ECONOMIC IMPACT OF
INCREMENTAL POLLUTION CONTROL
AT ASARCO'S TACOMA SMELTER
final report to
U. S. ENVIRONMENTAL PROTECTION AGENCY
RESEARCH TRIANGLE PARK, NORTH CAROLINA
AND
U. S. ENVIRONMENTAL PROTECTION AGENCY
REGION X
SEATTLE, WASHINGTON
under
EPA CONTRACT NO. 68-02-1349
TASK ORDER NO. 10
ARTHUR D. LITTLE
CONTRACT NO. C-76072-86
JULY 1977
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ECONOMIC IMPACT OF INCREMENTAL POLLUTION
CONTROL AT ASARCO1S TACOMA SMELTER
Final Report to
U. S. ENVIRONMENTAL PROTECTION AGENCY
RESEARCH TRIANGLE, NORTH CAROLINA
and
U. S. ENVIRONMENTAL PROTECTION AGENCY
REGION X
SEATTLE, WASHINGTON
under
EPA CONTRACT NO. 68-02-1349 - TASK ORDER NO,
ARTHUR D. LITTLE CONTRACT NO. C-76072-86
JULY 1977
Arthur D Little, Inc.
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This report was furnished to the
U. S. Environmental Protection Agency
by Arthur D. Little, Inc., Cambridge,
Massachusetts, under Contract No. 68-
02-1349 - Task Order No. 10. Its
contents are reproduced herein as re-
ceived from the Contractor. The
opinions, findings and conclusions
expressed are those of the Contractor
and not necessarily those of the U. S
Environmental Protection Agency
Arthur D Little, Inc
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TABLE OF CONTENTS
Page
List of Tables v
viii
List of Figures
I. SUMMARY 1-1
A. INTRODUCTION 1-1
B. PURPOSE, SCOPE AND APPROACH 1-1
C. FINDINGS 1-3
II. OVERVIEW OF THE U. S. COPPER INDUSTRY AND DESCRIPTION
OF ASARCO'S OPERATIONS II-l
A. INTRODUCTION II-l
B. OVERVIEW OF THE U. S. COPPER INDUSTRY II-2
C. GENERAL DESCRIPTION OF ASARCO, INCORPORATED 11-22
III. BACKGROUND INFORMATION RELEVANT TO AN IMPACT ANALYSIS
OF ASARCO'S TACOMA SMELTER III-l
A. INTRODUCTION III-l
B. PLANT DESCRIPTION OF THE TACOMA SMELTER AND REFINERY III-l
C. HISTORICAL RAW MATERIALS SUPPLY III-4
D. THE NATURE OF CUSTOM AND TOLL SMELTING CONTRACTS ;
ITS INFLUENCE ON ASARCO'S ACCOUNTING SYSTEM III-7
E. THE RELATIONSHIP BETWEEN TACOMA AND OTHER ASARCO
PLANTS 111-13
IV. BASELINE CONDITIONS IV-1
A. INTRODUCTION IV-1
B. BASIC MICROECONOMIC CHARACTERISTICS OF THE MARKET IN
WHICH ASARCO-TACOMA OPERATES IV-1
C. OUTLOOK FOR COPPER PRICES IV-13
D. TACOMA'S PRODUCTIVE CAPACITY AND RAW MATERIAL SUPPLY
FOR 1978 AND BEYOND IV-13
E. PRODUCTION COSTS AND REVENUES AT ASARCO-TACOMA IV-19
V. ECONOMIC IMPACT ANALYSIS V-l
A. INTRODUCTION V-l
B. RELATIONSHIP BETWEEN CRAMER, PEDCo AND ARTHUR D.
LITTLE REPORTS V-2
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TABLE OF CONTENTS (Continued)
Page
V. ECONOMIC IMPACT ANALYSIS (Continued)
C. COMPLIANCE COSTS AT ASARCO-TACOMA UNDER ALTERNATIVE
CONTROL OPTIONS V-8
D. METHODOLOGY OF IMPACT ANALYSIS V-21
E. CASH FLOW ANALYSIS OF INCREMENTAL POLLUTION CONTROL
OPTIONS UNDER BASE CONDITIONS V-40
F. SHUTDOWN V-46
G. SENSITIVITY ANALYSIS V-49
H. OTHER ISSUES V-68
I. LIMITATIONS OF ANALYSIS V-70
APPENDICES:
A - TYPICAL SMELTING AND REFINING SCHEDULE FOR COPPER
CONCENTRATES A-l
B - SULFURIC ACID AND SULFUR DIOXIDE B-l
C - ARSENIC TRIOXIDE (As203) C-l
D - LEPANTO CONSOLIDATED MINING COMPANY D-l
E - THE PHILIPPINE SMELTER E-l
F - ASARCO'S NORTHERN PERU MINING CORPORATION F-l
G - DUVAL CORPORATION G-l
H - ORDER-OF-MAGNITUDE COSTS OF A NEW SMELTER AND REFINERY H-l
I - JAPANESE SMELTING AND REFINING CHARGES 1-1
J - TRANSPORTATION COSTS FOR CONCENTRATES J-l
K - THE SMELTING OF SCRAP AND PRECIPITATES AT TACOMA K-l
L - ALTERNATIVE APPROACH FOR ECONOMIC IMPACT ANALYSIS L-l
M - INCREMENTAL S02 CONTROL AND OSHA COSTS M-l
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LIST OF TABLES
Table
No. Page
1-1 Incremental Costs at Asarco-Tacoma Under Alternative
Control Options 1-4
1-2 Estimated Net Present Value: Pollution Control
Superimposed on Baseline Conditions 1-8
1-3 Summary of Sensitivity Analysis Results 1-9
II-l Production of Refined Copper in the United States.
By Source, 1974-1976 II-3
II-2 Mine Production of Recoverable Copper in the United
States, 1973 and 1974 II-6
II-3 Copper Smelters in the United States at the End of
1975 II-8
II-4 United States Copper Refinery Capacity at Year-End
1974, 1975 and 1976 11-10
II-5 Consumption of Copper in the United States, 1950-1974 11-12
II-6 Prices of Refined Copper, Copper Scrap and Refined
Aluminum in the United States, 1947-1976 11-15
II-7 Summary of Salient Financial Aspects of U. S. Companies 11-18
II-8 Trends in Operating Profit Margin 11-19
II-9 Indicators of the Need for Capital Funds 11-20
11-10 Rates of Return on Stockholders' Equity 11-21
11-11 Asarco's Metals Production in 1974, 1975, and 1976 11-23
11-12 Summary of Asarco's Business Performance, 1972-1976 11-24
11-13 Asarco, Incorporated and Consolidated Subsidiaries
Consolidated Statement of Changes in Financial Position 11-25
11-14 Asarco's Domestic Copper Mining Activities 11-27
11-15 Asarco's Domestic Copper Ore Reserves 11-28
11-16 Production at Asarco's Copper Smelters, 1972-1976 11-30
11-17 Production at Asarco's Copper Refineries, 1972-1976 11-32
11-18 Asarco's Reported Pollution Control (P.C.) Costs 11-34
III-l Materials Flow to Smelter III-6
III-2 Depreciation Schedule 111-12
III-3 Interplant Flows to and from Tacoma 111-14
III-4 Typical Byproduct Production at Tacoma 111-16
IV-1 Forecasts of Domestic Copper Prices under Alter-
native Macroeconomic Growth Scenarios, 1978-
1985 IV-14
IV-2 Anode Production and Scrap Usage at the Tacoma Smelter IV-16
I.V-3 Expected Average Input of Sulfur-Bearing Materials
into the Tacoma Smelter IV-20
IV-4 1978 Costs for Tacoma IV-21
V-l SO2 Air Quality Standards Applicable to the Asarco
Smelter V-3
V-2 Asarco Control Alternatives which will Meet NAAQS V-4
V-3 Total Number of Violations of the National Air Quality
Standards for S02 at N26th and Pearl V-5
V-4 Total Number of Violations of the PSAPCA Air Quality
Standards for SO2 at N26th and Pearl V-7
V-5 Incremental Costs at Asarco-Tacoma for Various Options V-10
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LIST OF TABLES (Continued)
Table
No. Page
V-6 Incremental Costs at Asarco-Tacoma Under Alternative
Control Options V-12
V-7 Time-Phasing of Incremental Pollution Abatement
Expenditures at Asarco-Tacoma Under Control Option 1 V-13
V-8 Time-Phasing of Incremental Pollution Abatement
Expenditures at Asarco-Tacoma Under Control Option 2 V-14
V-9 Time-Phasing of Incremental Pollution Abatement
Expenditures at Asarco-Tacoma Under Control Option 3 V-15
V-10 Time-Phasing of Incremental Pollution Abatement
Expenditures at Asarco-Tacoma Under Control Option 4 V-16
V-ll Levels, Ranges, and Time-Phasing of Incremental
Pollution Abatement Expenditures at Asarco-Tacoma
Under Alternative Control Options, with and without
OSHA V-18
V-12 Annualized Compliance Costs at Asarco-Tacoma Under
Option 1.2B (Control Option 1, with OSHA, Base Case),
1978-1996 V-22
V-13 Annualized Compliance Costs at Asarco-Tacoma Under
Option 1.1B (Control Option 1, without OSHA, Base
Case), 1978-1996 V-23
V-14 Annualized Compliance Costs at Asarco-Tacoma Under
Option 3.2B (Control Option 3, with OSHA, Base Case),
1978-1996 V-24
V-15 Annualized Compliance Costs at Asarco-Tacoma Under
Option 3.IB (Control Option 3, without OSHA, Base
Case), 1978-1996 V-25
V-16 Annualized Compliance Costs at Asarco-Tacoma Under
Option 4.2B (Control Option 4, with OSHA, Base Case),
1978-1996 V-26
V-17 Control Option 4.2B (Minimum Control, with OSHA)
After-Tax Cash Flow Analysis Under Baseline Revenue
Conditions V-35
V-18 Estimated Depreciation Schedule for Tacoma, 1978-1995,
for Control Option 4.2B (Minimum Control, with OSHA),
Under the 11-Year Accelerated Depreciation Approach V-37
V-19 Estimated Depreciation Schedule for Tacoma, 1978-1995,
for Control Option 4.2B (Minimum Control, with OSHA),
Under the 11-Year Straight-Line Depreciation Approach V-38
V-20 Depreciation Estimates for Tacoma Under Control Option
4.2B (Minimum Control, with OSHA): Differences Between
Results Obtained by Using Accelerated and Straight-Line
Methods V-39
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LIST OF TABLES (Continued)
Table
No. Page
V-21 Summary of After-Tax Cash Flow Analysis Results for
the Various Control Options Examined where Tacoma is
Considered as Part of the Parent Company, Asarco, Inc. V-42
V-22 Summary of After-Tax Cash Flow Analysis Results for
the Various Control Options Examined where Tacoma is
Considered as Part of the Parent Company, Asarco, Inc. V-43
V-23 Estimated Net Present Values: Pollution Control
Superimposed on Baseline Conditions V-44
V-24 Projected Balance Sheet Items for Tacoma as of
December 31, 1977 V-47
V-25 Summary: Total Expected Annual Revenues at Tacoma,
1978-1995, for Sensitivity Analysis Under Discriminatory
Monopolistic Pricing at Various Assumed Copper Prices V-51
V-26 Expected Maximum Annual Revenues at Asarco-Tacoma,
1978-1995, for Sensitivity Analysis V-52
V-27 Expected Maximum Annual Revenues at Asarco-Tacoma,
1978-1995, for Sensitivity Analysis V-53
V-28 Expected Maximum Annual Revenues at Asarco-Tacoma,
1978-1995, for Sensitivity Analysis V-54
V-29 Expected Maximum Annual Revenues at Asarco-Tacoma,
1978-1995, for Sensitivity Analysis V-55
V-30 Sensitivity Analysis Results Under the Hypothesis
that Tacoma Adopts a Discriminatory Monopolistic
Pricing Behavior During the Period 1978-1995 Under
Alternative Assumed Copper Price Levels V-62
V-31 Summary of Sensitivity Analysis Results V-69
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LIST OF FIGURES
Figure
No. Page
III-l Tacoma Smelter Process Flowsheet III-2
III-2 Gas System Ductwork at Tacoma III-5
IV-1 Demand Functions Facing Asarco-Tacoma in the Short-Run IV-3
IV-2 Demand Functions Facing Asarco-Tacoma in the Long-Run IV-4
viii
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I. SUMMARY
A. INTRODUCTION
Asarco operates a copper smelter (and refinery) in Tacoma, Washington,
which accounts for about 7% of the nation's copper smelting capacity.
The Tacoma location has been used for smelting nonferrous ores and con-
centrates since about 1890. We understand that Tacoma started out
initially as a lead smelter. Lead smelting was discontinued after about
20 years and Tacoma has been a copper smelter since then. Over the
years, Tacoma has specialized in the smelting of copper concentrates high
in impurity content and is currently the only U. S. smelter that produces
byproduct arsenic trioxide.
The smelter installed a sulfuric acid plant in 1950, which recovered
about 17% of the sulfur in the feed. In 1974, a liquid SO^ plant was
added. Both SO2 recovery systems utilize converter gases and now re-
cover a nominal 51% (average 48%) of the sulfur in the feed. A 563-foot
stack is used to discharge the S02~containing streams. In addition,
the smelter has curtailed production during adverse metereological con-
ditions to decrease emissions (Supplementary Control System or SCS) and
has employed professional metereologists for this purpose since 1969.
Between 1971 and December, 1975, SCS was used successfully to meet National
Ambient Air Quality Standards (NAAQS—three-hour and 24-hour standards),
but there have been numerous violations of the short-term (5-minute, one-
hour) Puget Sound Air Pollution Control Agency (PSAPCA) and Department of
Ecology (DOE) standards. On four occasions in 1976, the NAAQS were
violated.
Since 1970, PSAPCA has required Tacoma to limit its SO2 emissions to 10%
of the sulfur in the feed. Asarco operated from 1971 to 1975 under a
variance from this regulation. In February, 1976, Asarco obtained another
five-year variance from the emission standards. As a part of this variance,
Asarco promised to increase the degree of particulate control at Tacoma.
B. PURPOSE, SCOPE AND APPROACH
This study is one of several studies commissioned by EPA/Region X,
addressing the question of incremental pollution control at Tacoma. This
study focuses on the economic impact. The two companion studies have
already been completed by H. E. Cramer1 and PEDCo-Environmental2. Of
T
H. E. Cramer Co., Inc., "Assessment of the Air Quality Impact of SO2
Emissions from the Asarco-Tacoma Smelter" (July, 1976), EPA 910/9-76-028.
2
PEDCo-Environmental, "Evaluation of Sulfur Dioxide and Arsenic Control
Techniques for the Asarco-Tacoma Smelter" (September, 1976), EPA 68-02-
1321, Task Order No. 35.
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these, the Cramer study used diffusion modeling to determine the degree
of constant SO2 emissions control required at Asarco-Tacoma to meet
National as well as local ambient air quality standards. The PEDCo study
determined the costs of various options that Asarco could use to increase
the sulfur recovery rate above the design level of 51%. These costs were
presented by PEDCo in mid-1978 dollars.
The approach used in this study is to assume that Asarco's decisions re-
garding Tacoma (to either spend the funds for incremental pollution
control or to shut the plant down and exercise other options), will be
based on rational microeconomic and financial principles. Thus,
this analysis of investment decision-making under uncertainty essen-
tially simulates the capital budgeting process at Asarco. It
should be noted that such an approach cannot reflect accurately and com-
pletely the perceptions of risk and uncertainty of the decision-makers
at Asarco. In real life, perceptions of risk and uncertainty can vary
significantly from individual to individual and from firm to firm. Again,
actions and reactions in real life may be more discontinuous than would
be implied in theory.
An economic impact study of this type requires access to sensitive or
confidential information at the plant level. On the other hand, since
this is a public report, this confidential information can potentially
be disseminated to a wide audience. Our approach has been to develop an
understanding of all the major factors that can affect decision-making
at Tacoma, such as pricing at other competitive smelters, raw material
supply, transportation costs, revenues sources, production costs for
mines, production costs at Tacoma, etc. In addition, we have developed
an understanding of Asarco's accounting structure and cost allocation
policies in order to assess Tacoma's past performance. Since the impact
analysis period is from 1978 to 1985 (and beyond to 1995), the historical
information can only be a guide in assessing the future. Thus, our
impact analysis relies on estimates of revenues and costs in various
categories (based on professional judgment) over the period from 1978-
1995. The report uses constant 1978 dollars as a basis in order to be
consistent with PEDCo costs.
The Tacoma smelter also faces incremental costs for meeting OSHA stan-
dards for control of inorganic arsenic. OSHA initially proposed a
0.004 mg As/m3 standard. Subsequently, Arthur Young & Company1 prepared
an Inflationary Impact Statement for OSHA on the basis of three possible
standards: 0.1, 0.05 and 0.004 mg As/m3. Based on testimony received
at the Hearings held in Washington, D.C., in September, 1976, the
Department of Labor can presumably select one of these three standards
^Arthur Young & Company, "Inflationary Impact Statement—Inorganic
Arsenic", Department of Labor, Occupational Health and Safety
Administration (1976).
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or some other standard. The costs for meeting these standards have been
an issue of controversy since the Arthur Young & Company estimates are
lower than others prepared on the same basis.1 Our analysis includes
OSHA costs, as estimated by Arthur Young & Company. OSHA costs would
have a major impact on the continuation of the operations at the Tacoma
plant. Potential costs for other possible standards such as ambient
lead and arsenic and in-plant SO2 and lead were not considered in the
study.
Thus, this study is based on assessments (based on professional judgment)
of:
• future raw material supply situation both with regard to impure
and clean concentrates;
0 the nature of smelting contracts and behavior of the major mines
that supply Tacoma's concentrates viz. Duval, Lepanto and Northern
Peru;
• the demand for and expected netbacks from Tacoma byproducts;
• the interrelationship between Tacoma and other Asarco plants;
• the future production costs at Tacoma;
• microeconomic analysis of the pricing behavior of Tacoma and the
major mines that ship concentrates to Tacoma;
• financial analysis of the various control options and the pricing
behavior of Tacoma;
• the influence of other standards, such as OSHA standards for
Inorganic Arsenic which impact Tacoma in a significant fashion; and
s the sensitivity of the findings to alternative assumptions during
which the baseline conditions (in a sense, "the most likely scenario")
are relaxed.
C. FINDINGS
1. Incremental Pollution Control Costs
Various combinations of incremental SO2 control, particulate control and
OSHA regulations for inorganic arsenic were examined to define a range
of incremental costs at Tacoma. These options and the associated capital
investment and O&M costs are shown in Table 1-1. For analytical purposes,
^ee Chapter V.
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TABLE 1-1
INCREMENTAL COSTS AT ASARCO-TACOMA UNDER ALTERNATIVE CONTROL OPTIONS
(millions of 1978 dollars)
WITHOUT OSHA
WITH 0SHA
Capital
Operating and
Capital
Operating and
Control Options
Investment
Maintenance Costs
Investment
Maintenance Costs
(Total)
(per year)
(Total)
(per year)
36.0
4.8
OPTION 1
Electric furnace smelting; acid
plant consolidation
55.9
5.8
-
-
Particulate control
5.6
0.8
-
-
TOTAL
61.5
6.6
97.5
11.4
OPTION 2
Roaster gas enrichment; acid plant
consolidation
34.9
5.5
-
-
Particulate control
5.6
0.8
-
-
TOTAL
40.5
6.3
76.5
11.1
OPTION 3
Improve existing acid plant
1.5
0.2
-
-
Roaster gas enrichment; acid plant
consolidation
34.9
5.5
-
-
Particulate control
5.6
0.8
-
-
TOTAL
42.0
6.5
78.0
11.3
OPTION 4
Improve existing acid plant
1.5
0.2
-
-
Particulate control
5.6
0.8
-
-
TOTAL
7.1
1.0
43.1
5.8
Source: Based on Table V-5.
