
metal and lead refined domestically from imported concentrates.24
Therefore, it is unlikely that Herculaneum would be able to recover
compliance costs through a price Increase.
On the other hand, it may be possible for Herculaneum to pass some of
its compliance costs back to its mines. This is because Herculaneum and
the mines are interdependent. The mines supply concentrate to Herculaneum,
while Herculaneum serves as a smelting and refining outlet for the mines.
If, in the extreme, compliance costs were to prove to be prohibitive and
Herculaneum were shut down, the mines would have to find an alternative
smelting and refining outlet. Perhaps Buick has spare capacity, but, in
general, U.S. lead smelting and refining capacity is limited. It might
therefore be necessary for the mines to ship their concentrate overseas for
smelting and refining. As mentioned previously, the transportation cost
differential relative to the LME cash price is about 5 cents per pound. To
avoid an increase in transportation and marketing costs, the mines might be
willing to help absorb some of Herculaneum's compliance costs.
The extent to which the mines would be willing to share the burden of
Herculaneum's compliance costs is not known. The maximum impact on
-8-
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Herculaneum 1s represented by the case of full-cost absorption. In the
analysis that follows, this case will first be examined. In order to exa-
mine this case, profitability at Herculaneum must be isolated. This is
equivalent to evaluating Herculaneum as a profit center. Later,
Herculaneum1s interdependence with Its mines will be recognized by con-
sidering the possibility that compliance costs can be passed backward to
the mines.
Because it is privately held (by Fluor and Homestake Mining), Doe Run
does not report its earnings to the public. Both Fluor and Homestake
Mining disclosed some results of Doe Run's operations in their 1988 annual
reports, however. Strangely, the disclosures are contradictory. Homestake
Mining reported that Doe Run had operating earnings (before interest and
taxes, which are paid at the corporate i.e., Fluor and Homestake Mining
level, and perhaps some corporate overhead allocations) of $63.4 million
on sales of $230.2 million in 1988, and operating earnings of $24.7 million
on sales of $174.4 million in 1987. Of the $63.4 million in operating
earnings in 1988, Homestake Mining reported its share as $29.8 million (not
exactly 42.5 percent because of an adjustment made for assets contributed
by the company to the partnership in excess of its equity share). This
leaves $33.6 million for Fluor. However, Fluor reported its share of Doe
Run's operating earnings in 1988 as $29.0 million. Fluor also reported
that its share of 1988 sales was $123.5 million. For 1987, Fluor reported
that Doe Run contributed $93.1 million to Its sales and a net operating
loss of $5.5 million to its earnings. The operating margin in 1988 was
27.5 percent as reported by Homestake Mining, and 23.5 percent as reported
by Fluor. Despite the differences, both Homestake Mining and Fluor attri-
buted the improved earnings in 1988 to higher volume, lower operating
costs, and higher prices for lead and byproducts.
Since the figures reported by Fluor and Homestake Mining are for the
entire Doe Run Co., they can only be used as guidelines for profitability
at Herculaneum. To estimate Herculaneum1s profitability, the aid of the
Bureau of Mines' Minerals Availability Field Office in Denver, Colorado was
enlisted. The BOM field office furnished estimates of capital and
operating costs for a generic smelter similar to Herculaneum. In addition,
the terms of a recent (1988) lead concentrate contract between a custom
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smelter and mine in North America were provided. This can be used to esti-
mate the cost to Herculaneum of lead concentrate.
Of course, Herculaneum does not purchase lead concentrate on the open
market. Instead, lead concentrate is supplied by Doe Run's mines. In
order to isolate Herculaneum1s profitability, however, it is necessary to
determine the market value of the lead concentrate supplied by the mines.
The true economic cost to Herculaneum of lead concentrate is the market
rate. Conversely, there is an opportunity cost to the mines if lead con-
centrate is transferred to Herculaneum at less than the market rate.
Specifications of the lead concentrate contract formula supplied by
the BOM field office and an example of a raw materials cost calculation are
provided in Exhibit 1. The contract was executed in 1988 between a custom
smelter and mine in North America. Unlike the cost data supplied by the
BOM field office, the lead concentrate contract is not necessarily generic.