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these options function as surrogates for other control options with
similar capital cost and O&M cost requirements.
2. Baseline Conditions
Asarco-Tacoma is a copper smelter/refiner deriving the bulk of its
revenue by providing smelting/refining services, essentially on a toll
basis. Its revenues from these toll services are supplemented by
additional revenues from the sale of byproducts. Under the baseline
conditions, we have assumed that the toll smelting/refining revenues
will continue to reflect a "contractual pricing" approach on the part
of Tacoma, which has been commonly used in the copper industry for
years, both within the U. S. and internationally.
Baseline conditions reflect the basic outlook that domestic smelter
capacity growth is effectively constrained through 1983 at the earliest,
but that sufficient Japanese smelter capacity will be available to ab-
sorb "overflow" U. S. concentrates and that a new Philippines smelter,
scheduled to commence operations in 1981, would provide potential compe-
tition to Tacoma in terms of the suppliers of dirty concentrates.
The assumed toll rate of 22.7c/lb for baseline analysis is broadly con-
gruent with long-run copper floor prices at around 80c/lb, such that,
under these copper price and toll conditions, all of Tacoma's suppliers
would be expected to continue remaining in business as they would cover
their long-run costs.
The baseline conditions assume annual production of 100,000 short tons
of refined copper, all derived from Tacoma-produced blister. Tacoma's
feed sources consist of clean concentrates (i.e., Duval and other
Southwestern mines), impure concentrates (i.e., Lepanto, Northern Peru
and East Helena), and scrap and precipitates. Tacoma requires a mix of
dirty and clean feedstocks in order to control the impurity content of
the final product.
The market that Tacoma faces for its smelting/refining services has the
following characteristics: The suppliers of clean concentrates (Duval
and other Southwestern producers) would switch to Japan if Tacoma's
price for this service exceeded the price offered by the Japanese smelters
on a freight-equalized basis. This condition holds both in the short-
run and the long-run. In addition, there are other possible options in
the long-run such as the construction of a new facility based on either
pyrometallurgical or hydrometallurgical techniques. Since Tacoma needs
clean concentrates to dilute the impurities, the loss of these clean
concentrates for any reason would force a Tacoma shutdown even if
additional impure concentrates were available.
The suppliers of impure concentrates have perfectly inelastic demand
until 1981, when the new Philippines smelter is scheduled to start
operations and are in the least favorable position in terms of a higher
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toll charge by Tacoma in the short-term. Tacoma's ability to arbitrarily
increase the price paid by these mines in the short-term is limited by
the absolute level of copper prices and the terms now operative in existing
contracts, which permit only a "pass-on" of increased cost in certain
categories. After 1980, the Philippines smelter would be in operation
and Lepanto (and perhaps Northern Peru) would have an alternate outlet.
Lepanto could consider increasing its mine output to continue supplying
Tacoma under certain long-run copper price conditions, and depending
upon Tacoma's pricing behavior vis-^-vis Lepanto, both before and after
1981.
The suppliers of scrap and precipitates have perfectly elastic demand
for Tacoma's services, since they have numerous alternative outlets.
Any price increase to these suppliers would trigger a switch of these
suppliers away from Tacoma.
The U. S. copper industry is expected to face smelter capacity constraints
until about 1983-1985, which result mainly from the way in which EPA
regulations (the Tall Stack Guidelines and the New Source Performance
Standards) prevent small increments of capacity at existing smelters.
As a result of this constraint, the copper prices in the U. S. would be
higher compared to the prices expected in the absence of these regulations.
3. Methodology
The methodological approach used in this report consists of an integrated
microeconomic/financial analysis framework to determine (on rational
financial/economic grounds) whether the management of Asarco-Tacoma would
be expected to invest in additional control and continue production at
Tacoma or decide to discontinue operations, and conduct an orderly plant
shutdown. The financial analyses were performed within an internally
consistent microeconomic framework defining revenue streams at Tacoma,
by taking into consideration several hypothesized copper prices, each
supplier's costs of production, Tacoma's potential competition in terms
of the availability of smelting/refining services provided by others and
their relative freight-equalized costs. Microeconomic analysis thus
helped define the degree of freedom available to, and the constraints
operating upon, each one of Tacoma's suppliers over time, under different
sets of long-run copper prices.
The financial analysis, which focused on the net present value of cash
flows at Tacoma, attempted to simulate Asarco decision-making with
respect to investment and operating strategies at Tacoma. Modern financial
theory and managerial economics characterize this type of problem as one
of investment decision-making under uncertainty. In effect, this approach
simulates the capital budgeting process at Asarco.
The techniques of capital budgeting employ the following concepts:
• Time value of money, i.e., a unit of money received today is worth
more than money received at a later date.
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• In the absence of constraints on external financing, alternative
courses of action can be compared by discounting future cash
flows to the present to obtain the Net Present Value (NPV) of
each alternative course of action using an appropriate discount
rate. All else equal, the preferred course of action is the one
with the highest Net Present Value.
• The discount rate used in the estimation of Net Present Value is
one that appropriately compensates the investor for the risk
incurred and that this rate is higher than that for a risk-free
investment such as a U. S. Treasury obligation. In our view, a
10% constant dollar discount rate would be a minimum for Asarco
and a 15% discount rate would be a representative discount rate
in the present context.
4. Findings Under Baseline Conditions
The baseline conditions assume a Tacoma smelter/refinery capacity of
100,000 tons/year based on 78,000 tons/year from sulfur-bearing materials,
i.e. clean concentrates from Duval and other Southwestern mines; impure
concentrates from Lepanto; Northern Peru and East Helena byproducts; and
22,000 tons/year of scrap and precipitates. Furthermore, they assume
that Tacoma would continue its normal "contract pricing" approach for
pricing its toll smelting and refining services.
In short, the baseline conditions best reflect normal pricing behavior
and the normal, historical relationship between a toll smelter/refinery
and its suppliers. It is consistent with long-run considerations which
typically govern the decisions and interrelationships of the nonferrous
metals companies.
The impact analysis methodology described above was used to analyse the
five incremental pollution control options described in Table 1-1 and
the remaining alternative; namely, the shutdown of Tacoma operations.
Table 1-2 summarizes the net present values of after-tax cash flows at
10% and 15% discount rates for these alternatives. The table indicates
that Option 4.IB (minimum control, no OSHA) is the only control option
with a significant positive net present value. However, when compared
to shutdown, it cannot be stated unambiguously that Option 4.IB would be
preferred over shutdown. All other options have relatively large
negative net present values and suggest (without much ambiguity) that a
shutdown decision would be preferred under baseline conditions.
5. Sensitivity Analysis
The sensitivity analysis reexamines the conclusions reached under the
baseline assumptions under conditions when the baseline conditions are
progressively relaxed. The following relaxations of the baseline con-
ditions were performed in order to examine the "feasibility space" or
conditions under which the specific pollution control options would be
preferred over the shutdown of Tacoma. The sensitivity analysis results
are summarized in Table 1-3.
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TABLE 1-2
ESTIMATED NET PRESENT VALUES: POLLUTION CONTROL
SUPERIMPOSED ON BASELINE CONDITIONS^
(in millions of 1978 dollars)
Net Present Value at Discount Rate of
Options Considered 10% 15%
4.IB (Minimum control, no OSHA) +6 +4
4.2B (Minimum control, with OSHA) -26 to -40 -21 to -31
3.IB (Intermediate; delay, no OSHA) -21 to -36 -16 to -24
3.2B (Intermediate; delay; with OSHA) Min. - 41 Min. - 34
1.1B (Maximum control; no OSHA) Min. - 32 Min. - 26
1.2B (Maximum control, with OSHA) Min. - 60 Min. - 50
Tacoma Shutdown ¦*- +17 to +20 ->
Notes: See Tables V-20 and V-21
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TABLE 1-3
SUMMARY OF SENSITIVITY ANALYSIS RESULTS
Option
Baseline
Conditions
Discriminatory Monopo-
listic Pricing Under Presence of
Long Run Copper Price at Other Regu-
80
85 90
(cents/lb)'
100 latory Costs
Higher Lower Lower
Trans- Smelter/ Variable
portation Refinery Cost/Higher Historical
Costs^ Output*3 Profit** Cash Flow*3
Lower
Capital
Investment'5
4.IB - Minimum Control, no OSHA
4.2B - Minimum Control, with
OSHA
I
3.IB - Intermediate; Delay;
no OSHA
3.2B - Intermediate; Delay;
with OSHA
1.1B - Maximum Control, no OSHA
1.2B - Maximum Control, with OSHA
Notes: Y = Yes—microeconomic/financial analysis indicates that a given control option is feasible and preferred over shutdown.
N = No—microeconomic/financial analysis indicates that a given control option is not feasible.
M = Maybe—microeconomic/financial analysis indicates that a given control option is barely or marginally feasible.
a. Version A revenue stream (i.e., Lepanto falls out after 1980 and is replaced by other domestic suppliers of clean concentrates.
b. These reflect modifications of base conditions reported in the first column.
C
-i
O
fD
U
n
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a. Discriminatory Monopolistic Pricing
It might be argued that if domestic copper prices are at a level where
all of Tacoma's suppliers stay open, it is possible for Tacoma to pursue
a discriminatory monopolistic pricing strategy to maximize its revenues.
Under this strategy, as domestic copper prices rise for any reason (e.g.,
a bottleneck in domestic smelter capacity), Tacoma would push each
supplier to the limit to extract maximum smelting/refining revenues with-
out losing the suppliers either via the mines shutting down or via mines
switching to alternative sources of toll smelting/refining services.
If progressively higher long-run copper prices are hypothesized, along
with a discriminatory monopolistic pricing strategy on the part of
Tacoma, the pollution control options become increasingly feasible.
This is because, at higher copper prices, revenues during earlier years
(which are important in any discounted cash flow analysis) become larger,
contributing to improved Net Present Value results.
Thus, at a level copper price of 85c/lb (1978 basis), Option 3.IB
(intermediate control; no delay; no OSHA) becomes viable. Similarly, at
a copper price of $1.00, Option 4.2B (minimum control, with OSHA) be-
comes unambiguously viable in addition to Option 3.IB.
While discriminatory monopolistic pricing represents a theoretically
correct mode for Tacoma to maximize its revenues, it represents a sharp
reversal of the manner in which such services have been priced in the
past and might also require Tacoma to use a strategm such as force majeure
to break existing contracts. Given that individual smelters/refiners
have no influence on copper prices, they have not followed such a strategy
in the past (i.e., they have been risk-averse) not knowing beforehand
what the copper price would be over the next contract cycle.
b. Other Regulations and Associated Compliance Costs
Tacoma faces other possible regulations and compliance costs such as OSHA
in-plant lead and SO2 standards and EPA ambient lead and arsenic standards.
Thus, while the potential impact of incremental SO2 control and OSHA
standards can be slightly altered by assuming an extended compliance
schedule, these other regulations and associated costs and uncertainty,
could affect Asarco's perception of risk and of the future viability of
Tacoma. A perception of high risk would tend to decrease the viability
of any proposed incremental control option.
c. Transportation Costs and "Distress" Payment
The analysis assumed that Duval and the Southwestern mines paid the
Japanese smelters an extra "distress payment" to persuade the Japanese
to accept their concentrates. The assumed distress payment is about
four times the normal profit from smelting and refining. For this
reason (and the fact that these mines would be shipping to Japan on a
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Arthur D Little, lnc
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long-term basis), it can be argued that a lower distress payment is more
appropriate. The sensitivity analysis under different distress payments
and with an assumed higher level of transportation costs does not alter the
conclusions reached under baseline conditions.
d. Alternative Cash Flows
Several alternative cash flows were hypothesized and their influence on
the baseline conclusions was examined. A cash flow different from the
baseline can be hypothesized on the basis of: a lower production rate
of 95,000 tons/year; an arbitrary decrease in variable costs resulting
in a pre-tax profit that is 10% of sales revenue; accelerated vs. straight-
line depreciation; different levels of on-going replacement investment,
etc. None of these variations alter the conclusions reached under the
baseline conditions.
One might argue that since profits or net earnings are usually obtained
as the difference between two relatively large numbers—revenues and
costs—their magnitude is sensitive to errors in estimation of either
revenues or costs or both. An independent check of the profit and cash
flow used in the baseline analysis is a comparison with Tacoma's
historical performance. Over the ten-year period (1965-1974), Tacoma's
average pre-tax net earnings were $1.85 million/year and gross earnings
were $3.34 million/year. If this average is adjusted for inflation and
converted to 1978 dollars, it is about $2.8 million, significantly
below the $3.3 million pre-tax profit assumed under the baseline conditions.
The difference between the Net Present Value associated with Option 4.2B
(minimum S02 control, with OSHA) and the option of closing Tacoma is
about $40 million. Thus, for Option 4.2B to be viable, additional NPV
of $40 million would be required to bring this option on par with shut-
down, looking only at the strict financial criterion of comparing NPV's
and treating the alternatives as being of comparable risk. An increase
in annual cash flow of $5-6 million/year at 10% and 15% discount rates,
respectively, is necessary for this to occur. Alternately, revenues
have to increase by about $10-12 million/year—equivalent to an increase
in toll smelting and refining charges of 7-8
-------
6. Limitations of Analysis
In this report, we have assessed the economic impact of incremental pollution
control expenditures on Tacoma under hypothesized base conditions. We
have further performed a series of sensitivity analyses to examine the
sensitivity of these conclusions to progressive relaxation of these base
conditions. This has enabled us to explore the impact analysis problem
under a reasonably wide range or combinations of conditions, to check
whether the final conclusions remain the same or are to be modified as
these base conditions are relaxed.
Generally speaking, our baseline and sensitivity analysis leads us to
believe that the conclusions reported are fairly "robust" (i.e., strong,
invariant, not very sensitive) over a wide margin of variability in the
magnitude of the numbers used in this report. Thus, our conclusions will
not be altered significantly if somewhat different sets of numerical
estimates are used. A different set of such numerical estimates could be
derived by other analysts by using more precise historical data and/or
by using their professional judgment. We believe it is unlikely for
such numerical estimates to fall outside the range used in the sensitivity
analysis and, even if they did, for them to be in a direction such that
the basic conclusions are altered. For these reasons, we believe that
additional historical data are not likely to have a significant effect on
the conclusions.
While the sensitivity analysis helps define a "feasibility space" over
which certain options are either feasible or not feasible, certain limi-
tations remain. These limitations generally fall into five broad cate-
gories which are not necessarily mutually exclusive: (1) variables or
factors omitted from consideration; (2) the reliability of the data used
and the correctness of their extrapolation over the impact period of
1978-1995; (3) validity of the methodological approach; (4) reasonableness
of the future "state(s) of the world" hypothesized for analysis; and
(5) correctness of the postulated decision-making behavior on the part of
Asarco.
There exist major uncertainties in the future with respect to other po-
tential environmental regulations and associated compliance costs at
Tacoma. These relate not only to costs for incremental SO2 control and
for OSHA-inorganic arsenic standards which are treated explicitly in
this report, but also to other potential costs (for ambient lead,
arsenic, in-plant SO2 and other standards) which could also be incurred
over the impact analysis period. This factor increases the uncertainties
at Tacoma. Our impact results are understated to the extent that these
costs are not explicitly considered.
Our analysis over the period 1978-1995 relies on numerous estimates and
projections prepared (by us or by others) on the basis of professional
judgment using available information as a guide. As noted already,
the conclusions are "robust" and quite insensitive to these projected
values. The conclusions change only under the twin assumptions of high,
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long-run copper prices starting in 1978 and of Tacoma's willingness based
on this expectation, to push all suppliers to the limit by practicing
discriminatory monopolistic pricing.
The methodological approach used in our analysis, relying on integrated
microeconomic and financial analysis principles and practice, is pred-
icated upon rational economic behavior. This may involve at least two
types of shortcomings. In the first instance, actions or reactions in
real life may be more discontinuous than would be implied by theory.
Moreover, certain "intangible" factors may be completely ignored by the
underlying theory utilized. For example, before embarking on a course of
discriminatory monopolistic pricing, Asarco may have to weigh such in-
tangibles as possible loss of "goodwill." While "goodwill" is intangible
in the sense that it is difficult to quantify, it might be an important
issue to Asarco given the fact that a majority of new projects in the
mineral industry are joint ventures and goodwill is important for the
continuation of this practice. Similarly, Asarco may not want to antagonize
the Government of Peru about Northern Peru, since Asarco has a much larger
equity investment in the Southern Peru Corporation of approximately $160
million.
It is not possible to define the future "state(s) of the world" (1978-1995)
in a precise manner. A single unique set of future conditions, including
copper prices, can be neither defined nor, of course, guaranteed for such
impact analysis. There are many participants in the present analysis,
each having a possibly different set of future expectations (e.g., on
copper prices), different set of alternatives open to them, and different
perceptions of risk than may be imputed to them in the analysis here. The
participants are assumed to behave in certain ways, based on theory,
which may not, in reality, occur, not because of any deficiency in theory,
but because real life is typically more uncertain and therefore too
complicated to be fully predicted through microeconomic or financial
analysis. Such factors include the "intangible" factors mentioned above;
legal risks that might be taken by Asarco-Tacoma in pursuing a discriminatory
monopolistic pricing strategy; the possibility that Lepanto, rather than
paying high toll charges over the period 1978-1980 as Tacoma's monopolistic
pricing behavior would require, might instead produce and stockpile its
concentrates until the new Philippines smelter opens, and so on. These
points, taken together, cumulatively indicate that the revenue streams
estimated for Tacoma over the period 1978-1995 under Tacoma's hypothesized
discriminatory monopolistic pricing behavior represent upper-bounds under
each assumed long-run copper price level.
Finally, it should be noted, that any analysis by a third party cannot
capture in complete detail the full range of decision options of Asarco,
Duval, other Southwestern mines, Japanese smelters, Lepanto, Northern
Peru, and the Peruvian Government, etc. Such an analysis cannot com-
pletely capture their perceptions of risk and uncertainty, subjective and
intangible factors such as goodwill, matters relating to litigation or
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threat of litigation from suppliers, etc. However, while all the details
of the thinking of interested parties in this issue have not been captured,
we believe that our analytical approach represents a reasonable approximation
of the central logic of the major participants (i.e., Asarco's) decision-
making relating to the Tacoma smelter and refinery.
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II. OVERVIEW OF THE U. S. COPPER INDUSTRY AND
DESCRIPTION OF ASARCO'S OPERATIONS
A. INTRODUCTION
This chapter provides an overview of the U. S. copper industry and a
description of Asarco's operations. The material presented in this
chapter is designed to give the reader the necessary background
information and perspective in which to place Asarco's Tacoma
operations described in detail in the next chapter.
The United States, the leading producer and consumer of copper in the
world accounting roughly for one-fifth of total world refined copper
production, consumption and reserves, has in the past been virtually
self-sufficient in copper.
Production of copper from primary (virgin) sources, based mainly on
the exploitation of sulfide mineral deposits, involves four principal
stages of production: mining, beneflciation (milling), smelting and
refining. U. S. mine production of copper reached 1.7 million short
tons (metal content) in 1973, a peak year. U. S. smelter and refinery
capacity is about 1.9 million short tons and 2.7 million short tons of
annual production, respectively.
Asarco, a major world producer of nonferrous metals with operations and
business interests both in the United States and abroad (e.g., Canada,
Mexico, Peru, Australia) is an important producer of copper domestically,
operating four open-pit mines, three smelters to process the copper
concentrates from the mines of Asarco and others, and two refineries.
Asarco represents about 5% of total U. S. mine output, 20% of total
U. S. smelter capacity and 25% of total U. S. primary refinery capacity.
In recent years, the U. S. copper industry, including Asarco, has
experienced modest growth in sales, low return on invested capital,
eroding profit margins and higher debt, reflecting the combined pressure
of inflation, higher cost of capital, increased capital requirements
for environmental control and a deep and prolonged economic recession.
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B. OVERVIEW OF THE U. S. COPPER INDUSTRY
1. Supply
The United States is the leading producer and consumer of copper in
the world, accounting roughly for one-fifth of total world refined
copper production, consumption and reserves. Except for certain
periods in the past coinciding with military developments or unusual
"demand crunch" periods, the United States has been nearly self-
sufficient in copper.
Production of refined copper in the United States from all sources is
detailed in Table II-l for 1974, 1975 and 1976. As shown here,
production of domestically mined copper accounts for a major share of
the total U.S. refined copper supply stream. It should also be noted
that refined copper from scrap, produced both by refineries and by
"secondary plants" (i.e., numerous small smelters of scrap copper),
makes an important contribution to total U.S. refined copper supply.
Unrefined copper from new and old scrap, used directly, represents,
on its own right, a significant source of copper supply.
Most of the domestically mined copper is produced in five western
states—Arizona, Utah, New Mexico, Montana and Nevada. Over 80 per-
cent of total U.S. mine production is located in Arizona, Utah
and New Mexico taken together. Arizona alone accounts for well over
half the total U.S. mine production of recoverable copper (about
63% in 1976).
The production of copper from primary (virgin) sources is based mainly
on the exploitation of sulfide mineral deposits, and involves four
stages of processing:
e mining—where ore containing approximately 0.4-2% copper is mined;
0 beneficiation (or milling)—where the copper-containing minerals
are separated from waste rock to produce a concentrate containing
about 25% copper;
o smelting—where concentrates that contain about 25 percent copper
are melted and reacted to produce 98% pure "blister" copper; and
• refining—where blister copper is refined electrolytically to
produce 99.9% pure cathode copper. Some of the new hydro-
metallurgical processes combine the functions performed by smelting
and refining. Subsequently, cathode copper is melted and cast into
various shapes for fabrication.
About 98% of the domestic mine production of copper comes from ores
mined primarily for their copper content, the remainder is recovered
from complex or mixed base-metal ores. The copper ores also are the
source of significant quantities of byproducts and coproducts such
as gold, silver, molybdenum, nickel, platinum, selenium, tellurium,
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TABLE II-l
PRODUCTION OF REFINED COPPER IN THE UNITED STATES, BY SOURCE, 1974-1976a
(thousands of short tons)
1974
1975
1976
TOTAL
Produce
d by:
TOTAL
Produced by:
TOTAL
Produc
2d by:
SOURCE
Refineries
Secondary
Plants^
Ref ineries
Secondary
Plantse
Refineries
Secondary
Plantse
TOTAL (primary and secondary)
2,151,566
2,067,177
84,389
1,787,864
1,714,258
73,606
1,911,668
1,825,874
85,794
Primary (new) refined copper
produced in the United States
1,654,658
1,654,658
_
1,443,378
1,443,378
_
1,537,188
1,537,188
-
from domestic ores, as
reported by refineries
1,420,905
1,420,905
-
1,268,189
1,286,189
-
1,420,603
1,420,603
-
from foreign ores, matte,
etc., as reported in
refineries^5
233,753
233,753
157,189
157,189
116,585
116,585
Secondary refined copper
produced in the United
States0
496,908
412,519
84,389
344,486
270,880
73,606
374,480
288,686
85,794
from new scrap
NA
229,328
NA
NA
139,230
NA
NA
144,215
NA
from old scrap
NA
183,191
NA
NA
131,650
NA
NA
144,471
NA
Notes and Sources:
b.
d.
U. S. Bureau of Mines, Mineral Industry Surveys, "Copper in 1976" (April 15, 1977), p. 4.
The separation of refined copper into metal of domestic and foreign origin is only approximate, as accurate separation is
not possible at this stage of processing.
Includes copper reported from foreign scrap.
U. S. Bureau of Mines, 1974 Minerals Yearbook, Copper, Preprint, p. 28.
U. S. Bureau of Mines, Mineral Industry Surveys, "Copper in December 1976" (March 10, 1977). p. 3.
NA: Not available on a consistent basis from public sources.
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palladium, arsenic, rhenium, iron, lead, zinc, and sulfur. Lead, moly-
bdenum, iron, and zinc minerals are separated from copper minerals by
selective flotation. Gold, silver, nickel, platinum, palladium, selenium,
and tellurium are recovered from anode sludges at electrolytic copper
refineries. Arsenic and sulfur are extracted during copper smelting,
and rhenium is obtained in the processing of molybdenum concentrates
recovered as a coproduct in the treatment of some copper ores.
To minimize transportation costs, mills are almost always located close
to the mines. The value of the concentrates is high enough to allow
some flexibility in smelter location. Still, most smelters are located
near the mills which supply them or on tide water or rail head in order
to receive concentrates from distant mills. Refineries can be located
anywhere between smelters and fabricators, since the transportation
costs for blister and refined copper are about the same.
The domestic copper industry can be segmented into "primary" and
"secondary" sectors, for analytical purposes, on the basis of the pricing
behavior of the firms on the sellers' side. By this criterion, the pri-
mary sector consists of firms which sell the bulk of their refined copper
output (mostly from mined copper but also including some refined from
scrap) on the basis of a commonly-followed domestic producers' price.
Firms in the secondary sector, on the other hand, are those which sell
their copper output regardless of its form (i.e., whether refined or
scrap) and regardless of its origin (i.e., whether processed from mined
copper—from domestic or foreign source—or refined from scrap) on the
basis of one of several "outside market" prices.
The primary sector consists of firms vertically integrated to different
degrees from mining to refining and beyond into fabrication. These firms
include principally, the following: Anaconda/ARCO, Asarco, Cities
Service, Copper Range, Cyprus, Duval, Hecla, Inspiration,.Kennecott,
Magma, Phelps Dodge and Ranchers Exploration. These twelve firms
market their own copper. Several of these sellers do not have their
own smelting or refining facilities and have their raw materials
treated by others.
Several of the producers participate either directly or through subsidiaries
in all five stages of production: mining, milling, smelting, refining and
fabrication. The productive capacities, however, are not always matched
between the different stages of production. Kennecott, the largest U. S.
producer, is vertically integrated from mining through refining and, to a
very small extent, further integrated downstream into fabricating through
its wholly owned subsidiary, Chase Brass and Copper, which reportedly
purchased 25% of its copper requirements in 1976 from Kennecott (consti-
tuting about 6-6% of Kennecott's copper sales in that year). Anaconda
participates in fabrication through Anaconda American Brass and Anaconda
Wire and Cable. These subsidiaries consume more copper than is produced
by Anadonda. Phelps Dodge produces wire, wire rod and copper tube. These
fabricating facilities consume about 30% more copper than the primary
production of Phelps Dodge. Similarly, Cities Service owns New Haven
Copper and Chester Cable; Copper Range owns Hussey Metals; Cyprus owns
Cyprus Wire and Cable and El Paso Natural Gas (participant with Hecla
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Mining in the Lakeshore project) owns Narragansett Wire. While Asarco
does not own fabricating capacity directly, it owns 33% of Revere.
Other producers are vertically integrated from mining through refining.
These include producers of refined metal using smelting techniques (Magma/
Newmont); using hydrometallurgical techniques (Ranchers) or both (Inspira-
tion). Magma and Inspiration also produce semifabricated shapes.
The other producers do not participate fully in all stages of production.
While Cities Service in Tennessee is integrated through smelting, its more
significant production in Arizona is treated by Inspiration. Cyprus and
Duval, except for experimental hydrometallurgical plants, use custom/toll
smelters and refineries. Cyprus uses Phelps Dodge and Magma, and Duval
uses Asarco. Similarly, Amax does not possess primary smelting and re-
fining capacity. Amax's smelter and refinery in New Jersey treats mainly
secondary materials. Its primary production is from Anamax, operated
under equal partnership with Anaconda, by hydrometallurgical means.
In addition, there are smaller independent mining firms, such as UV
Industries, Earth Resources, Hecla Mining, McAlester Fuel, Federal
Resources, Eagle-Picher, Keystone Wallace Resources, and Micro Copper,
who use custom or toll smelting and refining services. The major custom
and toll smelters and refiners are Asarco, Phelps Dodge, Inspiration and
Anaconda. Others such as Magma process only minimal quantities.
Detailed information on mine production of recoverable copper in the United
States, as well as on U. S. smelter and refinery capacity, is presented in
Tables II-2, -3, and -4. In 1974, four firms—Kennecott, Phelps Dodge,
Anaconda, and Newmont—accounted for 64% of total U. S. mine production.
Eight firms, including these four plus Duval, Cyprus, Asarco and Copper
Range, accounted for 88% of the total. Seven firms—Asarco, Kennecott,
Phelps Dodge, Magma, Anaconda, Inspiration, and Copper Range—together
represent virtually all of total U. S. smelter and primary refinery capacity.
Asarco, taken by itself, represents about 5% of total U. S. mine output,
20% of total U. S. smelter capacity and 25% of total U. S. primary re-
finery capacity.
2. Demand
Copper is a metal of key importance, both because of its highly desirable
properties (e.g., high electrical and thermal conductivity, corrosion
resistance, ductility and malleability durability, low melting point
and high strength) and because of its diversity of uses. Copper has
a wide range of uses in today's modern industrial economy, in pure
or alloyed form, including such diverse products as plumbing fixtures,
ship propellers, electrical wire and car radiators. While aluminum
and other materials are substitutable for copper and alloys in many
electrical structural and decorative applications, in still many other
uses copper is the preferred and largely nonsubstitutable resource.
Copper consumption trends in the United States since 1950 are shown
in Table II-5. It can be seen that refined copper accounts for a large
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TABLE II-2
MINE PRODUCTION OF RECOVERABLE COPPER IN THE UNITED STATES, 1973 and 19743
Amount
Mine
(Short
tons)
Compot
iltlon (7-y
Company and Mine
Locat ion
Type
1973
1974
1973
1974
Kennecott Copper Corporation
471.721
402,213
27.46
25.19
Chino
New Mexico
OP
67,836
60,557
3.95
3.79
Nevada
Arizona
OP
50,012
37,562
2.91
2.35
Ray Mines
Arizona
OP
98,908
74,764
5. 76
4.68
Utah
Utah
OP
254,965
229,330
14.84
14.36
Phelps Dodge Corporation
319.358
280,211
18.59
17.55
Morenci
Arizona
OP
119,535
112,790
6.96
7.06
Tyrone
New Mexico
OP
104,011
97,030
6.05
6.08
Ajo (Sew Cornelia)
Arizona
OP
53,797
43,501
3.13
2.72
Blsbee (Copper QueenO
Arizona
Lavender Pit
OP
19,387
11,833
1.13
0. 74
Underground Mines
UG
22,628
15,057
1.32
0.94
The Anaconda Company
200,454
190,059
11.67
11.90
Twin Buttes (Anamax Mining
Co., under equal partner-
ship with Amax Inc.)
Ari zona
OP
36,824C
20,071°
2.14
1.26
Berkeley Pit
Montana
OP
104,474
98,889
6.08
6.19
Anaconda Vein Minos (Leonard,
Load Haul Dump, Mountain
Con, Steward Minos)
Montana
uc
21,674
17,454
1.26
1.09
Continental East Pit
Montana
OP
1,647
15,676
0.01
0.98
Yerington
Nevada
OP
35,835
37,969
2.09
2. 38
Nevmont MininR Corporation
160.381
151,826
9.34
9.51
Magma Copper Co.'*
San Manuel
Arizona
UG
22,474
29,437
1.31
1.84
Superior
Arizona
UG
135,789
120,208
7.90
7.53
Idarado Mining Co.
Idarado Mine
Colorado
UG
2,118
2,181
0.12
0.14
Duval Coiporation
(Subsidiary of Pennzoil Co.)
131.214
131,843
7.64
8.26
OP
55,619
52,249
3.24
3.27
Espcranza, Mineral Park
Arizona
Sierrita
Arizona
OP
75,595
79,594
4.40
4.98
Cyprus Mines Corporation
110.390
103,353
6.43
6.47
Cyprus Pima Mining Co.,
Pima Mine
Ar izona
OP
88,140
81,889
5.13
5.13
Cyprus Bagdad Copper Company,
Bagdad Mine
Arizona
OP
19,152
18,379
1.12
1.15
Cyprus Bruce Copper and
Zinc Co.
Arizona
UG
3,098
3,085
0.18
0.19
Asarco Incorporated
73.100
79,200
4.26
4.96
Mission
Arizona
OP
46,600
40,300
2.71
2.52
Silver Bell
Arizona
OP
23,800
23,500
1.39
1.47
San Xavler
Arizona
OP
2,700
5,9 00
0.16
0.37
Sacaton
Arizona
OP
-
9,500
-
0.59
White Pine Copper Company
(Subsidiary of Copper Range Co.)
White Pine
Michigan
UG
78,506
66,898
4.57
4.19
Inspiration Consolidated Copper
Company
65.196
61,238
3.80
3.83
Christmas
Arizona
OP
9,508
6,698
0.55
0.42
Inspiration (Thornton, Live
Oak, Red Hill)
Arizona
OP
51,332
49,700
2.99
3.11
Ox Hide
Arizona
OP
4,356
4,840
0.25
0.30
Cities Service Company
33,280
33,855
1.94
2.12
Copperhill
Tennessee
UG
4,025
970
0.24
0.06
Miami (Copper Cities, Diamond H,
Pinto VAlley)
Arizona
OP
29,255
32,885
1. 70
2.06
Amax
(Anamax Mining Co., under
equal partnership with Anaconda)
Twin Buttes
Arizona
OP
36,824°
20,071°
2.14
1.26
UV Industries, Incorporated
Bayard Operations
New Mexico
OP
24.240
24,167
1.41
1.51
SUBTOTAL (of ABOVI" COMPANIES)
1,704,664
1,544,934
99.23
96.74
OTHERS (Calculated Rusidujlly)
13,276
52,068
0.73
3.26
TPTAL8
1,717,940
1,597,002
100.00
100.00
II-6
Arthur D Little
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NOTES AND SOURCES: ACCOMPANYING TABLE II-2
a. Individual company data have been obtained from
the 1973 and 1974 corporate annual reports and
from American Bureau of Metal Statistics, Inc.
(ABMS), Nonferrous Metal Data 1974 and 1975.
b. Sum of the components may slightly differ from the
totals given due to rounding-off.
c. One-half of total Anamax production.
d. 100.0% owned by Newmont Mining Corporation.
e. 80.1% owned by Newmont Mining Corporation.
f. The "Other" category was calculated as the residual
of the total less the subtotal for the individual
companies reported above. This category includes,
for example, Rancher's Exploration and Development
Corporation, Earth Resources Company, El Paso
Natural Gas Company, Hecla Mining Company,
McAlester Fuel Company, Federal Resources Corpora-
tion, Eagle-Picher Industries Incorporated,
Keystone Wallace Resources, Micro Copper Corpora-
tion and others.
g. The total is obtained from U. S. Bureau of Mines,
Mineral Industry Surveys, "Copper in 1974"
(April 8, 1975) for 1973 data (p. 3) and "Copper
in 1975" (March 26, 1976) for 1974 data (p. 3).
II-7
Arthur D Little, Inc
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TABLE II-3
COPPER SMELTERS IN THE UNITED STATES AT THE END OF 1975
Annual Capacity
Company
Asarco, Inc.
Asarco, Inc.
Asarco, Inc.
The Anaconda Company
Cities Service Company,
Copperhlll Operations
Inspiration Consolidated
Copper Company
Magma Copper Company
(subsidiary of Ncwmont
Copper Co.), San Manuel
Division
Kennecott Copper Corporation
Nevada Mines Division
Chino Mines Division
Ray Mines Division
Utah Copper Division
c
Phelps Dodge Corporation
Douglas Smelter
Morenci Branch
New Cornelia Branch
SUBTOTAL
White Pine Copper Co.
(subsidiary of Copper
Range Company)
TOTAL
Location
El Paso, Texas
Hayden, Arizona
Tacoma, Washington
Anaconda, Montana
Copperhlll, Tennessee
Miami. Arizona
San Manuel, Arizona
McGill, Nevada
Hurley, New Mexico
Hayden, Arizona
Garfield, Utah
Douglas, Arizona
Morenci, Arizona
Ajo, Arizona
Short tons of
material*
576,000
960,000
600,000
750,000
75,000
450,000
600,000
400,000
400,000
420,000
1,000,000
700,000
900,000
250,000
8,281,000
NA
Short tone of
product
100,000
180,000
100,000
198,000c
16,000
150,000
200,000
78,000
80,000
80,000
280,000
90,000
196,000
77,000
1.B25.000
85,000
1.910.000
II-8
Arthur D Little, Inc
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NOTES AND SOURCES: ACCOMPANYING TABLE II-3
a. American Bureau of Metal Statistics, Inc. (ABMS),
Nonferrous Metal Data 1975, p. 29. Figures given
represent short tons of "change" (i.e., material
intake or "feed" for processing).
b. Estimated based on individual company annual reports,
10-K forms, telephone conversations with individual
company/plant representatives, and data given in
Engineering and Mining Journal (E/MJ), 1976 Inter-
natioal Directory of Mining and Mineral Processing
Operations. The figures given here represent
annual productive capacity defined in terms of
production or output (copper content).
c. Upon completion of Anaconda's smelter modification
program, this is expected to rise to 216,000 short
tons per year (18,000 short tons per month).
These figures are exclusive of Anaconda's new Arbiter
plant near Anaconda, Montana. At this plant, pro-
duction commenced in October, 1974; it was temporarily
shut down in July, 1975 and was reopened in August,
1976. The Arbiter plant is expected to have a
capacity of approximately 36,000 short tons of
cathode copper production per year.
See The Anaconda Company, Proxy Statement for a
Special Meeting of Shareholders to be Held
October 20, 1976, p. 71.
d. Exclusive of modifications underway expected to expand
the existing capacity.
e. The figures given here for Phelps Dodge Corporation
are exclusive of the company's new Hidalgo smelter,
at Playas in Hidalgo County, New Mexico, which is
the first copper smelter in the United States to use
flash smelting process developed in Finland. The
Hidalgo smelter, which started operations on July 1,
1976 and produced 37,944 short tons of copper anodes
in 1976, is expected to have a productive capacity of
100,000 short tons per year.