Contracts are negotiated individually between mines and smelters, and terms
can vary considerably according to a number of different factors. In addi-
tion, not all concentrates are suitable for all smelters. Therefore, the
contract formula should be considered as allowing for only a crude estimate
of Herculaneum1s raw materials costs.
In Exhibit 1, only the lead content is considered in calculating
the cost of concentrate. It is possible that Herculaneum produces
small amounts of zinc, copper, and silver as byproducts. However, neither
Fluor nor Homestake Mining mentioned byproducts in discussing smelting-
refining operations in its 1988 annual report. Morever, the BOM field
office indicated that, in general, byproducts do not contribute signifi-
cantly to profits at smelters. For example, profits from silver, which can
be appreciable, tend to accrue to the mine. Therefore, excluding bypro-
ducts from both revenue and costs should have little impact on profits.
Nevertheless, to the extent that byproducts contribute to Herculaneum's
profits, profitability in this analysis will be understated.
Continuing with Exhibit 1, note that the cost of lead concentrate is
equal to the concentrate's lead value, minus the cost to smelt and refine
the concentrate (treatment charge), and minus a price participation clause
which establishes how the value of lead in concentrate in excess of
smelting and refining costs is shared between the smelter and the mine.
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Exhibit 1
CONTRACT FORMULA FOR THE COST OF CONCENTRATE
(LEAD CONTENT ONLY)3
Inputs
(1) Lead content of concentrate * 75%
(2) Lead recovery rate = 95%
(3) Grade deduction = 1.5 units
(4) Percent paid for = (75-1.5)775 x .95 = 93.1%
(5) Refined lead output * 204,482 metric tons
(6) Concentrate purchased = 204,482 metric tons * 0.75 * 0.95 = 286,992
metric tons
(7) Treatment charge rate (includes refining charge) = $180/metric ton
(8) Variable component of price participation agreement: l/4t for every
cent per pound in price of lead above 33$/lb
(9) Fixed component of price participation agreement: 12$/lb
Calculation for a lead price of 37*/1b
(1) Value of lead content =
286,992 metric tons x 0.931 x 0.75 x $0.37/lb x 2,204.62 Ibs/metric
ton = $163.5 million
(2) Treatment charge =
$180/metric ton x 286,992 metric tons = $51.7 million
(3) Price participation = [$0.12/lb + [(37t/lb - 33*/lb) x $0.002511 x
204,482 metric tons x 2,204.62 Ibs/metric ton = $58.6 million
(4) Net paid to mine (cost of concentrate) =
$163.5 million - $51.7 million - $58.6 million = $53.2 million
aBased on an actual North American lead concentrate contract in 1988.
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At a lead price of 37*/lb, the value of the lead content is $163.5 million
and the treatment charge is $51.7 million. The difference, $111.5 million,
is divided between the smelter and the mine, with the smelter keeping $58.6
million (price participation = $58.6 million) and the mine receiving $53.2
million. The $53.2 million paid to the mine is the smelter's cost of lead
concentrate. The results of the calculations in Exhibit 1 for a lead price
of 37
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Table 2
CALCULATION OF MATERIALS COST
($ Million)
Value of lead content
Treatment charge
Price participation
Net paid to mines3
(cost of concentrate)
27*/lb
$119.3
51.7
54.1
13.5
Price
37*/lb
$163.5
51.7
58.6
53.2
47*/lb
$207.6
51.7
69.9
86.0
aEqual to the value of lead content minus the treatment
charge and minus price participation.
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Table 3a
ESTIMATE OF NET INCOME BEFORE TAXES
FROM LEAD PRODUCTION AT HERCULANEUM
(Millions of Dollars)
Revenue
Materials cost3
Operating costb
Capital recovery0
Return on capitald
Corporate overhead
Net income before taxes
Before-tax profit margin
27t/lb
$121.7
13.5
50.8
9.1
14.1
13.5
20.7
17.0%
Price
37*/lb
$166.8
53.2
50.8
9.1
14.1
13.5
26.1
15.6%
47*/lb
$211.9
86.0
50.8
9.1
14.1
13.5
38.4
18.1%
Calculated using the lead concentrate contract formula in
Exhibit I.
blncludes operating and maintenance costs, current environ-
mental compliance costs, and costs of administration and
supervision.
cAnnual value of the capital cost ($135.8 million) amortized
evenly over 15 years.
dAnnual value required to earn a 15 percent return on capital
(i.e., to pay for a 15 percent cost of capital).