II-9
Arthur D Little, Inc
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TABLE II-4
UNITED STATES COPPER REFINERY CAPACITY AT YEAR-END 1974, 1975 AND 1976a
(annual capacity,
short tons of
refined copper
production)
Company, Location
At end of 1974
At end ot 1975
At end of 1976
PRIMARY PRODUCERS
Anaconda
Great Falls, Montana
Raritan Copper Works,
Perth Araboy, N.J.C
E
E
295.000
180,000
115,000
252,000
252,000
252.000
252,000
Asarco
Baltimore, Maryland
Perth Amboy, N.J.e
Tacoma, Washington
Aj&arlllo, Texas
E
E
E
E
642,000
318,000
168,000
156,000
744,000
168,000
156,000
420,000
576.000
156,000
420,000
Kennecott
Garfield, near Magna,
Utah
Anne Arundel County,
Maryland
Hurley, New Mexico
E
E
LF
565,000
186,000
276,000
103,000
565,000
186,000
276,000
103,000
565,000
186,000
276,000
103,000
Phelps Dodge
El Paso, Texas
El Paso, Texas
Laurel Hill, L.I., N.Y.
Laurel Hill, L.I. , N.Y.
E
LF
E
LF
537,000
420,000
25,000
72,000
20,000
537,000
420,000
25,000
72,000
20,000
537,000
420,000
25,000
72.000
20,000
Magma (subsidiary of
Newmont)
San Manuel, Arizona
E
200,000
200,000
200,000
200,000
200,000
200,000
White Pine (subsidiary of
Copper Range)
White Pine, Michigan
LF
90,000
90,000
90,000
90,000
90,000
90,000
Inspiration
Inspiration, Arizona
E
70,000
70,000
70,000
70,000
70,000
70,000
SUBTOTAL
2,399,000
2,458,000
2,290,000
SECONDARY REFINERS
United States Metals
Refining Co. (a sub-
sidiary of AMAX, Inc.)
Carteret, N.J.
E, LFf
260,000
260,000
260,000
Cerro Copper and Brass,
Div. of Cerro Corp.,
St. Louis, Mo.
E
44,000
44,000
44,000
Chemetco, Inc., Alton,
Illinois
E
40,000
40,000
40,000
Reading Industries, Inc.,
Reading, Penn.
E
40,000®
40.0008
40,000®
Southwlre Co., Carrollton
Ga.
»
E
65,000h
65,000h
65,000h
SUBTOTAL
449,000
449.000
449.000
TOTAL
2,848,000
2,907 ,000
2,739,000
11-10
Arthur D Little, Inc
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NOTES AND SOURCES: ACCOMPANYING TABLE II-4
a. Except otherwise noted, data for 1974 and 1975
are based on American Bureau of Metal Statistics,
Inc., (ABMS), Nonferrous Metal Data for 1974 and
1975; data for 1976 are estimates based on
miscellaneous sources, including individual
company annual reports and 10-K forms filed with
the Securities and Exchange Commission.
b. E: Electrolytic; LF: Lake and fire refined.
c. Permanently closed in May, 1975.
d. Permanently closed in December, 1975.
e. Permanently closed in March, 1976.
f. Electrolytic: 175,000 short tons/yr.; Lake and
fire refining: 85,000 short tons/yr.
g. These figures differ substantially from those
listed in ABMS (see Note "a" above); based on
data given in Reading Industries, Inc., Form 10-K
for the fiscal year ended December 31, 1975, p. 6
h. These figures differ somewhat from those listed
in ABMS (see Note "a" above); based on data given
in Southwire Co., 1975 Annual Report, p. 12.
11-11
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TABLE II-5
i
i—1
ho
Year
1950
1955
1960
1965
1970
1971
1972
1973
1974a
1950-1970
1950-1974
1960-1973
1960-1974
Total
1.28
1.31
4.04
2.91
CONSUMPTION OF COPPER IN THE UNITED STATES, 1950-1974
(copper content, in thousands of short tons)
Percent Composition
2272.2
2418.7
2079.3
2995.4
2930.5
2956.0
3266.2
3481.7
3106.2
Ref ine^
Copper
Scrap
(%)
Total
1482.2 790.0 100.0
1536.7 882.0 100.0
1372.3 707.0 100.0
2034.4 9A1.0 100.0
2044.0 £86.5 100.0
2017.8 938.2 100.0
2236.2 1030.0 100.0
2445.6 1036.1 100.0
2156.6 949.6 100.0
(Average annual compound growth rate)
1.62 0.58
1.57 0.77
4.54 2.98
3.28 2.13
Refine
Copper
65.2
63.5
66.0
67.9
69.7
68.3
68.5
70.2
69.4
Scrap
34.8
36.5
34.0
32.1
30.3
31.7
31.5
29.8
30.6
Notes: a. Preliminary.
5" b. Includes copper refined from scrap.
£; c. Refers to directly consumed scrap.
a
ET Source: Copper Development Association, Copper Supply and Consumption 1950-1969; 1955-1974.
n>
3
n
-------
and increasing share of total U.S. consumption during this period, with
directly consumed scrap reaching barely over 30 percent by 1974. It
should be noted, however, that during this same period the share of
refined copper from scrap at smelters and refiners in total refined
copper production has increased from 14.3% in 1950 to 22.6% in 1974.
Consequently, refined copper production from scrap plus directly
consumed scrap, taken together, account for a larger share of total
consumption (i.e., 46.1% in 1974).
Demand for copper is a derived demand, since it is used as an intermediate
input in the production of final goods which are ultimately demanded
for consumption or investment. Semifabricators, which alter the shape
of copper inputs into products for final use, are the "first-line"
consumers of copper.
Among semifabricating industries in 1974, wire mills, which use only
refined copper, accounted for 47% of total copper consumption. Brass
mills, which consume refined copper and scrap in fairly equal pro-
portions, accounted for about 39% of total consumption. Ingot makers,
who use almost entirely scrap, were the third largest consumers at
seven percent. Foundries, consuming predominantly scrap, used about
four percent, with powder plants, and "other industries" accounting
for the remainder.
The major end-use industries consuming semifabricated goods are electrical
and electronics products, building construction, consumer and general
products, industrial machinery and equipment, transportation, and
ordnance and accessories.
The largest use of copper is in electrical equipment and supplies.
The manufacture of electric motors, power generators, motor-generator
sets, dynamotors, fans, blowers, industrial controls, and related
apparatus requires copper for the best electrical performance. Electrical
instruments and test equipment, power distribution systems including
transformers, bus bars, and switchgear, and electric lighting and
wiring equipment require large quantities of copper. Electronic navi-
gation and communication systems also rely on copper in the form of
cable and related electric parts. Although aluminum is used for
virtually all high-voltage overhead power transmission lines, copper is
widely used in underground lines and dominates the smaller gage wire
market.
Although industry observers are not in complete accord on the prevalence
and importance of long-run substitution in demand (LRS), and comprehensive
and detailed quantitative information is unavailable on the degree to
which LRS has actually occurred in the industry during the past thirty
years, it is generally agreed that aluminum has been the most serious
competitor to copper. The greatest replacement of copper has been in
the power wire and cable sector, where some 40 percent of insulated
power cable and over 90 percent of bare conductor applications are now
provided by aluminum.
11-13
Arthur D Little Inc
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Copper and aluminum are also mutually interchangeable in some heat exchanger
applications. The largest use of copper in the area, automobile radiators,
is vulnerable to aluminum. Heat exchangers in household freezers and
refrigeration and automotive air-conditioners are predominantly aluminum,
while desalination and marine exchangers remain predominantly copper or
copper-base alloys.
Available econometric studies of demand for copper generally indicate
substantial inelasticity (or insensitivity) in the short-run with respect
to movements in (own) prices and macroeconomic activity levels. The long-
run elasticity estimates are all greater than the short-run estimates,
indicating that the response of demand to relative prices and activity is,
indeed, more sensitive in the long-run.
3. Prices
Historically, copper has been marketed at prices based on a number of
different systems, some of them quite complex. Nevertheless, two basic
pricing channels can be distinguished, the producer prices and prices re-
lated to quotations on a metal/commodity exchange. Table II-6 presents
trends in copper prices during the postwar period.
Producer prices are prices set independently by the major primary producers
at which primary refined copper is sold. In the United States, the
domestic producers' price is a set of nearly uniform price quotations used
by the major U.S. primary producers and, for a good part of the postwar
period and by Noranda, one of the Canadian producers, for sales in the United
States. During the postwar period, aoout 75 percent of all refined copper
production in the United States has been sold at the domestic producers'
prices.
Prices related to quotations on a metal/commodity exchange refer to prices
at which copper is sold internationally (outside North America) by most
producers most of the time, related through various formulas to prices pre-
vailing principally on the London Metal Exchange (LME). The LME and the
New York Commodity Exchange (COMEX) are the two organized metal exchanges
(markets). Of the two, the LME is generally considered to be the more
important in terms of turnover, physical deliveries, and its influence on
the pricing of copper in general: most of the "formulas" for pricing copper
that are found on long-term contracts are related, in one way or another,
to LME prices, since LME prices are generally considered to reflect, without
delay, changes in the supply and demand situation worldwide. It is import-
ant to emphasize that the LME and COMEX are basically hedge and speculative,
rather than physical markets.
In addition (and related) to these two basic copper pricing channels, a
number of others can be distinguished, under the collective title of price
prevailing in the "outside market". With reference to copper markets in
the United States, the "outside market" encompasses all trade in copper
apart from sales made by the primary producers. The outside market en-
compasses the secondary industry (including scrap dealers and secondary
11-14
Arthur D Little. Inc
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TABLE II-6
PRICES OF REFINED COPPER, COPPER
. SCRAP AND REFINED
ALUMINUM IN
THE UNITED STATES, 1947-1976
(Yearly
averages, cents
per pound)
U.S.
U.S.
Producer
LME
Producer
Refined
a
Refinedk
Scrap
Refined ^
Year
Copper
Copper
Copper
Aluminum
1947
21.0
23.5
16.2
15.0
1948
22.0
24.1
17.3
15.7
1949
19.2
21.9
13.9
17.0
1950
21.2
22.3
17.7
17.7
1951
24.2
27.5
21.3
19.0
1952
24.2
32.3
19.0
19.4
1953
28.8
32.2
22.4
20.9
1954
29.7
31.3
24.5
21.8
1955
37.5
43.9
33.6
23.7
1956
41.8
41.0
31. 6
24.0
1957
29.6
27.4
20.1
25.4
1958
25.8
24.8
17.6
24.8
1959
31.2
29.8
22.6
24.7
1960
32.1
30.8
21.2
26.0
1961
29.9
28.7
21.8
25.5
1962
30.6
29.3
21.6
23.9
1963
30.6
29.3
22.2
22.6
1964
32.0
44.0
26.0
23.7
1965
35.0
58.6
34.5
24.5
1966
36.2
69.1
44.7
24.5
1967
38.2
51.2
33.2
25.0
1968
41.8
56.0
32.8
25.6
1969
47.5
66.3
42.9
27.2
1970
57.7
62.9
39.5
28.7
1971
51.4
49.3
27.6
29.0
1972
50.6
48.5
39.0
26.4
1973
58.9
80.8
50.-2
25.0
1974
76.6
93.1
54.9
34.1
1975
63.5
56.1
33.9
39.8
1976
68.8
63.9
51.6
44.3
Notes and Sources: a. U. S. producer refinery wirebar f.o.b. (i.e., U. S.
producer delivered price minus shipping cost; the
shipping cost was 0.9c/lb. effective August 1,
1976): Metals Week, Engineering and Mining Journal.
b. Official morning session prices on the London
Metal Exchange; electrolytic wirebars, monthly
average, settlement price: Metal Bulletin, American
Bureau of Metal Statistics Yearbook and Engineering
and Mining Journal.
c. Estimated New York area delivered price from clean
No. 2 heavy copper scrap (No. 1 prior to 1956) :
Metal Statistics and Engineering and Mining Journal.
d. Major U. S. producer (list) ingot price: Metals
Week, Engineering and Mining Journal.
Arthur D Little, Inc
11-15
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refiners), some of the smaller domestic producers of refined copper
selling at premiums over the price of the major domestic producers, and
the merchants. More broadly, the "outside market" also includes, with
reference to the United States, transactions in physical copper on the
LME and COMEX plus imports based on LME quotations.
As indicated, demand for copper is quite inelastic in the short-run,
and the supply of copper is basically slow, characterized by long
adjustment periods. Hence, wide swings in demand over the business
cycle in industrial countries, combined with speculative activity in
the very short-run on the two organized commodity exchanges, have
contributed to the volatility of copper prices internationally.
However, U. S. domestic producers' prices, while lagging LME prices,
have generally been considerably more stable. Generally speaking,
the domestic primary producers appear to possess discretionary pricing
power. In response to persistent demand shifts, they have tended to
change their prices only slowly and not by the magnitude often
experienced by the LME price, such that the producers' prices have
generally remained well below LME prices during periods of strong
demand and above LME prices during periods of weak demand. Thus, during
periods of rising or excess demand for refined copper, participating
producers (U. S. and some foreign) chose to ration their available
copper supplies to customers at a price below the level of the LME
price rather than increase their price.
There appears to be no complete, simple, logical explanation or set
of explanations for the divergence, over certain periods, between the
U. S. producers' and the LME prices.
All of the proposed explanations are either logically inconsistent
and/or are unable to explain certain "anomalous" behavior on the part
of the producers.
Neither copper price fluctuations nor the presence of a two-price system
for copper should mask the important point that the long-run price of
copper tends to equal the price that is sufficient to induce continued
investment. This price, which may be regarded as the long-run economic
cost of producing copper, is thought to have increased sharply in recent
years after having remained fairly steady over a long period. Hence,
despite the fact that a number of factors appear to have had substantial
restraining influence on the pricing decisions of the domestic primary
producers (e.g., the threat of long-run substitution from aluminum,
potential competition from abroad, the presence of U.S. government stock-
piles, etc.), costs of production in the face of deteriorating ore
grades effectively provide a rising floor for copper prices in the
long-run.
11-16
Arthur D Little, lnc
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4. Financial Performance
In recent years, the U.S. copper industry has experienced modest growth
in sales, low return on invested capital, eroding profit margins and
higher debt, reflecting the combined pressure of inflation, higher
cost of capital, increased capital requirements for environmental
control and the worst recession during the postwar period.
Overall profitability for the copper producers, in terms of operating
margin on sales, declined from about 23% in 1967 to 19% in 1974. Over
the same period, profit margins for large industrial companies and
manufacturers in general was rather stable. In terms of after-tax
return on stockholders' equity, copper producers have shown a rate
of return equal to the Federal Trade Commission (FTC) average for all
manufacturing. However, the copper industry has been characterized by
much greater volatility in its rate of return. This, in turn, stems
from the cyclicality of the industry and fluctuations in copper prices.
Capital expenditures by most companies increased sharply in recent
years. A significant portion (i.e., about 25%) of the total
industry capital expenditures over the period 1972-1975 has been for
pollution abatement, mostly associated with SO2 controls at smelters.
About 60% of the total, however, represents investment in mining and
milling capacity.
With capital expenditures increasing faster than internal cash generation
(from earnings, depreciaton, and deferred taxes), the cash-flow position
of the companies deteriorated. Consequently, there has occurred in
recent years a sharp increase in external financing. Over the last five
years, overall debt has approximately doubled, while equity has
increased significantly. Indeed, some companies are believed to have
temporarily reached prudent limits to debt in their capital structure
and await higher earnings and stock prices to restore balance and
financing flexibility.
Selected comparative financial statistics for principal U. S. copper
and other nonferrous metals producers, recent trends in profitability
and long-term debt are presented in Tables II-7-10.
11-17
Arthur D Little, Inc
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TABLE 11-7
SUMMARY OF SALIENT FINANCIAL ASPECTS OF U. S. COMPANIES
Company
Value of 1974
Production of
Primary Copper
@ 75c/lb.
(millions of
dollars)
1971-1974
Average
Operating
Margin on
Total Company
Sales
(percent)
j Level of
Operating Profit
| 0 75c/lb.
Total Average | Copper, Co.
Capital Spending! Average Margin
1972-1974 ; Only on Primary
(million of [ (millions of
dollars) i dollars)
Employment
Levels^
Mining,
Milling,
Smelting
and Refining
T—
/
Long Term Debt
as Percent of
Total
Capitalization
Common Stock
Book
Value
$/Share
at 12/31/75
Market
Value
Z Book
Amax
$149
15.1%
$ 227
22.5
1,500
2 7%
42.7
111
Anaconda
285
10.2
145
29.1
5,500
28d
54.8
31
Asarco
159f
6.7
101
10.7f
3,400
28
32.2
41
Cities Service
61
17. 53
370
10.7
2,000
32
60.5
64
Copper Range
101
13.4
6
13.5
2,800
23
44.9
41
Cyprus Mines
150
31.7
43
47.6
2,000
2 3e
29.4
74
Inspiration Consolidated
113b
24.4
29
27.6
2,200
26
35.1
59
Kennecott
603
19.0
187
114.6
11,000
21d
42.2
73
Newoont
225
29.9
48
67.3
4,400
27e
26.4
87
Pennzoil (Duval)
197
15.9
267
31.3
2,600
556
15.5
125
Phelps Dodge
421
20.4
182
85.9
7,500
37
43.4
84
Notes: a. Figure used in Standard & Poor's Copper Composite Average.
b. Figure used is 1973 deliveries basis; 1974 figure not representative due to production difficulties.
c. The employment level In U. S. primary copper production totals 45,000 for the above companies.
d. Total capitalization includes minority lease obligations.
e. Total capitalization includes minority interests.
f. Based on total Asarco mine production, of which the domestic U. S. share accounts for 78%. Average earnings from primary metals sales
were $4 million pretax. If prorated based on sales, copper would have accounted for $12.8 million.
Source: Arthur D. Little, Inc. estimates.
The information presented above has been obtained from company annual reports and SEC filings, statistical services, financial manuals, and other
sources believed to be reliable, but its accuracy and completeness are not guaranteed.
While reasonable care has been taken in data compilation and presentation, we cannot guarantee absolute comparability from one company to the next,
due to differences in the nature of earnings, and differences in accounting. However, to the best of our knowledge, the above data present an
accurate and meaningful basis for selective comparisons.
-------
TABLE II-8
TRENDS IN OPERATING PROFIT MARGIN
(Percent of sales)
Year
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
Large
Industrial
Companiesa
15.9
16.2
16.4
15.5
15. 8
15.4
14.5
14. 6
15.0
15.8
15.4
Major
Copper k
Companies
22.7
26.5
29.3
23.9
22.9
27.8
23.4
15.5
16.6
19.1
18.7
Notes and Sources; a. Standard & Poor's composite
data, 425 industrials,
b. Standard & Poor's composite
data, based on Anaconda, Copper
Range, Inspiration Consolidated,
Kennecott Copper, Newmont Mining,
and Phelps Dodge.
11-19
Arthur D Little. Inc
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TABLE II-9
INDICATORS OF THE NEED FOR CAPITAL FUNDS
5-Year Growth in 5-Year Cash Flow
Plant Equipment as 7. of Total
Company % Growth Needs
Amax 102% 53%
Asarco 97 78
Anaconda 43 61
Cities Service 30 72
Copper Range 38 94
Cyprus Mines 96
Inspiration Consolidated 192 64
Kennecott 47 83
Newmont Mining ^ 76
Phelps Dodge 92 62
c
Pennzoil Company 15 57
Notes: a. Not available for purposes of comparison. The 442%
reflects IMS/Cyprus method of reporting, accounting,
and restating for consolidation of subsidiaries over
the period in question.
b. Not meaningful for purposes of comparison, due to
large investment holdings.
c. Capital expenditures net of retirement and disposals
in some years.