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Table 3b
ESTIMATE OF NET INCOME BEFORE TAXES
FROM LEAD PRODUCTION AT HERCULANEUM
(Cents per Pound3)
Revenue
Materials costb
Operating cost0
Capital recover/1
Return on capital6
Corporate overhead
Net income before taxes
27*/lb
27.0*
3.0
11.3
2.0
3.1
3.0
4.6
Price
37$/lb
37.04
11.8
11.3
2.0
3.1
3.0
5.8
47*/lb
47.0*
19.1
11.3
2.0
3.1
3.0
8.5
aBased on 1988 production at Herculaneum of 450,806,000 Ibs.
Calculated using the lead concentrate contract formula in
Exhibit I.
clncludes operating and maintenance costs, current environ-
mental compliance costs, and costs of administration and
supervision.
dAnnual value of the capital cost ($135.8 million) amortized
evenly over 15 years.
eAnnual value required to earn a 15 percent return on capital
(i.e., to pay for a 15 percent cost of capital).
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Capital recovery is simply the annual value of the capital cost,
$135.8 million, amortized evenly (straight-line depredation) over an
assumed useful life of 15 years. The $135.8 million capital cost is for a
new facility that, like Herculaneum, is not in compliance with the lead
standard, but is in compliance with existing particulate and S02 standards.
A firm will also require a return to cover its cost of capital. To
finance an investment, a firm can use some combination of debt and equity.
In Tables 3a and 3b, the cost of capital is assumed to be 15 percent. In
order to pay for a cost of capital of 15 percent, a firm needs to earn a 15
percent return on investment. The average annual amount required to earn a
15 percent return on capital is calculated to be $14.1 million, or 3.H/lb.
The calculation is simply the difference between the annualized capital
cost, calculated using the Capital Recovery Factor over a useful life of 15
years at a discount rate of 15 percent, and the annual value of the capital
cost amortized evenly over 15 years. Since Tables 3a and 3b account for
the cost of capital, net income is net of interest expense. However, con-
sidering that interest rates are currently less than 15 percent, return on
capital in Tables 3a and 3b may overstate the cost of capital if the
investment can be financed largely or entirely with debt. Therefore, the
net income estimate may be conservative - in the short run. In the long
run, a firm must cover Us total cost of capital. Fifteen percent is
believed to be a reasonable estimate of the total cost of capital, con-
sisting of a mix of debt and equity.
The corporate overhead factor of 3.0e/lb is from a previous BOM study
in 1988.26 This factor accounts for overhead such as selling and admin-
istrative expenses. In the BOM study, the corporate overhead factor was
described as including transportation costs to the consumer.
The before-tax profit margin at 37*/lb, the current price of lead, 1s
lower than the operating margins reported by Fluor and Homestake Mining for
Doe Run in 1988, 23.5 percent and 27.5 percent, respectively. However, the
Fluor and Homestake operating margins do not account for Interest expense
and corporate overhead. Therefore, the net income calculation in Tables 3a
and 3b appears to be reasonable.
As a sensitivity, net income is recalculated in Table 4 for a lead
price of 27«/lb using a different materials cost. The price participation
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Table 4
ESTIMATE OF NET INCOME BEFORE TAXES
AT A PRICE OF 27*/LB: MATERIALS COST SENSITIVITY
$ Million */lba
Revenue
Materials cost0
Operating cost0
Capital recoveryd
Return on capital6
Corporate overhead
Net income before taxes
Before-tax profit margin
$121.7
33.8
50.8
9.1
14.1
13.5
0.4
0.3%
27.0*
7.5
11.3
2.0
3.1
3.0
0.1
0.3%
aBased on 1988 production at Herculaneum of 450,806,000 Ibs.
bEqual to one-half of the difference at a lead price of
27*/lb between the value of lead content, $119.3 million,
and the treatment charge, $51.7 million.
clncludes operating and maintenance costs, current environ-
mental compliance costs, and costs of administration and
supervision.
dAnnual value of the capital cost ($135.8 million) amortized
evenly over 15 years.
eAnnual value required to earn a 15 percent return on capital
(i.e., to pay for a 15 percent cost of capital).