Source: Arthur D. Little, Inc. All other figures are as presented
by Business Week's Capital Survey, September 22, 1975.
11-20
Arthur D Little. Inc
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TABLE 11-10
RATES OF RETURN ON STOCKHOLDERS' EQUITY
(Percent)
FTC Average of Major
All Manufacturing Copper Companies ^
Years Pre-Tax After Tax Pre-Tax After Tax Inflation Rate
1965
21.9
13.0
19.7
13.0
1.8
1966
22.5
13.5
20.9
14.0
2.7
1967
19.3
11.7
13.0
9.1
3.5
1968
20.8
12.1
17.2
11.7
3.3
1969
20.1
11.5
22.5
15.3
4.9
1970
15.7
9.3
20.3
14.8
5.5
1971
16.5
9.7
5.5
4.2
4.4
1972
00
1—1
10.6
12.0
9.5
3.6
1973
21.8
13. la
18.2
13.5
5.5
1974
23.4
14. 9a
18.9
13.8
10.4
Averages
20.0
11.9
16.8
11.9
NA
Standard
)eviation
(%)
2.6(13)
1.8(15)
5.2(31)
3.4(29)
NA
Notes: a. Fortune 500 all-industry median was 12.4% in 1973 and
13.6% in 1974.
b. GNP Implicit Deflator, (1958 = 100).
NA: Not Available.
Sources: Federal Trade Commission, Division of Financial Statistics,
Quarterly Financial Report for Manufacturing, Mining, and
Trade Corporation, 1975 eds.; and Arthur D. Little, Inc.
11-21
Arthur D Little, Inc
-------
C. GENERAL DESCRIPTION OF ASARCO, INCORPORATED
1. Overview
Asarco's business has, for many years, been in the mining, smelting, and
refining of nonferrous ores and concentrates, producing therefrom
principally copper, lead, zinc, silver, and gold, and recovering related
by-products from such operations. The business also includes buying
and processing nonferrous scrap and selling the alloys produced,
producing and selling coal and asbestos, and producing chemical
materials and manufacturing machinery for the metalplating and finishing
industry. Asarco's operations are carried on principally in the United
States with additional operations in Canada, Mexico, and Peru. Asarco
has substantial investments in other mining companies, principally in
Australia (Mount Isa Mines holdings—49%), Peru (Southern Peru Copper
Corporation—51.5%), Mexico (Industrial Minera Mexico—34%), and has
held a substantial interest in Revere Copper and Brass Incorporated
(33.4% stock plus convertible debentures).
Asarco accounts for between 10 and 20% of domestic sales of refined
copper, lead, and zinc, and somewhat more than one-third of the sales
of refined silver. Through its ownership of Lake Asbestos of Quebec,
Ltd. in Canada, Asarco has about 6% of the domestic market for asbestos.
Coal is its other principal non-metallic product, and Asarco accounts
for about 1% of the domestic market, through its Midland Coal Company
Division, acquired in late 1970.
Table 11-11 succinctly illustrates Asarco's participation in nonferrous
metals production in years 1974-1976. Equity in non-consolidated
associated companies operating outside the United States accounts for
nearly one-fourth of Asarco's assets, and 40% of stockholder's equity.
Sales in 1974 totalled $1,344.1 million, an all-time high. Earnings
before taxes and extraordinary items were a record $160.1 million,
including $103.4 million ($43.4 million in dividends1) in equity
earnings of non-consolidated associated companies. In 1975, sales
and earnings dropped to $1,004.6 million and $15.4 million pre-tax,
respectively. A five-year financial summary (1972-1976) may be found
in Table 11-12.
Table 11-13 presents a consolidated Sources and Uses of Funds statement,
for years 1972-1976. Note that Asarco generated $433 million in
cash flow over this five-year period, but added $544.6 million to
property, and paid $149.0 million in dividends. Its long-term debt
1
Asarco, Incorporated, 1976 Annual Report, p. 19.
11-22
Arthur D Little, lnc
-------
TABLE 11-11
ASARCO'S
METALS
PRODUCTION
IN 1974, 1975, AND 1976
(in
short tons except
otherwise noted)
Metal
1976
1975
Copper (Tons)
Mines
Mission
35,200
26,900
40,300
Sacaton
22,000
21,900
9,500
Silver Bell
22,300
18,300
23,500
San Xavler
11,400
9,700
5,900
Cranduc3
8,500
9,300
15,900
Qui ruvilea
3,800
6,200
7,400
Ot hers
3.500
3.600
4,000
Total
106.700
95,900
106,500
Ref ineries
Amarlllo
252,500
30,600
_
Tacoma
87,300
119,700
117,400
Perth Araboy
13,800
117,100
127,600
BaItI more
-
41,800
111,000
Total
353,600
309,200
356,000
Associated
Mount Isac
164,100
175,800
167,000
CorapanJ es
Southern Peru**
156,400
119,600
134,400
Industrial Minerd
Mexico 40,200
35,100
37,900
Lead (Tons)
Mines
Buchans.
10,900
11,900
13,900
Leadville
7,300
7 ,500
6,400
Park CityS
3,500
2,300
-
Others
6.700
3.700
4,400
Total
28.400
25,400
24,700
Ref tnerius
Omaha
121,000
118,200
125,800
Glover
76,300
81,900
72,900
Total
197,300
200,100
198,700
Assoclated
Mount Isac
148,900
146,700
139.200
Companies
Industrial Mlnera
Mexico0 96,800
85,600
108,200
Neptune
1,100
1 ,400
3,500
7.inc (Tons)
Mines
Tennessee
42,700
47,900
56,400
Buchans
17,800
19,500
23,400
Leadvillc
14,600
14,100
12,800
Ground Hog
12,700
10,900
12,400
Quiruvilca
6,200
4,400
4,700
Park City&
4,700
2,700
-
Qulooa
3.100
-
-
Total
101,800
99,500
109,700
Z lnc
Fuming
Plants
37.600
41.800
39,600
Zinc
Columbus
19,600
14,000
20.700
Oxide1
Hlllsboro
8,800
7.200
15 &nn
Total
28,400
21,200
Ref ineries
Corpus Christi
90,200
81,900
81,100
Amarillo
-
20,400
46,700
Total
90,200
102,300
127,800
Associated
Industrial Minora
Mexlcok 146,700
127,300
135,700
Compan ies
Mount Isac
123,800
126,600
113,400
Neptune^
15,300
11,700
15,700
Silver (Troy Ounces)
Mines
Ga1ona
J,421,000
3,350,000
3,486,000
Quiruvilca
1,068,000
1,134,000
1,388,000
Coeur
661,000
-
_
Buchans
554,000
611,000
741,000
Mission
407,000
292,000
511,000
Leadville
335,000
352,000
330,000
Park City*
219,000
161,000
-
Others
700.000
550.000
644.000
Total
7,365,000
6,450,000
7.100.000
Refineries
Amarillo
32,997,000
-
_
Perth Amboy
11 ,314,000
44,576,000
37,835,000
Baltimore
-
10,679,000
16,947.000
Total
44j311,000
55,255,000
54,782,000
Associated
Industrial Mlnera
Mexico® 18,133,000
17,303,000
20,770,000
Compan ies
Mount Isac
11,277,000
11,045,000
9,690,000
Neptune^
62,000
98,000
72,000
General Note: All figures for associated companies represent entire production, not Asarco's share
Asarco's 50X share of copper in concentrates.
Blister output plus copper exported in concentrates.
Metal content of products for fiscal year ended June 30.
Blister output.
Refined output.
Metal content of products.
Asarco's 40J share of metal in concentrates.
Metal content of zinc fume recovered from lead 6melter slag at El Pa90 and East Helena.
Metal content of zinc oxide.
Refined output plus metal content of concentrates and fuae sold.
Source: Asarco, Incorporated, 1976 Annual Report. p. 18.
11-23
Arthur D Little, Inc
-------
TABLE 11-12
SUMMARY OF ASARCO'S BUSINESS PERFORMANCE, 1972-1976
GENERAL NOTE: The following cables sec forth, for Che five years ended December 31, 1976, Che approximate amounts of Asarco1s (i) consolidaCed sales
and earnings, before taxes on income, attributable to its principal lines of business and (il) consolidated sales of principal products
and services. Sales figures do not include sales by nonconsolidated associated companies.
Line of Business 1976 1975 1974 1973 _____ 1972
(dollars in thousands)
Earnings
Earnings
Earnings
Earnings
Earnings
Sales
(Loss)
Sales
(Loss)
Sales
(Loss)®
Sales
(Loss)®
Sales
(Loss)®
Primary metals3
$
815,232
$ 32,920
$
793,045
$ 27,493
$1,067,658
$ 78,927
$
875,563
$ 60,911
$
653,706
$ 27,754
Secondary metals
143,365
2,716
121,698
3,340
192,395
10,706
137,162
1,467
107,754
1,032
Asbestos
81,165
17,298
31,956
(301)
42,867
11,344
25,718
5,376
21,151
3,837
Coal b
45,119
2,527
39,190
(3,879)
25,114
(9,923)
18,756
(10,719)
21,514
(5,267)
Other products
18,856
(1,853)
18,749
(309)
16,016
(597)
11,240
86
10,220
1,273
Equity in earnings of
nonconsolidated associated
companiesc
-
30,668
-
27,829
-
103,378
-
69,774
-
27,285
Nonoperating3
-
(30,098)
-
(18,309)
-
(3,921)
-
(7,108)
-
(3,277)
Unusual items
-
-
-
(20,500)
-
(29,838)
-
2,237
-
-
$1
,103,737
$ 54,178
$1;
,004,638
$ 15,364
$1,344,050
$106,076
$1;
,068,439
$122,024
$
814,345
$ 52,637
Sales 1976 1975 1974 1973 1972
(dollars in thousands)
Copper
$
263,
,669
242
$
167,
,676
17%
$
290.
,316
22%
$
324,671
30%
$
263,
,942
32%
Silver
209,
,610
19
252,
,634
25
285,
,176
21
174,083
16
110,
,534
14
Lead
89,
,496
8
81,
,712
8
143,
,125
11
110,547
10
67,
,438
8
Zinc
73,
,875
7
85.
,893
9
120,
,866
9
75,697
7
56,
,232
7
Secondary metals
143,
,365
13
121.
,698
12
192.
,395
14
137,162
13
107,
,754
13
Asbestos
81,
,165
7
31,
,956
3
42.
,867
3
25,718
3
21,
,151
3
Coal
45,
, 119
4
39,
,190
4
25,
,114
2
18,756
2
21,
.514
3
Other products
197,
,438
18
223,
,879
22
244.
,191
18
201,805
19
165,
,780
20
Total
IL
,103,
I r>»
1
r*»
100%
$1.
o
o
.t-
,638
100%
$1
,344,
,050
100%
?1
,068,439
100%
?
814.
,345
100%
NoCes: a. Includes mining, smelcing and refining of copper, silver, lead, zinc and byproduccs as well as toll treatment charges for
smelting and refining.
b. Primarily ilmenice, limestone, sand and gravel,
c. See note 4 of note to financial statement (i.e.. Footnote MgM below).
d. Primarily dividends and interest on investment (other than those accounted for by the equity method), patent royalties and
interest expense.
e. See note 11 of notes to financial statement (p. 29 of "Source" noted below).
f. Includes byproducts, ilmenite, toll treatment charges, etc.
g. Restated as follows: (Note 4: Investments, Asarco Incorporated, 1976 Annual Report, p. 26): Dividends from companies
accounted for by the equity method were (in millions): 1976—$10.0; 1975—$22.0; 1974—$43.3; 1973—$15.3; 1972—$18.9.
Taxes have not been provided on the undistributed earnings of associated companies more than 50% owned and corporate joint
ventures, accounted for by the equity method, as such earnings have been reinvested indefinitely, and no remittance of such
earnings to Asarco is foreseen. At December 31, 1976, the cumulative amount of equity in such undistributed earnings on
which income taxes have not been recognized is $218.1 million.
Source: Asarco, Incorporated, 1976 Annual Report, p. 31.
-------
TABLE 11-13
ASARCO, INCORPORATED AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION
(for the years ended December 31)
~ ~~ 1976 1975 197 4a 1973a 1972a
(dollars in thousands, except per share amounts)
Cash and Marketable Securities, beginning of year $ 34,599 $ 20,239 $ 19,618 $ 15,097 $ 10,379
Source of Funds:
Net earnings 42,313 25,438 124,620 99,439 43,584
Add expenses not requiring outlay of funds:
Depreciation and depletion 50,667 36,484 34,877 26,801 23,928
Deferred income taxes 1,326 (2,884) 6,009 (983) 1,138
Estimated costs of plant closings and partial mine write-off - 20,500 29,838 19,700
Equity in earnings of nonconsolidated associated companies, in
excess of dividends received (20,701) (5,847) (60,025) (54,470) (8,386)
Funds provided from operations 73,605 73,691 135,319 90,487 60,264
Long-term debt incurred 92,000 232,180 38,370 50,750 16,500
Funds committed to construction (69,525) 19 2,544 11,873 (14,436)
Proceeds from sale of future production 10,000 13,000 -
Other, net (including materials and supplies) 3,854 (9,237) (21,025) 6,362 23
109,934 309,653 155,208 159,472 62,351
Use of Funds:
Inventories (59,200) 20,243 33,032 (15,450) (8,527)
Investments, net 22,892 (325) (17,806) (9,472) (232)
Property 76,039 167,495 137,666 96,679 66,732
Accounts receivable 1,668 (6,691) (11,112) 37,773 9,456
Current liabilities, other than estimated costs of plant closings
provided in the current year 20,283 80,842 (38,382) 3,616 (47,794)
Long-term debt reductions 33,490 6,687 13,580 10,083 3,600
Dividends 18,721 28,148 38,103 32,040 32,097
Treasury stock, net 209 (1,106) (494) (318) 2,301
114,102 295,293 154,587 154,951 57,633
Cash and Marketable Securities, end of year $ 30,431 $ 34,599 $ 20,239 $ 19,618 $ 15,097
Note:
Source:
a. Restated by Asarco.
Asarco, Incorporated, 1976 Annual Report, pp. 21-29.
-------
increased commensurately from $51.0 million ($38.1 million in 1971)2
to $400.4 million.1
In 1974, a peak year, Asarco had approximately 15,300 employees. Employ-
ment dropped to 13,500 in 1975 as a result of the recession and depressed
metals market and further dropped to 13,100 in 1976.
2. Analysis of Asarco's Operations in Copper
Asarco"s primary metals business typically produces 70-80% of consoli-
dated Asarco sales. Table 11-12 indicates that copper has declined in
importance over the five-year period 1972-1976. Copper sales of $263.9
million represented 40% of primary metal sales in 1972; at $167.7 million
in 1975, they represented only 21% of such sales ($263.7 million in 1976,
accounting for 24% of total sales revenues). Lead and zinc revenues as percent
of the total have shown greater stability. Silver has increased in
importance, from $110.5 million in 1972 to $252.6 million in 1975, when
it represented 32% of Asarco primary metal sales, and 25% of total
consolidated sales. Toll processing charges and by-product sales have
fluctuated around 20% of primary metals business revenue.
The average pre-tax earnings of Asarco's primary metals business has
been about $40 million per year, representing a margin of about 5% on
sales averaging $750 million per year. Asarco1s entire domestic
complex of mines, smelters, and refineries accounts for only about 50%
of Asarco's total pre-tax earnings; this, on an after-tax basis, would
be comparable to the cash dividends Asarco receives from its holdings
in the foreign ventures Southern Peru Copper (Peru), M.I.M. (Australia),
and Industrial Minera (Mexico).
3. Asarco's Domestic Copper Mining, Smelting and Refining Operations
Approximately 31% of the copper content received by Asarco's smelters
during 1976 was attributable to Asarco's own mines, Asarco's share of
the production by non-consolidated associated companies and the output
of mines under joint ventures; 21% was attributed to purchased
materials; and the remaining 48 was treated for others (e.g., Duval)
on a toll basis.
Copper production and related data on Asarco's domestic copper mining
activities are presented in Table 11-14. Ore reserves for Asarco's
principal domestic copper mining properties are shown in Table 11-15.
Asarco owns and operates three copper smelters located at El Paso, Texas;
Hayden, Arizona; and Tacoma, Washington. In addition to treating its own
mine production, Asarco is a custom smelter and refiner in that it pur-
chases ores and concentrates from other domestic and foreign producers
for its own account. It also processes material owned by others on a
toll basis.
T
Ibid. , p. 23.
2
Asarco, Inc., 1973 Annual Report, p. 31, "Ten Year Financial Summary,
1964-1973".
11-26
Arthur D Little. !nc
-------
TABLE 11-14
ASARCO'S DOMESTIC COPPER MINING ACTIVITIES
Mineral Content
Ore Milled
(Short Tons)
Mission:
1972
1973
1974k
1975
1976°
Sacaton:
1974c
1975
1976
San Xavier:
1972
1973
1974a
1975
1976
Silver Bell
1973
1973
1974,
1975?
1976
8,400,000
8,800,000
7,500,000
5,100,000
6,407,000
2,020,000
3,630,000
3,782,000
840,000
1,220,000
1,370,000
1,317,000
3,800,000
3,900,000
3,800,000
2,500,000
3,084,000
Copper
(%)
0.61
0.60
0.61
0.60
0.62
0.63
0.74
0.71
0.81
0.61
0.77
1.05
1.12
0.60
0.64
0.65
0.72
0.72
Silver
(Ounce/
Short Ton)
.12
.16
.14
.10
. 12
0.05
0.06
0.07
.08
.05
.06
.07
.07
Molybdenum
(%)
.032
. 017
.019
.020
.019
.013
.012
.016
.016
.016
Copper
Produced
(Short Tons)
45,400
46,600
40,300
26,900
35,200
9,500
21,900
22,000
600
2,700e
5,900e
9,700e
11,400e
23,600
23,800e
23,5006
18,3006
22,300*
Notes: a. Operations at Mission and San Xavier were affected by a five-week strike in 1974.
b. Affected by production curtailments throughout 1975 and through mid-1976 as a result of
weak demand for copper.
c. Production commenced in May 1974 reaching designed capacity of 9,000 tons per day late
in year.
d. Approximately 100,000 tons per year of copper-bearing oxide ore produced by San Xavier
was used as flux material at Asarco's Hayden, Arizona, and El Paso, Texas, copper smelters.
e. Includes copper attributable to precipitates produced by leaching operations at these mines.
At San Xavier, all of the oxide ore is treated by leaching.
Source: Asarco, Inc., 1976 Form 10-K filed with the Securities and Exchange Commission, p. A3.
-------
TABLE 11-15
ASARCO'S DOMESTIC COPPER ORE RESERVES
(December 31, 1976)
Mission
Sacaton
open pit
underground
San Xavier
oxide ore
sulfide ore
Silver Bell
Ore Reserves
(Short Tons)
141,200,000
24,200,000
16,700,000
3,300,000
167,400,000
24,800,000
Average Copper
Content
(%)
0.73
0.70
1.23
1.04
0.52
0.66
Note:
Given in terms of copper content.