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clause in the concentrate contract Included a variable component for prices
of lead exceeding 33*/lb. It is possible that the contract formula is not
applicable at prices below 33c/lb, and that at 27*/lb, the contract would
be renegotiated. This is suggested by the change in the distribution of
the value of lead content in excess of the treatment charge at different
lead prices in Table 2. Note that at a lead price of 47*/lb, price par-
ticipation for the smelter is $69.9 million, while the mines are paid $86.0
million. At 37$/lb, the smelter keeps $58.6 million, while the mines
receive $53.2. At 27*/lb, however, while the smelter keeps $54.1 million,
the mines receive only $13.5 million. The reason for this is that the lead
concentrate contract is formulated so that at lead prices below 33
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Table 5a
POST-COMPLIANCE NET INCOME BEFORE TAXES
AT HERCULANEUM
(Minions of Dollars)
Pre-compliance net
income before taxes
Annual ized compliance
cost
Post-compliance net
income before taxes
Compl
P=27*/
Ib
$20.7
1.3
19.4
iance
P=37*
Ib
$26.1
1.3
24.8
Costia
/ P=47*/
Ib
$38.4
1.3
37.1
Compliance Cost2b
Ib Ib Ib
$20.7 $26.1 $38.4
16.8 16.8 16.8
3.9 9.3 21.6
aThe Fluor Daniel capital cost estimate of $7.7 million, or $1.3 million
annualized.
bThe BOM capital cost estimate of $68.3 million and annual operating cost esti
mate of $3.7 million, for a total annuallzed cost of $16.8 million.
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Table 5b
POST-COMPLIANCE NET INCOME BEFORE TAXES
AT HERCULANEUM
(Cents per Pound3)
Compliance Costib
Compliance Cost2c
P=27«/ P=37
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profitable after compliance costs. In the short run, Herculaneum could
continue to operate because it would be covering operating and materials
costs, its variable production costs. Herculaneum could also continue to
operate in the long run. In the long run, all costs are variable,
including capital recovery (in the long run a firm can change plant capa-
city or move to another industry), the cost of capital, and overhead. As
Tables 5a and 5b demonstrate, these costs would also be covered. Post-
compliance net income, representing net income in the long term, is greater
than zero under each lead price scenario: 0.9*/lb at a lead price of
27*/lb, 2.H/lb at a lead price of 37*/lb, and 4.8$/lb at a lead price of
47*/lb.
The BOM considers a 15 percent internal rate of return (IRR) as
necessary for a mineral operation to continue producing over the long
term.27 A 15 percent IRR has already been built into the calculation of
post-compliance net Income through the requirement of a 15 percent return
on capital 1n Tables 3a and 3b and the calculation of the annualized
compliance cost 1n Tables 5a and 5b using a 15 percent discount rate.
Therefore, so long as post-compliance net income is greater than zero,
Herculaneum will be covering its cost of capital by earning a 15 percent
IRR and will be making a profit over the long term.
The effects on net income of the materials cost sensitivity intro-
duced 1n Table 4 are examined in Table 6. The sensitivity assumes that
lead profits are shared equally by mines and smelters at lead prices below
33*/lb and that the price of lead falls by 10*/lb to 27*/lb. Under both
compliance cost scenarios, net Income would become negative. It would be
possible for Herculaneum to continue operating 1n the short run, but 1n the
long run 1t would be better for Doe Run to shut down Herculaneum and
redeploy its assets to a more profitable venture (i.e., one that earns a 15
percent return on investment).