Source: Asarco, Inc., 1976 Form 10-K filed with the
Securities and Exchange Commission, p. A4.
11-28
Arthur D Little Inc
-------
Table 11-16 shows the material processed and the blister copper produced
at each of Asarco's copper smelters for the five-year period 1972-1976.
During 1976, the El Paso, Hayden and Tacoma smelters operated at
approximately 80%, 65% and 74%,1 respectively, of effective capacity."
Smelting operations at the El Paso, Hayden and Tacoma smelters are
curtailed from time to time, with resulting losses in production,
to comply with air quality regulations. All three copper smelters
are equipped with ambient air monitoring and meteorological measuring
systems.
The Tacoma smelter treats material high in arsenic and antimony content
from both foreign and domestic sources and is the sole domestic pro-
ducer of arsenic trioxide and metallic arsenic. Arsenic trioxide is a
raw material used in the production of pesticides, weed control agents,
wood-treating preservatives and other products. Metallic arsenic is
used in various specialty alloys.
The Hayden smelter treats principally copper concentrates and precipitates
produced by mines in the United States. The El Paso and Tacoma smelters
also process the output of southwestern mines, but in addition possess
a capability, believed unique among domestic copper smelters, to process
a variety of crude copper-bearing materials that contain important
recoverable metals in addition to copper and precious metals.
The El Paso copper smelter is operated in conjunction with a lead
smelter and cadmium fume and zinc fume recovery units at the same
plant site. This combination of facilities permits the extraction of
a range of metal values from complex copper-bearing materials including
drosses, sludges and other residue materials from other nonferrous
smelting and refining operations. A plant to produce commercial grade
antimony metal with a designed capacity of 1,200 tons of antimony per
year is under construction at El Paso. The estimated cost of the new
plant is $7.0 million and completion is planned for mid-1977. This
plant will treat tetrahedrite—a complex copper-antimony-silver mineral.
^his implies "effective" smelter capacity at Tacoma of about 112,000
short tons per year of copper production as of 1976. However, similar
figures on production and capacity utilization for 1974 given in
Asarco, Inc., 1974 Form 10-K (p. A6) imply "effective" capacity of
about 119,000 short tons per year of copper production as of 1974.
For analytical purposes, however, we believe the implicit "effective"
smelter capacity figures derived from Form 10-K production and capacity
utilization data are misleading. We estimate Tacoma's maximum pro-
duction from sulfur-bearing materials, before unit costs would start
rising significantly, to be about 78,000 short tons a year of copper
production. To this is added another 22,000 short tons a year or pro-
duction from precipitates and scrap, which is higher than actual peak
production (in 1974) from this source. Tacoma's "effective" smelting
capacity (i.e., the point beyond which unit costs would start rising
sharply) is hence estimated at about 100,000 short tons of copper
production per year.
11-29
Arthur D Little, Inc
-------
TABLE 11-16
PRODUCTION AT ASARCO'S COPPER SMELTERS, 1972-1976
Material Processed—(Short Tons)
Years
El Paso
Hayden
Tacoma
Total
1972
365,000
755,000
406,000
1,526,000
1973
463,000
746,000
384,000
1,593,000
1974a
371,000
614,000
350,000
1,335,000
1975
417,000
522,000
333,000
1,272,000
1976
399,000
523,000
355,000
1,277,000
Blister Copper
Produced—(Short
Tons)
Years
El Paso
Hayden
Tacoma
Total
1972
78,000
160,000
100,000
338,000
1973
98,000
147,000
96,000
341,000
19 7 4a
77,000
129,000
87,000
293,000
1975
86,000
105,000
72,000
263,000
1976
83,000
102,000
83,000
268,000
Note:
a. Copper smelters were shut
down by strikes
of about five
weeks in
1974.
Source: Asarco, Inc., 1976 Form 10-K filed with the Securities and
Exchange Commission, p. A5.
11-30
Arthur D Little, Inc
-------
Asarco's copper refineries are located in Amarillo, Texas, and Tacoma,
Washington. The refineries process substantially all of the output of
Asarco's copper smelters. They also refine blister copper and copper
crystals from other smelters on a toll basis and recycle copper scrap.
Table 11-17 shows production data with respect to Asarco's copper
refineries for the five-year period 1972-1976.
During 1976, Tacoma and Amarillo refineries operated at approximately
58% and 68%, respectively, of effective capacity.
Of the 354,000 short tons of refined copper produced by Asarco's
refineries during 1976, approximately 26% was attributable to
materials produced by Asarco's mines and Asarco's share of the
materials produced by nonconsolidated associated companies and under
joint ventures, 34% to purchased materials, and 40% was treated for
others on a toll basis. Refined copper is sold by Asarco in the form
of cathodes, wirebars, cakes, billets, ingot bars and continuous-
cast copper rod for use in electrical, transportation, construction,
electroplating and other applications.
Asarco completed construction in 1976 of the copper refinery at
Amarillo, Texas. All elements of the $196 million plant have now
been activated with a minimum of start-up problems. Amarillo has
a designed capcity of 420,000 short•tons of refined copper per year
and is being operated currently at a rate of 265,000 short tons of
copper per year. The Amarillo refinery replaces the Company's
obsolescent East Coast refineries at Baltimore and Perth Amboy.
Asarco anticipates that sufficient blister copper will be available
from its own smelters and from other sources for effective utilization
of the Amarillo refinery.
4. Pollution Control Expenditures1
Capital expenditures reported by Asarco in order to comply with
pollution control standards in the past five years have been as
follows: 1972: $21.7 million; 1973: $23.9 million; 1974: $19.9
million; 1975: $22.0 million; 1976: $31.9 million. Major projects
have included sulfuric acid plants at Asarco's Hayden and El Paso
copper smelters and a liquid sulfur dioxide plant at the Tacoma copper
smelter. Of these capital costs, $24 million were recouped from
outside shippers under a surcharge formerly in effect. In addition
to capital expenditures, pollution control operating and maintenance
costs amounted to approximately $11.7 million, $14.7 million, $16.5
million, $21.0 million, and $31.9 million, respectively, in the years
1972 through 1976. Since January 1, 1976, the operating expenses
included in environmental costs are net after sales revenue of sulfur
dioxide and sulfuric acid.
^For a more complete discussion refer to Asarco, Inc., 1976 Form ]0-K
filed with the Securities and Exhange Commission, pp. A17-A18.
11-31
Arthur D Little. Inc
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TABLE 11-17
Years
1972
1973
1974a
1975
1976
Amarillo
PRODUCTION AT ASARCO'S COPPER REFINERIES, 197 2-1976
Refined Copper Produced—(Short Tons)
30,000
253,000
Bait imore
211,000
138,000
111,000
42,000c
Perth Amboy
154,000
155,000
128,000
117,000
14,000d
Tacoma
120,000
120,000
117,000
120,000
87,000
Total
485,000
413,000
356,000
309,000
354,000
i
ho
Notes: a. Copper refineries were shut down by strikes of about five weeks in 1974.
b. Production commenced September 1975.
c. Terminated copper refining operations June 1975.
d. Terminated copper refining operations March 1976.
Source: Asarco, Inc., 1976 Form 10-K filed with the Securities and Exchange Commission, p. A6.
>
-i
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c
-t
O
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3
n
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Asarco estimates that further known future capital expenditures to
comply with pollution control standards over the next few years totals
about $94 million (as of year-end 1976), and may affect many of
Asarco's facilities. Major projects, which were begun in 1975, include
a four-year program at the El Paso plant to reduce dust and fugitive
emissions and treat waste gases and a three-year program at the East
Helena plant to treat waste gases. Estimated future expenditures for
the El Paso and East Helena projects totaled $67.6 million and
$14.4 million, respectively, as of December 31, 1976. In addition,
a $7 million program to reduce further the amounts of arsenic-bearing
particulate matter emitted and to provide better control of low-level
sulfur dioxide emissions at the Tacoma plant was started in 1976.
A two-year project to construct a new acid plant at Corpus Christi
has recently been completed at a cost of approximately $15.4 million.
On February 19, 1976, the Puget Sound Air Pollution Control Agency
(PSAPCA) granted a variance from certain local air pollution regu-
lations to Asarco's Tacoma, Washington, smelting and refining facility.
The terms provide for a variance from specific air regulations
pertaining to particulate matter, arsenic and sulfur dioxide for
periods ranging from two (2) years to five (5) years. Asarco's
variance applications proposed a program, estimated to cost $7 million,
directed toward further control of particulate and arsenic emissions,
and fugitive emissions of sulfur dioxide.
5. Pollution Control Costs and Financing Limitations
Table 11-18 indicates that for the period 1971-1976 inclusive, Asarco
spent over $100 million, or an average of $18 million/year on pollution
control equipment (excluding O&M costs). In the past two years this
represented about 22% of total capital spending.
The associated O&M cost penalty was estimated by Asarco to have increased
from $8 million in 1971 to $32 million in 1976, when it represented about
4% of primary metals sales. This seems to us to be a very significant
burden (even allowing for some overestimation on Asarco's part) when
it is noted that Asarco's 1971-1976 pre-tax, pre-pollution control
margin on primary metals averaged 6.8%.
Asarco's total debt has increased sharply over the last five years, and
its pollution control debt has taken a sharp jump recently. Asarco's
debt/equity ratio has been increasing steadily since 1971, when it was
5.4% and stood recently at 32%. It reported a ratio of earnings to
fixed charges of 3.7 on the parent company consolidated basis, and 2.9
to a total enterprise basis, for 1975; these ratios were 0.8 and 1.0,
respectively, as of March 31, 1976.
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Arthur D Little, Inc
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TABLE 11-18
ASARCO'S REPORTED POLLUTION CONTROL (P.C.) COSTS
(in millions of current dollars)
1976 1975 1974 1973 1972 1971
Capital Expenditures
Total Property 76.0 167.5 137.7 96.7 66.7 37.4
Pollution Control 31.9 22.0 19.9 23.9 21.7 6.7
Percent of Pollution Control 42.0% 13.0% 14.0% 25.0% 33.0% 18.0%
Operating Costs
Pollution Control O&M Cost
Penalty 31.9 21.0 16.5 14.7 11.7 7.6
Pollution Control Cost as
Percent of Primary
Metals Sales 3.9% 3.0% 1.5% 1.7% 1.8% 1.5%
Total Pollution Control Costs 63.8 43.0 36.4 38.6 33.4 14.3
Source: Based on Asarco, Inc., Financial Statements.
11-34
Arthur D Little. Inc
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We think it is interesting and important to note that the sum of
pollution control costs, over the period 1971-1976, amounts to 64%
of Asarco's net increase in long-term debt obligations of $362 million.
Of this total, at least $82 million was specifically designated for
pollution control financing as of December 31, 1976. If one assumed
all pollution control costs were financed by long-term credit
obligations, normal debt service alone would be more than $20
million/year.
In this connection, it is pertinent to note the restrictions on
additional financing that may obtain, especially when contemplating,
say, a $40-90 million total control package option for Tacoma:
Under 1971-1975 "average" conditions, Asarco could receive about $80
million in cash flow from its worldwide operations, from which it would
be expected to pay $30 million or more in dividends to stockholders,
and debt maturities. The balance is considerably less than Asarco's
recent capital expenditure program, which averaged nearly $100 million
per year. Thus, it must look to additional earnings, debt, and equity
financing, to make total cash outlays of greater than $50 million per
year. There are obviously limits on all counts: on earnings, the
limit is the extent to which earnings in the near term will be above
average; on equity financing, Asarco's stock at $18/share is
substantially below its stated book value of about $31, thus involving
substantial dilution of equity in sale at current market prices. A
recent proposal for equity financing from its Australian affiliate has
apparently been shelved.
On additional debt, Asarco is under restrictive covenants associated
with its $70 million of 7-7/8% notes due in 1994—held by three major
insurance companies. These require that Asarco meet certain fixed
charge and working capital coverage ratios, and limit debt to 82% of
stockholders' equity less equity in assets of foreign ventures.
Indications are that, as of late 1976, Asarco would require additional
equity before additional long-term financing would be feasible. Using
1976 year-end equity figures, the indications are that Asarco, with
$400 million in long-term debt, was at or very close to its debt limit
under the indenture restrictions.
Under the most ambitious options for Tacoma, Asarco would have to
allocate only $10-20 million per year (in constant 1978 dollars) for
incremental capital expenditures over the next five or six years. It
is not clear that this amount could be accomodated now under "average"
business conditions, unless other Asarco capital outlays were
reduced and/or deferred. Even then, this does not mean that such
expenditures would be economically attractive, since it may fail to
meet Asarco's risk-return criteria.
11-35
Arthur D Little. Inc
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6. Asarco's Cost of Capital
Asarco realized long-term return on equity for the period 1965-1976
inclusive of 12-13% in current dollars. For the most recent five
year period, 1972-1976, the return was only about 9-1/2%. If the
recession year, 1975, is eliminated, Asarco's return for the latter
period becomes 11% on average. When one adjusts this return for
inflation, the result is an ex post real rate of return of only 5%.
Today, high grade bonds are available which yield 7-9% pre-tax, and
high grade preferred stocks are available which yield about 7.5%
after tax. Since the nonferrous metals business is highly cyclical
and erratic, Asarco would be expected to earn more on its equity than
on these relatively risk-free investments.
We believe Asarco's management, like that of other metals/mining
companies, traditionally used an ex ante equity rate of return
criterion or hurdle rate of 12-15% for evaluating investments
of average risk in the business and economic environment of the
1960's with inflation of 3% or less. This implies a hurdle rate of
9-12% in constant dollar terms. With 5% expected inflation, we
would expect Asarco management and stockholders to think in terms of
a hurdle rate greater than the return allowed for regulated electric
utilities (i.e., 12-3/4-16% return on equity1, in current dollar
terms). This suggests to us a minimum Asarco hurdle rate of 10% in
constant dollars which would apply to investments of normal business
risk to Asarco.
1 See, for example, Blyth Eastman Dillon & Company, Incorporated,
Investment Research "Electric Utilities Market Service", Volume V,
Number 2, April 1977; and Testimony of Mr. Eugene Meyer of Kidder
Peabody & Company, Docket 761-8, New Jersey Board of Public Utility
Commissioners, 1976.
11-36
Arthur D Little. Ini
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III. BACKGROUND INFORMATION RELEVANT TO AN IMPACT
ANALYSIS OF ASARCO'S TACOMA SMELTER
A. INTRODUCTION
This Chapter presents background Information relevant to the analysis of
increased pollution control costs at the Tacoma smelter. This information
is organized as follows:
Section B describes briefly the production and pollution control
technology in use at the Tacoma smelter. This section is aimed
at readers who are unfamiliar with the technological aspects of
copper smelting.
Section C describes the historical raw material supply situation.
Section D presents a discussion of the nature of custom and toll
smelting contracts and how the accounting system at Tacoma re-
flects these characteristics.
Section E describes the interrelationships between Tacoma and
other Asarco plants.
B. PLANT DESCRIPTION OF THE TACOMA SMELTER AND REFINERY
For completeness, this report presents only a brief description of the
Tacoma smelter and refinery. Any reader interested in detail should refer
to other reports on this plant (e.g., Pacific Environmental Services (1976),1
or PEDCo (1976))
1. Process Flowsheet
The smelter section of the plant consists of the coarse ore and concentrate
handling and crushing equipment, ten multiple-hearth (Herreshoff) roasters,
two reverberatory furnaces, four converters, and three anode furnaces.
Arsenic processing equipment consists of six Godfrey roasters (four usable),
arsenic trioxide settling kitchens, arsenic trioxide storage, and a metallic
arsenic plant.
The plant flowsheet is shown in Figure III-l. Concentrates and other feed
materials are fed to the multiple-hearth (Herreshoff) roasters. The hot
Pacific Environmental Services, (February 1976), "Design and Operating
Parameters for Emission Control Studies: Asarco-Tacoma Smelter," EPA
600/2-76-036k.
PEDCo-Environmental, (September 1976), "Evaluation of Sulfur Dioxide and
Arsenic Control Techniques for the Asarco-Tacoma Smelter," EPA 68-02-1321,
Task Order No. 35.
III-l
Arthur D Little, Inc
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Ship
Copper ^hapes
Casting FurAJCe«
(2)
Cathodes
Ref inerv
(1 bldgs).
Anode Casting
Anode Furnace
t
Electrc-
lvte
f I rt rs
^ M -i »
.rv
"unl
v - "Off* '»h1
Ore and Concen-
trate Crushing
and Hand 11ng
»/3 rye 1 ones
82.000 SCFM
Ca 1 r1nes
Arsen f c
Charge Bin
Codfrey
Roasters
(6)
Dust
Baghouses
(4)
Baghouse
Sl1iceous
Ores
Crushed Ore
And Concentrates
He rrcshoff
Roa<; I ers
(10)
Hot Calcines
Arsenic
Sett 1lng
Kitchens
Conveyor
Svsten
30,000-70,000
SCFM
400°F-'>00OF
1.57. S0„
40,000 - 100.000 SCFM
2500°F
Reverberators
Furnaces
(2)
L
Heat
Boi1 or s
700
800°
M
Anodr Slag
,S 1 ag to
Dump
Conv«> rf ers
(4)
(3 operating)
Mull i
Cvc1 ones
17
a.2°,
Storage
As Ship
A'2°3
Reduction
Plant
13050 SCFM
150°F
1900 -19000
•*- SCFM
1 00° F
Dust
n
Precipitators
(Plate and Pi pe)
2"v. c
0.6ISQJ
273,000 99.000
SCFM r \ SCFM
A.2°3
Ship
#2
Precipitator
(Plate)
Sprav ESP ^.Scrubbers
Chamber
Spray
Chamber
(2)
M 'list
>ttrell
2 3000
J SCFM
Acid
Plant
200 TPD
52SO-, Design
.h2so4
Ship
Lead Dust Ship or Arsenic
Proc sstng
ESP
Pec*c3e
P1 ant
Ml sn
"•"h t p"*
0- bore
Ac i «J| Plant
Dore
Ship
Ni ter^ Sfleniun
6 I ag . Plant
t
bodlun
S e 1 e n it
Ship
0 to 100.000
scrM
? 500°F
\ent to Precipitatois
During Convert Knllout
Scrubbers
5"
n
Source: Pacific Environmental Services, EPA-600/2-76-036K
FIGURE III-l
TAC0MA SMELTER PROCESS FLOWSHEET
-------
calcines from the multiple hearth roasters are taken to one of two rever-
beratory furnaces (only one reverb is normally in use) where they are
smelted to a matte containing 35-45% copper. Slag from the furnace is sent
to the dump. The matte is tapped into ladles which are carried by crane
to the converters.
The converters produce copper which is transferred by ladles to the anode
furnace where some minor impurities are removed by fire refining and the
molten metal is cast into anodes.
The refinery section consists of two casting furnaces, an electrolytic
refinery, a nickel sulfate plant and recovery facilities to reclaim dor£
(a gold, silver bullion), and a selenium-tellurium containing slag.
The anodes are refined in the electrolytic refinery into cathodes. The
cathodes from the refinery are either shipped as such or melted in a
cathode furnace, cast, and shipped as standard copper shapes. As a part
of the electrolyte purification circuit, nickel sulfate is produced.
Refinery slimes are sent to the dor£ plant which produces dord for ship-
ment and niter slag which is also shipped.
Flue dusts from roasters and reverb containing arsenic are fed to the
Godfrey roasters. The arsenic trioxide volatilizes and is passed through
arsenic settling kitchens (of which there are three), where the arsenic
trioxide is condensed. The arsenic trioxide is in two grades: raw (95%
pure) or refined (99% pure). AS2O3 is shipped or is further processed in
a reduction plant and shipped as arsenic metal. The calcine residues from
the Godfrey roasters are recycled to the charge preparation area.
2. Existing Pollution Control Equipment
The plant already has some particulate control facilities. As a part of
its application for a variance, Asarco has agreed to revamp the particulate
control system to increase capture of particulates.
The converter gases are treated in either a liquid S02 plant or a sulfuric
acid plant for the control of SO2 emissions. Converter gases pass through
a multicyclone before going to individual gas cleaning circuits for the
liquid S02 and acid plants. The gas cleaning circuit consists of spray
chambers, precipitators, scrubbers, and mist precipitators. The tail
gases from the liquid SO2 and acid plants go to the stack. The converter
gases can also be bypassed from the precipitator directly to the stack.
The particulates recovered from the converter gas stream are shipped to
a lead smelter (the East Helena lead smelter of Asarco).
The single contact acid plant handles an average of 23,000 SCFM of gas and
produces nominally 153 tons/day of acid. Acid storage capacity is 2,500
tons .
The liquid SO2 plant processes up to 45,000 SCFM of converter gases. It
was built for a design capacity of 200 TPD. The gas stream being weaker
than that assumed for design, the operating rate is about 150 TPD. The
III-3
Arthur D Little, lnc
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gaseous SO2 is absorbed in dimethyaniline (DMA) and then regenerated by
steam stripping, as pure S02. The S02 is liquefied by compression and is
then stored under pressure. The DMA concentration plant contains 20,000
gallons of DMA which is passed between the pregnant tank and the strip
tank. When there is no SO2 being generated by the converters, the system
operation can be cut back so that very little DMA is processed.
A plan view of the flues between the roasters, reverberatory furnaces,
converters, acid plant and liquid S02 plant and the stack is shown in
Figure III-2. Gases from the multiple-hearth roasters pass into the
roaster building flue, then to the roaster chamber or settling flue and
then to the junction of the reverberatory furnace flue. Gases from the
reverberatory furnaces pass through waste heat boilers, then to the re-
verberatory furnace flue. The No. 1 brick flue takes most of the gases
from the roaster building and the No. 2 brick flue most of the gases from
the reverberatory furnaces. A cross-over link is installed to allow sys-
tem pressure balance. The draft is obtained from the 563 foot high main
stack and is 2" WC at the base. The gases from the converter hoods are
drawn by two hot gas fans and allowed to pass either to the liquid S02
plant, the sulfuric acid plant or the stack. An additional line from the
acid plant to the brick flue provides S03 from the acid plant to condition
the gases for the final precipitator treatment before the stack. The acid
plant and S02 plant tailgases are vented to the main stack downstream of
the precipitators.
3. Current SO? Emission Control
The current nominal design level of sulfur recovery at Tacoma is a nominal
51%; on a consistent basis the plant achieves about 45-48% control, mainly
because the gas streams are more dilute than originally assumed when the
sulfur dioxide recovery system was designed. The plant practices supple-
mentary control, i.e., when atmospheric dispersion is poor and ambient air
SQ2 concentrations approach the standard, smelting is discontinued or re-
duced until meteorological conditions improve.
C. HISTORICAL RAW MATERIALS SUPPLY
Tacoma is a custom smelter and receives feed materials from many sources.
The feed mix to Tacoma consists of concentrates, lead plant byproducts
(i.e., matte and speiss), precipitates and scrap.
Table III-l shows average feed compositions into Tacoma for the past
several years. The overall composition of the smelter charge has not
varied significantly for many years. Tacoma is one of the few processors
of impure concentrates in the world and the only such processor in the
U. S. who produces byproduct As203. Two of the concentrate sources for
Tacoma—Lepanto and Northern Peru—provide high-impurity concentrates which
are unacceptable in any reasonable amount to other smelters for metallur-
gical reasons. The same is true of lead plant byproducts (though they
constitute a smaller stream in comparison). The low-impurity concentrates
are acceptable to other smelters and the shipment of such concentrates to
Tacoma is a matter of competitive smelting and refining charges and the
III-4
Arthur D Little Inc
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Ouilri Sampling Fort
01 Cot t rel I
230 F
Inlet Sampling Port
700-800 F
Ilea t Bo i 1 e r s
J MI) .
1<> liquid ^ _ ' S}
( |»l.tin WO"! | rii.imlu r j
FLUE DIMENSIONS
Flue
No. I Brick Flue
(A-H)
No. 2 Brick Flue
(C-D)
Junction Tower (E)
Reverb Flue
(G-H)
Roaster Building Flue
U-J)
450*
550'
26'
165-10"
2U*
24 *
43'-4
20 * -6
12'
Note. Roasters 1-6 10,000 SCFM/Roaster
Roaster 7-10 15,000 SCFM/Roaster
x Denotes Water Sprays
11.>t i. f.n
Source: Pacific Environmental Services, EPA-600/2-76-036K.
FIGURE III-2
GAS SYSTEM DUCTWORK AT TACOMA
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TABLE III-l
MATERIALS FLOW TO SMELTER
(Percent)
SMELTER
ASARCO, TACOMA
Approximate
Annual Tonnage
(1971 1973)
Cu
Fe
S
As
Sb
Pb
Zn
Bi
Se
Te
Sn
Ni
CONCENTRATES
273,603
26.2
23.6
35.2
4.2
/12.8\
I Maxj
0.36
/1.85\
I Max)
0.67
/7.6\
I Maxi
(E)
0.05
yb.83\
^Max J
0.01
/0.03\
I Maxy
0.02
/0.08\
U/lax J
0.03
/o.e\
I Ma xf
LEAD PLANT BY-PRODUCTS
Matte
Speiss (1)
Speiss (2)
6,039
11,144
30
41.76
59.84
59.16
5.06
0.58
0.80
16.57
0.68
0.30
1.19
17.25
11.47
0.50
8.83
6.70
9.15
8.70
10.20
2.67
0.10
0.14
-
0.082
0.007
0.027
0.061
0.008
0.048
0.04
0.70
3.80
PRECIPITATES
3,995 (C)
74.8
6.8
0.84
0.37
0.23
0.095
0.09
0.008
HIGH GRADE SCRAP
(PURCHASED)
10,308 (C)
96.0
0.2
LOW GRADE SCRAP
(PURCHASED)
1,079 (C)
71.0
2.35
INHOUSE REVERTS
91,135
20.6
6.5
5.2
21.4
1.9
5.2
2.2
0.12
AVERAGE SMELTER
CHARGE
24.79
21.11
31.31
5.2
0.82
1.03
1.56
-
-
-
-
R — Revertos
C — Converters
Ro — Roasters
Source: Arthur D. Little, Inc., (October 1974) , "The Economic Impact of New Source Performance
Standards on the Copper Industry: An Assessment", Report to EPA.
-------
availability of such services at Tacoma vs. other smelters. From Tacoma's
viewpoint, some clean concentrates are a necessary component of the
smelter charge to act as a diluent.
The various raw material inputs into Tacoma can be classified in several
different ways:
o Sulfide-bearing materials (i.e., concentrates and lead plant by-
products) vs. non-sulfide-bearing materials (i.e., precipitates
and scrap).
• Low-impurity vs. high-impurity concentrates: The former can be
treated at any smelter and Tacoma has to compete internationally
for such concentrates, but Tacoma needs these to act as a diluent.
On the other hand, Tacoma and the high-impurity concentrates are
mutually interdependent since such concentrates cannot be smelted
at other smelters in any reasonable amount.
• Imported materials vs. U. S. domestic materials: The major sources
of imported materials are Northern Peru and Lepanto—located on
Luzon in the Philippines. The bulk of the domestically mined
materials come from the U. S. Southwest and a major fraction of
this material (50-80% depending on the year) comes from the
mines of Duval.
0 Material from Asarco plants vs. other material: Northern Peru
(100% owned by Asarco) and lead plant byproducts from East Helena
lead smelter are Asarco-owned inputs. All others are not Asarco
material. It should be noted that Asarco does not rely on Tacoma
for smelting any significant portion of its domestic mine production.
• Material purchased on contract1 vs. spot purchases or interplant
transfers: The concentrates from Duval, Northern Peru and Lepanto
fall into the former category. Tacoma will also process batches
of "spot" concentrates (i.e., those purchased on a one-time basis)
or other concentrates exchanged with or shipped from Arizona
smelters when concentrate receipts in Arizona exceed smelting
capacity.
D. THE NATURE OF CUSTOM AND TOLL SMELTING CONTRACTS; ITS 'INFLUENCE
ON ASARCO'S ACCOUNTING SYSTEM
1. Custom and Toll Contracts
The terms "custom" and "toll" are used to describe the smelting (and
usually refining) of concentrates produced by one firm at a smelter
Tacoma's concentrate supply contracts have a contractual period of 3 years
or less. The Japanese smelters have typically signed longer-term contracts
with periods of 6 to 12 years.
III-7
Arthur D Little, Inc
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and refining of another firm.- In custom smelting, the concentrates are
sold by the mining firm to the smelting and refining firm. In toll
smelting, the smelting and refining firm provides these services to the
mining firm and returns the recovered metals.
The transactions between a mining firm and a custom (or toll) smelter and
refinery are covered by a contract called a "smelter schedule." Appendix
A presents a typical example of such a schedule. Such schedules apply
to concentrate deliveries not only to Asarco's smelters, but also
Japanese and European smelters. Important features are as follows:
e In toll processing, the metal is returned after 90 days. In custom
processing, concentrates are paid for based on prices prevailing
90 days after receipt of concentrates. As discussed below, this
feature applies to Tacoma.
o In both custom and toll processing, the smelting and refining
charge is quite insensitive to the price of copper. Because of
this structure of the contracts, a toll smelter and refinery has
revenues that are independent of the metal price. The same is
true for custom processing as long as the metal is sold at the
same time that the concentrates are paid for. These revenues,
which reflect smelting and refining services, are referred to as
"gross margin." As a result of this, any change in copper wirebar
price directly affects the value of concentrate. The smelter and
refining margin remains unchanged.
• When precious metals (gold and silver) are present in significant
amounts, they are paid for or returned in a fashion identical to
that described above for copper. Impurities such as arsenic,
antimony, bismuth, lead, nickel, selenium and tellurium are
penalized if present in significant quantities because their
presence can cause metallurgical problems and can require
additional processing.
e The contracts contain escalation clauses for changes in energy
and labor rates. Thus, any cost increase resulting from changes
in these rates can be passed on. Any cost increase resulting
from increases in fuel use or from a productivity loss cannot
be passed on.
This structure for smelting and refining charges evolved historically
because a smelter operates efficiently (i.e., at minimum average total
cost) at a little below rated capacity. Because of process bottlenecks,
production above this point cannot be sustained for long without using
large quantities of other factors of production, e.g., labor, maintenance
materials, etc. On the other hand, the heat losses from any furnace are
constant and essentially independent of output so that at low outputs,
average energy costs at a smelter can increase dramatically. Given these
constraints, smelters have been operated as service (low-risk) operations
with a high rate of capacity utilization. Any benefits or disbenefits
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from fluctuations in metal prices have been reflected back to the mines
who typically have more degrees of freedom for adjusting to changing
market conditions.
2. Tacoma's Contracts
Three notable arrangements at Tacoma are those concerning: (1) Lepanto
Consolidated Mining Company of the Philippines, which sends high-arsenic
copper concentrate to Tacoma for smelting and refining (see Appendix D);
(2) Northern Peru Mining (a wholly-owned Asarco company), which sends
similar material via the Peruvian Government Marketing Agreement (see
Appendix F); and (3) Duval Corporation (a subsidiary of Pennzoil Corporation)
(see Appendix G), which is Asarco's single largest copper concentrate cus-
tomer and provides clean concentrate. These three firms now account for
about 65% of Tacoma's sulfur-bearing smelter feed.
We do not have in our possession copies of the contracts with these com-
panies nor are we familiar with the exact contractual terms in force. All
available information from diverse sources indicates that Tacoma's con-
tracts with these three sources follow the features shown in Appendix A—
features which are followed all over the world in contracts for copper
concentrates. This evidence includes the nature of Asarco's accounting
system, and the testimony of Simon D. Strauss, Executive Vice President
of Asarco, Inc.1
Based on available information and professional judgement, we estimate
Tacoma's smelting and refining charges for 1978 to be 22.7c/lb copper.
We understand that the Lepanto and Northern Peru arrangements involve
International Metals Company, a consolidated subsidiary, that is, Asarco
purchases concentrates from these mines. In the case of Duval, concentrates
from Duval's Battle Mountain mine are smelted and refined mainly at Tacoma,
and additional material from the Sierrita mine and other Duval properties
is also treated at Tacoma. Asarco, depending on the arrangements in force,
may or may not have an ownership interest in all of these concentrates.
For example, in 1976, approximately 52% of Duval's total copper production
was toll smelted by Asarco and 25% was purchased by Asarco.
The Lepanto contract signed in late 19763 is a three year contract renew-
able on option. The contract reportedly contains ceilings on smelter
charges or on escalations based on world copper prices (LME prices) at any
time.
Simon D. Strauss, Testimony before OSHA re: Proposed Standard for
Occupational Exposure to Inorganic Arsenic, September 9, 1976, p.
488 of Hearing Record Transcript.
2
Pennzoil Company, 1976, Form-IOK, p. 15.
^Metals Week (September 20, 19 76), p. 3.
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3. Tacoma's Accounting System
a. General Features
Asarco-New York, i.e., the parent company, treats Tacoma as a profit
center for accounting purposes. This encompasses all of Tacoma's opera-
tions including smelting and refining services and byproduct sales.
Asarco's accounting system for Tacoma reflects all the characteristics of
a toll smelter and refinery. The title to the major metals (copper, lead,
zinc, gold and silver) is retained by the mine under a toll contract or
by Asarco-New York for a custom contract. (All contracts are handled out
of New York.) The gross revenues for the plant are smelting and refining
charges adjusted for metal loss/gain during processing plus revenues from
sales of byproducts such as arsenic trioxide, nickel sulfate, sulfuric
acid, etc. Title to the byproducts rests with Tacoma.
While Tacoma's accounting system appears to treat byproducts as separate
cost and profit centers, the costs of byproduct production are not fully
allocated costs, and the smelting and refining operations bear the costs
of separating impurities and byproducts. Copper thus bears the cost of
removing arsenic until the arsenic-containing dusts are delivered from the
arsenic collection system. The byproduct account starts at this stage
and the costs of further treatment and marketing are borne by this account.
Similarly, the precious metal account starts at the dor£ furnace, i.e.,
downstream of smelting and refining, and the nickel sulfate account starts
after electrolyte purification. Also, costs are recorded as incurred and
"profits" (sales of byproducts) are also recorded as incurred. Thus, the
accounting system will show a loss when the byproduct is put into inventory
or a large profit when extra material is sold out of inventory.
Tacoma returns the copper after 90 days, either to the mine under a toll
contract or to Asarco-New York under a custom contract. The actual time
for the metal in process is within + 10 days of this amount. The impact
of this difference, therefore, is relatively minor. On custom contracts
there are some risks and benefits that accrue to Asarco-New York after 90
days .
The mines are paid 90 days after receipt of concentrates at prices pre-
vailing at the time of payment. If Asarco is unable to sell this metal
at the time of payment to the mines, Asarco-New York has to carry the
metal in inventory. If at a later time this metal is sold at a higher
price, a profit is realized by New York. Similarly, if this accumulated
metal is sold at a lower price, a loss is realized by New York.1
Simon D. Strauss, Testimony before OSHA re: Proposed Standard for
Occupational Exposure to Inorganic Arsenic, September 9, 1976, p. 487
of Hearing Record Transcript.
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b. Book Value
Our impression is that the gross book value of plant and equipment at Tacoma
was approximately $46.7 million at December 31, 1975. Our understanding is
that the net plant and equipment (after accumulated depreciation and amor-
tization charges) at Tacoma was approximately $32 million at December 31, 1975.
c. Depreciation
Asarco uses the ADR Guidelines for equipment life allowed by the Internal
Revenue Service as the basis for depreciation for tax purposes. For non-
ferrous manufacturing operations, Asarco uses an 11-year life for acid plants,
refineries, and smelters, and 9 years for chemical plants. Double declining
balance (DDB) depreciation is taken for the first two years, and the Sum-Of-
The-Year's Digits method (SOYD) is used for the remaining life. Table III-2
illustrates how this would work.
d. Investment Tax Credit
Asarco takes the Investment Tax Credit all "up front" as capital expendi-
tures are made, i.e., at the presently allowable 10% of the amount of the
investments, rather than spreading it over the life of the assets.
e. Corporate Overhead Allocation
Tacoma derives benefits from the parent company's financing and services for
which it has been assessed an overhead allocation of about $2 million/year.
Asarco's policy has been to allocate general corporate administrative ex-
penses (including interest on debt, research and development) among lines
of business in proportion to the operating expenses attributable to such
lines. Tacoma's share is about 7% of the total amount so allocated.
f. Shutdown Reserves
At March 31, 1976, Asarco carried reserves of $32 million on its balance
sheet as liabilities to cover the anticipated losses to be incurred upon the
closing of the Baltimore and Perth Amboy copper refineries and the Amarillo
zinc plant. For Perth Amboy, some $10.5 million of the $20.5 million re-
serve was a current liability. We understand that the non-current portion
of reserves represents in large part the present value of severance pay and
additional pension benefits which must be paid when an actual plant shutdown
occurs, as provided under union contract clauses. Tacoma's plant and equip-
ment were carried on Asarco's books at about $32 million at year-end 1975.
In contrast,. Perth Amboy was carried at $7 million.
By comparison with Perth Amboy, we estimate that a Tacoma shutdown decision
would involve an "unusual item" charge in Asarco's financial statements of
approximately $40 million, pre-tax; which would become a reserve (less current
charges for severance pay, plant write-off, etc.) to be drawn down over some
20 years subsequent to any shutdown. Actual payments would flow through
Asarco's income statement year-by-year with a tax offset depending on the
effective tax rate.
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TABLE III-2
DEPRECIATION SCHEDULE
Depreciation Basis: DDB First Two Years - SOYD Remaining Life
(Figures below are in Percent of original cost)
11 years Life 9 years Life
Remainder
Year 1 18.18 81.82 22.22 77.78
60.49
45.37
3?. 41
21.60
12.96
6.48
2.16
0.00
Value
100.00
Remainder
100.00
1
18.18
81.82
22.22
2
14.88
66. 94
17. 28
3
13.39
53.55
15.12
4
11.90
41.65
12.96
5
10.41
31.24
10.80
6
8.93
22.31
8.64
7
7.44
14.88
6.48
8
5.95
8. 93
4.32
9
4.46
4.46
2.16
10
2.98
1.49
11
1.49
0.00
Source: Arthur D. Little, Inc., estimates.
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E. THE RELATIONSHIP BETWEEN TACOMA AND OTHER ASARCO PLANTS
Table III-3 shows the interplant flows between Tacoma and the other Asarco
plants; namely, the East Helena lead smelter and the Amarillo copper re-
finery.