If Herculaneum were closed, domestic primary refined lead capacity
would decline by 34 percent. As a result, it would probably be necessary
for the U.S. to export much of its lead ore and concentrate, and the U.S.
would probably have to increase its reliance on foreign sources of lead
metal, though perhaps the slack could be picked up somewhat by domestic
secondary producers. The employment impact is not known, but 1t could be
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Table 6
POST-COMPLIANCE NET INCOME BEFORE TAXES
AT A PRICE OF 27*/LB: MATERIALS COST SENSITIVITY
Pre-compl lance net
Income before taxes
Annual 1zed compliance
cost
Post-compliance net
income before taxes
Compliance Costi3
$ Million $/lbc
$0.4 O.H
1.3 0.3
(0.9) (0.2)
Compliance Cost2b
$ Million C/lbc
$ 0.4 O.H
16.8 3.7
(16.4) (3.6)
aThe Fluor Daniel capital cost estimate of $7.7 million, or $1.3 million
annualized.
bThe BOM capital cost estimate of $68.3 million and annual operating cost esti-
mate of $3.7 million, for a total annuallzed cost of $16.8 million.
cBased on 1988 production at Herculaneum of 450,806,000 Ibs.
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significant. Overall, Doe Run employed 1,036 workers at the end of 1988.28
No doubt, many of these workers are employed at Herculaneum.
It should be noted that in addition to the impact of compliance costs
on profitability, Doe Run would also consider the cost of shutting down
Herculaneum in making a shutdown decision. To the extent that shutdown
costs exceed salvage value, Doe Run may be willing to sustain small losses
from operating Herculaneum in order to postpone a shutdown decision.
It is apparent that if the price of lead falls, Herculaneum's long-
term viability is very sensitive to how lead profits are shared by mines
and smelters. The lead concentrate contract used to calculate materials
cost may not be applicable for lead prices below 33$/lb. Additional
research is needed to determine the comparative impact on the profitability
of mines and smelters at lead prices below 33$/lb.
To this point, Herculaneum's interdependence with its mines has not
been considered. If, as discussed previously, Doe Run's mines would have
an economic incentive to help share Herculaneum's compliance cost burden,
the economic impact on Herculaneum would be less severe. In the compliance
cost scenarios presented in Tables 5a and 5b, Herculaneum's long-term
viability was already established. For the materials cost sensitivity in
Table 6, however, the interdependence of Herculaneum and Us mines could
influence Doe Run's decision whether or not to shut down Herculaneum.
Already, under the sensitivity, Herculaneum is close to the shutdown point,
as pre-compliance net income is only O.H/lb. Therefore, Herculaneum's
long-run survival would require that the mines absorb all of the compliance
costs. If, in the event that Herculaneum were shut down, the mines were
forced to export concentrate in order to stay in business, and marketing
and transportation costs increased by, say, 5
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Capital Affordabillty
In addition to the ability to absorb annual compliance costs, it is
necessary to examine the ability of Herculaneum to finance an initial capi-
tal outlay of from $7.7 million to $68.3 million. One source of financing
is internal cash flow. By making the assumption that capital expenditures
are offset by depredation (constant asset base), net Income is a proxy for
cash flow. As Table 3a indicated, current (price of lead = 37*/lb) net
income at Herculaneum is $26.1 million. Therefore, Herculaneum would be
able to finance 38 percent of the maximum capital cost of $68.3 million
from net income in one year.
Debt could also be Issued. At the end of 1988, Homestake Mining had
long-term debt of $60.2 million compared to $757.0 million in shareholders'
equity, while Fluor had long-term debt of $95.0 million and $601.7 million
in shareholders' equity. Both companies have a low degree of financial
leverage and should have plenty of capacity to take on additional debt.
Finally, both parent companies have liquid assets which could help
finance the Investment 1n pollution controls. At year-end 1988, Homestake
Mining had $91.4 million and Fluor had $164.6 million 1n cash and cash
equivalents. With regard to overall liquidity, Homestake Mining had
working capital (current assets minus current liabilities) of $242.4
million at the end of 1988, while Fluor had working capital of $154.4
million.
Summary and Conclusions
Under current market conditions, the Doe Run Company primary lead
smelter-refinery in Herculaneum, Missouri would be able to invest as much
as $68.3 million in pollution controls to comply with EPA's lead emissions
standard of 1.5 ug/m3, and would still be profitable In the long run.
Herculaneum would be able to cover Its cost of capital by earning a 15 per-
cent internal rate of return (IRR). Thus, the facility would be able to
meet the Bureau of Mines' criterion of a 15 percent IRR as necessary for a
mineral operation to continue producing over the long term. Herculaneum
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would also be able to finance the initial capital outlay required for
compliance.
In the long run, all costs are variable, and a firm can avail itself
of such opportunities as changing plant capacity or moving to another
industry. Under current market conditions, the imposition of control costs
would not change Herculaneum's incentive to maintain current capacity and
remain in the lead smelting-refining business. However, Doe Run may con-
sider other options in order to avoid making the control expenditures, such
as switching production to its Buick facility. The benefits of doing this
would depend on Buick1s comparative profitability, including the costs
if any necessary to bring Buick into compliance with the lead standard.
If the capital cost is a high as $68.3 million, Doe Run may also consider
investing in a new smelting-refining facility instead of rehabilitating
Herculaneum. The $68.3 capital cost represents slightly over half of the
estimated cost of the current Herculaneum facility, $135.8 million. In a
1988 study, the Bureau of Mines found that it would be more cost-effective
for lead producers in Missouri to invest, as a consortium, in a new flash
smelter that would meet current environmental standards, than to rehabili-
tate existing plants.29
If current market conditions change, i.e., if the price of lead
declines, the affordability of the controls would depend on the cost of
lead concentrate. The contract formula used to calculate the cost of lead
concentrate may not be applicable at lead prices below 33*/lb. Applying
the lead concentrate contract at a lead price of 27*/lb, it was found that
Herculaneum would still be profitable after absorbing compliance costs.
Under the hypothetical scenario that lead profits would be shared equally
by mines and smelters at a lead price of 27*/lb, however, it was seen that
Herculaneum's long-term viability could not be assured. It would be very
useful to obtain additional information, perhaps from industry sources, on
lead concentrate contracts for lead prices below 33$/lb.
Even if the price of lead falls to 27$/lb, and lead concentrate
contracts are renegotiated to redistribute lead profits between mines and
smelters, Herculaneum might not have to shut down if Doe Run's mines have a
vested interest in Herculaneum's survival. Herculaneum and its mines are
interdependent, and the mines may have an economic incentive to help absorb
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some of Herculaneum1s compliance costs. To the extent that Herculaneum1 s
compliance costs can be passed backward to the mines, the economic impact
on Herculaneum of the materials cost sensitivity at a lead price of 27e/lb
would be less severe.
Finally, two compliance cost estimates were examined that are widely
disparate. One capital cost is only $7.7, while the other is $68.3
million. Although both are affordable, the higher cost would have a signi-
ficant impact on Herculaneum1s earnings. Perhaps additional research is
needed to come up with a more definitive estimate of compliance costs.
-26-
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References
1. Homestake Mining Company. 1988 Annual Report, p. 15.
2. U.S. Department of the Interior, Bureau of Mines. "Mineral Commodity
Summaries 1989," Lead. Washington, DC, January 1989. Page 90.
3. U.S. Department of the Interior, Bureau of Mines. "Preprint from the
1987 Bureau of Mines Minerals Yearbook Lead." Washington, DC.
Page 1.
4. Reference 2.
5. U.S. Department of the Interior, Bureau of Mines. Information
Circular 8962. "Lead and Zinc Availability Domestic." Minerals
Availability Field Office, Denver, CO, 1983. Page 7.
6. U.S. Department of Commerce, International Trade Administration.
1989 U.S. Industrial Outlook. Washington, DC, January 1989. Page
18-5.
7. Reference 6, p. 18-6.
8. "Two Scenarios Try to Explain LME Lead Fall." American Metal Market,
February 3, 1989, p. 2. - ~ --
9. Homestake Mining Company. Form 10-K for the fiscal year ended
December 31, 1988. Page 13~.
10. U.S. Department of the Interior, Bureau of Mines. Mineral Industry
Surveys. "Lead Industry in February 1989." Washington, DC, April 24,
1989. Page 3.
11. Reference 9, p. 14.
12. Reference 11.
13. Reference 1.
14. Fluor Daniel, Inc. "Evaluation of Lead Emission Controls at the Doe
Run Company's Primary Lead Smelter at Herculaneum, Missouri."
Redwood City, CA, April 24, 1989.
15' ai'i; DHParimnn^ °r the Inter1or» Bureau of Mines. Information Circular
9160, "Lead Reduction in Ambient Air: Technical Feasibility and Cost
Ana ysis at Domestic Primary Lead Smelters and Refineries." Minerals
Availability Field Office, Denver, CO, 1987.
16. Reference 1, p. 31.
-27-
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17. Metals Week. July 31, 1989, p. 1.
18. Reference 17.
19. Reference 8.
20. Reference 17.
21. Reference 6, p. 18-6.
22. U.S. Department of the Interior, Bureau of Mines. "Lead ~ A Chapter
from Mineral Facts and Problems," 1985 Edition. Washington, DC. Page
Ifc
23. Reference 17.
24. Reference 2.
25. U.S. Department of the Interior, Bureau of Mines. Information
Circular 9026. "Primary Lead and Zinc Availability ~ Market Economy
Countries." Minerals Availability Field Office, Denver, CO, 1985.
Page 27.
26. U.S. Department of the Interior, Bureau of Mines. Open File Report
55^88, "Impact of Existing and Proposed Regulations on the Domestic
Lead Industry." Intermountain Field Operations Center, Denver. CO
August 1988. Page 22.
27. Reference 25, p. 8.
28. Reference 9, p. 25.
29. Reference 26.
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TECHNICAL REPORT DATA
(Please read Instructions on the reverse before completing)
1. REPORT NO.
EPA-450/3-90-001
2.
3. RECIPIENT'S ACCESSION NO.
4. TITLE AND SUBTITLE
Affordability Analysis of Lead Emission Control for a
Smelter-Refinery
5. REPORT DATE
October 1989
6. PERFORMING ORGANIZATION CODE
7. AUTHOR(S)
Thomas M. Scherer
8. PERFORMING ORGANIZATION REPORT NO.
9. PERFORMING ORGANIZATION NAME AND ADDRESS
JACA Corporation
550 Pinetown Road
Fort Washington, Pennsylvania 19034
10. PROGRAM ELEMENT NO.
11. CONTRACT/GRANT NO.
68D80072
12. SPONSORING AGENCY NAME AND ADDRESS
U.S. Environmental Protection Agency
Control Technology Center
Research Triangle Park, North Carolina
13. TYPE OF REPORT AND PERIOD COVERED
Final
14. SPONSORING AGENCY CODE
27711
15. SUPPLEMENTARY NOTES
Work Assignment Manager: Donald G.
Gillette, Office of Air Quality Planning
and Standards
16. ABSTRACT
The primary objective of this document is to evaluate the affordability and
economic impact of additional control measures deemed necessary for a smelter-
refinery to meet the lead emission standard. The emphasis in the analysis is on
the impact of control costs on the smelter-refinery's profitability. The analysis
was performed using control cost data from two different lead smelter studies in
conjunction with other existing industry data.
17.
KEY WORDS AND DOCUMENT ANALYSIS
DESCRIPTORS
b.IDENTIFIERS/OPEN ENDED TERMS C. COSATI Field/Group
Lead Smelter Emissions
Air Pollution Control Technology
Lead Smelter-Refineries
Affordability Analysis-Emission Control
Lead Emissions
Air Pollution Control
Lead Smelter Refinery
Affordability Analysis
18. DISTRIBUTION STATEMENT
Release unlimited
19. SECURITY CLASS (This Report I
21. NO. OF PAGES
20. SECURITY CLASS (Thispage)
22. PRICE
EPA Form 2220-1 (R«v. 4-77) PREVIOUS EDITION is OBSOLETE
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