East Helena's byproducts contain copper, arsenic, antimony, lead and silver.
The size of this stream is a function of the copper, arsenic and antimony
intake at East Helena. Tacoma separates arsenic and copper away from the
rest and returns a lead-rich converter fume to the lead smelter. The anode
slimes from the Tacoma copper refinery are treated at Tacoma to produce
dor£ (a mixture of gold and silver) and a slag containing selenium and
tellurium. These streams are then treated at the Amarillo refinery to
recover the metals.
Tacoma derives a margin (revenue) from treating the East Helena byproducts.
Similarly, the other plants derive a margin from treating Tacoma's output
streams. This margin, like the copper smelting and refining margin, is a
treatment charge. We believe that Asarco's margin on precious metals is
very small. This observation is based on many smelting contracts we have
seen in the past where, for example, 98% of the gold in a concentrate is
typically returned to the mine under a toll contract or is paid for under
a custom contract at the full market price at the time of the transaction.1'2
(A more detailed discussion of smelter schedules is presented in Appendix A.)
Similarly, we believe that the margin on selenium and tellurium is also
small and selenium and tellurium processing is not always profitable. This
observation is based on the fact that contracts for blister containing se-
lenium and tellurium typically contain a profit/loss sharing clause where
the shipper benefits from, or is penalized for the selenium and tellurium
content.
In the past, Tacoma treated about 20,000 tons/year of blister copper from
the Hayden smelter in the Tacoma refinery. After commissioning of the
Amarillo refinery, this blister is being treated at Amarillo. This appears
to be a logical, cost-minimizing strategy for the following reasons. In
electrolytic refining, labor costs are usually a larger component of total
costs than electricity costs. A large automated and modern plant like
Amarillo would have a much higher productivity than an older, smaller plant
like Tacoma. Thus, for the future, we expect the Tacoma refinery to treat
only the smelter output from Tacoma.
Asarco has constructed an antimony plant at El Paso which will treat copper-
silver-antimony-arsenic containing concentrates by a hydrometallurgical
process. This plant is expected to come on-stream in 1977. Once this
It should be noted that net margins from copper smelting and refining and
from precious metal treatment are usually not treated separately even for
accounting purposes.
Simon D. Strauss, op. cit., p. 473.
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TABLE III-3
INTERPLANT FLOWS TO AND FROM TACOMA
Item
Characteristics
Average Size
of the Stream
per Year
To Tacoma
E. Helena Matte and Speiss
52.8% Cu; 9.7% Pb
1.7 oz/ton Au; 236 oz/ton Ag
12,000 tons
From Tacoma
Nitre Slag to Amarillo
Dor£ to Amarillo
Converter Dust to E. Helena
contains Se and Te
1.1% Au; 97.2% Ag
0.2% Cu; 0.4% Pb; 1.3 oz/ton Ag
200 tons
11,000,000 oz
35,000 tons
Source: Arthur D. Little, Inc. estimates, based on Asarco data.
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plant is operating, East Helena will no longer smelt these concentrates.
This would decrease the size of the byproduct stream to Tacoma.
If Tacoma were to close, Asarco would lose revenues from smelting and
refining services and from byproduct sales. Table III-4 shows typical
byproduct production at Tacoma. We would expect the arsenic production
to decrease after the antimony plant is on-stream. We have used an esti-
mate of 10,000/year of As203 production in the base case for the impact
analysis. Other byproducts would remain the same except for sulfur deri-
vatives which would increase with different levels of incremental pollu-
tion control.
Lepanto and Northern Peru would have to close until an alternative outlet
such as the Philippine smelter became available. Duval and other producers
of clean concentrates would seek smelting and refining services from other
smelters in this country and abroad and/or consider alternatives such as
hydrometallurgical processing.
As far as the other Asarco plants are concerned, the major loss would be
in the ability to treat the East Helena matte and speiss. Asarco, with
the construction of the antimony plant at El Paso, has already taken the
first step to reduce the copper-silver-antimony-arsenic intake into East
Helena, and reduce the size of the recycle stream. This reduced stream
might be small enough to be blended with the feed at Hayden or El Paso
without any equipment changes. Under these conditions, the arsenic would
be enriched in the roaster and reverb dusts. A portion of this dust might
have to be bled from the system from time-to-time and stockpiled. If this
proves infeasible, the next step would be the construction of roasting
facilities at El Paso to handle these flue dusts. A Godfrey roaster (for
arsenic recovery) is a relatively small piece of equipment and the building
of such a roaster (plus the necessary particulate control facilities) at
El Paso could probably cost perhaps $5-10 million. However, we do not
know whether the regulatory environment would permit this type of con-
struction.
There is also evidence in the technical literature1 to suggest that East
Helena byproducts could be treated by a hydrometallurgical process very
similar to that employed in the antimony plant. The East Helena byproducts
contain metals valued at $23-25 million/year. Based on the discussion
above, we believe that the stockpiling of these byproducts in the event
of a Tacoma shutdown is a remote possibility.
Finally, a Tacoma shutdown will result in underutilization of Amarillo's
capacity for dor€ refining and selenium/tellurium recovery.
^"Gerlach and Pawlek, "Pressure Leaching of Speiss" in Unit Processes in
Hydrometallurgy, Gordon and Breach Science Publishers, (1963), pp. 308-325.
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TABLE III-4
TYPICAL BYPRODUCT PRODUCTION AT TACOMA
Crude Arsenic Trioxide 95% pure 7,000 tons
Refined Arsenic Trioxide 99% pure 4,000 tons
Metallic Arsenic 200 tons
NiSO^ 26.2% Ni 900 tons
H2SO4 93% acid 50,000
Liquid S02 35,000
Source: Arthur D. Little, Inc. estimates, based on Asarco data.
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IV. BASELINE CONDITIONS
A. INTRODUCTION
The baseline conditions represent expected operations at Tacoraa in 1978
and beyond in the absence of incremental expenditures for additional
S02 control or for proposed OSHA standards for inorganic arsenic.
These baseline conditions provide a point of reference from which
comparisons can be made. The baseline conditions are here defined,
as a minimum, to include the following points: (a) Basic microeconomic
characteristics of the market in which Asarco-Tacoma operates,
(b) outlook for smelter capacity and forecasts of copper prices,
(c) Tacoma's production capacity and raw materials supply for 1978
and beyond, and (d) production costs and revenues (including byproduct
revenues) at Tacoma.
Section E of Chapter V summarizes how the various aspects of the base-
line conditions presented here are used in the impact analysis.
B. BASIC MICROECONOMIC CHARACTERISTICS OF THE MARKET IN WHICH
ASARCO-TACOMA OPERATES
For the purposes of our analysis, the relevant market in which Asarco-
Tacoma operates is defined as the exchange or sale of a service, namely
smelting and refining, where on the seller side we have Asarco-Tacoma
and on the buyer's side we have, principally, producers of low impurity
of "clean" concentrates (i.e., Duval and others), producers of high
impurity or "dirty" concentrates (i.e., Lepanto, Northern Peru, East
Helena matte and speiss) and suppliers of scrap and precipitates.
On the sellers' (or supply) side, Tacoma's basic potential competition
consists of the Japanese smelters and the new Philippines smelter
expected to come onstream at the beginning of 1981, under the general
"state of the world" assumption of a domestic smelter capacity constraint
over the next five to seven years. On the buyer's side, most of the
principal suppliers mentioned are quite dependent on Tacoma, at least
in the short-run, as a minimum for technical reasons (i.e., the high
impurity content). If microeconomic theory is generally to be used
as a conceptual guide, such a market can be characterized as one having
certain key features of bilateral oligopoly.
The concept of bilateral oligopoly would suggest that both sides
(i.e., Tacoma and its customers) exercise considerable market power.
A closer analysis indicates, however, that while such a perception
may be largely correct as a first approximation, it tends to overstate
the market power actually enjoyed by Asarco-Tacoma or by its various
suppliers. Asarco-Tacoma, would, theoretically, be able to exercise
market power over particularly the 1978-1980 period. However, as
discussed below in some detail, Tacoma's market power is not only
IV-1
Arthur D Little, Inc
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limited even in the short-run but is also highly dependent on copper
prices. This means it would be risky for Tacoma to try and take
advantage of its perceived market power, by following a discriminatory
monopolistic pricing strategy based on an expected or ex ante copper
price level over which it has no control. Should the expected copper
price level prompting such action not in fact materialize, the smelter,
having charged the mines to the limit, may end up facing a disastrous
situation if the mines decide, for example, to shut down, not being
able to recover even their variable costs. This may explain, in
part, why Tacoma and other smelters have historically been reluctant
to exercise their presumed market power, in the sense just described.
Nevertheless, the microeconomic discussion presented below explores
the theoretical "decision space" available to the various participants,
over the short-run as well in the longer-run, and the constraints
influencing their decisions. This serves to illustrate the degree
of interdependence of the various participants in the relevant
market in which Asarco-Tacoma operates and provides the needed "market
structure" background used in our impact analysis.
1. Short-run Demand Conditions Facing Asarco-Tacoma
The demand functions facing Asarco-Tacoma in the short-run, as well as
in the long-run, are shown in Figures IV-1 and IV-2, in terms of
Tacoma's three major groups of customers (i.e., suppliers of "clean"
concentrates, "dirty" concentrates, and scrap and precipitates).
We will proceed to discuss the short-run and long-run demand conditions
under which Asarco-Tacoma is most likely to operate over the relevant
period. The short-run discussion will first consider conditions
under which domestic smelter capacity is constrained and available
excess capacity exists in Japan. We will then show how the demand
conditions facing Tacoma would differ, if at all, under conditions
of smelter capacity constraints both in the U. S. and Japan.
a. Suppliers of "Clean" Concentrates
(Principally Duval plus others; we will use Duval as a surrogate for
this group of Tacoma's customers): price elasticity of demand1 is zero
(i.e., e = 0, demand is perfectly inelastic), over the smelting/
refiningpprice range (at Tacoma) between zero and pi, with qi = 46,500
short tons/year of production of contained metal (Duval: 26,100 short
defined, for our purposes here, as "point elasticity of demand",
which measures the proportionate change in the quantity demanded
resulting from a proportionate change in price:
e = _
p q p
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Arthur D Little, Inc
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FIGURE IV-1
DEMAND FUNCTIONS FACING ASARCO-TACOMA IN THE SHORT-RUN
a,b
A. Short-run demand functions facing Tacoma under con-
ditions of domestic smelter capacity constraints and
available excess capacity in Japan.
(1) "clean" concentrates
(2) "dirty" concentrates
(3) scrap and precipitates
B. Short-run demand functions facing Tacoma under condi-
tions of domestic smelter capacity constraints and no
excess capacity in Japan.
P\
(1) "clean" concentrates
(2) "dirty" concentrates
(3) scrap and precipitates
Notes: a. These demand functions depict demand conditions expected to prevail in any typical year
over the period 1978-1981.
b. Discontinuities in demand functions shown by dotted lines Indicate potential mine closure
beyond a smelting/refining price level charged by Asarco-Tacoma, given prevailing copper
prices (see text).
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Arthur D I ittle I
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FIGURE IV-2
DEMAND FUNCTIONS FACING ASARCO-TACOMA IN THE LONG-RUN3'b
P
P,
D
(1) "clean" concentrates
(2) "dirty" concentrates
(3) scrap and precipitates
Notes: a. "The long-run" is defined here to refer basically to the post-1981 period; the new Philippines
smelter to come on-stream at the beginning of 1981.
b. Discontinuities in demand functions shown by dotted lines indicate potential mine closure
beyond a smelting/refining toll rate charged by Asarco—Tacoma, given prevailing copper
prices (see text).
-------
tons/year; others 20,400 short tons/year). At pi, the demand schedule
becomes discontinuous and perfectly elastic (ep = °°) , since at pi
Duval (i.e., "clean" concentrate suppliers) would be indifferent
between Tacoma and Japan and would shift to Japan at Tacoma prices
in excess of pi. Our estimate of pj is 27.5c/lb. (in 1978 prices),
which defines the estimated "trigger" point for Duval and other
Southwestern suppliers of clean concentrates, derived as follows:
T J
P + ci < p +C2 + d
where (c/lb; in 1978 prices):
T
p : smelting/refining charge at Tacoma (cents per pound of copper
content);
c^: weighted average transportation cost from Battle Mountain and
the Southwest (e.g., Sierrita) to Tacoma, estimated at
3.5c/lb;
C2: weighted average transportation cost to Japan from Battle Mountain
and the Southwest, estimated at about 5C/lb;
d : "distress payment" to Japanese smelters, for accommodating
foreign concentrates, estimated at about 4c/lb;
p"*: the average smelting/refining charge at Japanese smelters,
estimated at 22c/lb;
then,
PT + 3.5
-------
Depending on short-term opacity utilization and concentrate supply
situation, we would expect this incremental "distress" payment to
vary a great deal. We do not have in our possession contracts
governing such sales. We believe the normal smelter/refinery profit
on smelting and refining services is about 5% of margin or about
lc/lb. In comparison, an incremental "distress payment" of
4
-------
3.V0
c. : estimated average (unit) operating and maintenance costs
(i.e., average variable costs) at mine/mill i (i = 1, ..., m),
where operating and maintenance costs are defined to include
estimated required interest payments.
This inequality says that at a given copper price, Tacoma will charge
the mine as high as possible but just short of causing the mine to
shutdown (i.e., the mine is barely able to cover its variable costs,
including estimated required interest payments).
As discussed in Chapter III, Asarco has several potential alternatives
to treat the East Helena byproduct stream within its other plants.
(The size of this stream will also decrease after the antimony plant
in El Paso starts up in 1977.) For analytical convenience, we have
treated East Helena byproducts to be equivalent to the other impure
concentrates from Lepanto and Northern Peru. This note concerning
our analytical treatment of East Helena holds for all subsequent
discussions pertaining to East Helena given in this chapter or in
Chapter V.
c. Suppliers of Scrap and Precipitates
The demand function facing Tacoma on the part of the suppliers of scrap
and precipitates is perfectly elastic (e = ¦») at P3 = 22.7c/lb. This
is a clearcut instance where Tacoma is a^price-taker, not a price-setter,
as many other firms (e.g., secondary smelters) are able to provide the
needed services. (See Appendix K-) This means that if Tacoma raises
its smelting/refining charges for this group of its customers above about
23
-------
where the terms are as defined before, and
T , o
P . + c , > p + c.
it it ' t jt
where
p° : average smelting/refining charges at other smelters in
t
year t, in 1978 dollars, to which the mines could shift;
and,
c : transportation cost(s) from each mine to other smelters.
2. Long-run Demand Conditions
Long-run demand functions facing Tacoma from the three major groups
of suppliers are shown in Figure IV-2 and discussed below:
a. Suppliers of "Clean" Concentrates
The demand function is perfectly elastic at a given smelting/refining
cost (including transportation cost), pj, above which Duval (i.e.,
Tacoma's largest single supplier of "clean" concentrates) would decide
to build its own smelter. For a discussion of the economics of a new
smelter in the Southwest refer to Appendix H. Our estimate of the
smelting/refining cost at such a new smelter is 33-35
-------
Northern Peru and East Helena: With the potential (planned) availability
of a new ocean-front smelter in the Philippines as of the beginning of
1981, with enough extra capacity to accommodate both Northern Peru and
(in principle) East Helena, the maximum charge that Tacoma could exact
(in the case of Northern Peru) can be estimated from the following
inequality which defines Northern Peru's "trigger" point, effective
after 1980:
T P ,
P + c3 < p + ci+
where (c/lb; in 1978 prices):
T
p : smelting/refining charge at Tacoma;
C3 : transportation cost from Northern Peru (Quiruvilca Mine) to
Tacoma (estimated at 3c/lb) ;
p
p : smelting/refining charge at the new Philippines smelter
(estimated at 33.0c/lb);
c^ : transportation cost from Northern Peru (Quiruvilca Mine) to
the new ocean-front Philippines smelter (estimated as 3.0c/lb).
T P
Since C3 and c^ fall out (i.e., C3 = c^), we have p p (i.e.,
pT cannot exceed 33.0 ct
where the terms are as defined before and ct is the average variable
costs at Northern Peru (and East Helena), including required interest
payments. The sufficient, long-term, condition is given by the same
inequality, except that the c^vc on the right-hand side is replaced
by c£tc, which is the average total cost of Northern Peru (and East
Helena), including a "normal" rate of return on investment.
Lepanto: The Lepanto-Tacoma relationship presents a special case,
with certain complications, discussed in detail in the next chapter
(refer to Sections D and G). It should suffice to identify here only
the conditions under which Lepanto would continue supplying Tacoma
after 1980. The necessary, but not sufficient, condition for this
to happen is given by
T P
Pt + c5 < Pt + c6
where (c/lb; in 1978 prices):
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Arthur D Little, Inc
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p : smelting/refining charge at Tacoma;
c5 : transportation cost from Lepanto to Tacoma (estimated as
3.0c/lb);
p
p : smelting/refining charge at the new Philippines smelter
(estimated as 33.0c/lb);
C6 : transportation cost from Lepanto to the new Philippines smelter
(estimated as 1.0c/lb).
T
We can hence solve for p as follows:
pT + 3.0c/lb 33.Oc/lb + 1.0/lb
pT < 33.0 + 1.0 - 3.0
pT < 31.0^/lb
The sufficient condition would have two versions, weak and strong.
Weak version:
cu , T avc
Pt ~ ^Pt Ct
and/or
cu , P , v . avc
Pt " (Pt + c6) £ ct
where the terms are as defined before; c^vc refers to Lepanto's average
variable costs (defined to include required interest payments).
Strong version:
cu , T . . ^ ate
Pt - (P + c5> ^ ct
and/or
cu . P . ate
Pc - (P + cs) > ct
where
Si t c
ct is total unit costs (average total cost) at Lepanto, in year t,
for both the mining and milling stages of production (f.o.b. mill).
Average total cost equals the sum of average variable cost and average
fixed cost at each given level of production; over the entire range
of production, the average total cost (ATC) function of a firm
(industry) is typically described, for pedagogical purposes, as
U-shaped.
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c. Suppliers of Scrap and Precipitates
Their demand function for Tacoma's services is perfectly elastic, as
discussed before, at about 22.7c/lb. Hence, the earlier discussion
holds here.
3. Short-run and Long-run Market Conditions for Asarco-Tacoma:
Conclusions
We have earlier characterized the relevant market in which Asarco-Tacoma
operates, in quite general terms, as one having key features of bilateral
oligopoly. In such markets, both buyers and sellers are said, to possess
market power, such that there exists no unique equilibrium price-output
solution. In other words, the price-output solution in a market with
bilateral oligopoly (oligopoly-oligopsony) features is essentially
indeterminate. Gaming or bargaining is very quickly introduced into
the picture, with each bargain being possibly influenced by the
previous one.
In the present case, a few buyers (i.e., mines producing "clean"
concentrates, "dirty" concentrates, and suppliers of scrap and
precipitates) face at least two sellers, one of which is Asarco-Tacoma.
Although both sides would appear to possess market power, particularly
in the short-run, a clear examination of the possible options open to
the various participants indicates that Asarco-Tacoma can in fact
exercise quite limited market power. Beyond certain well-defined
price levels Tacoma may want to charge, the suppliers would find it
advantageous to seek alternative arrangements, if not immediately
certainly within a few years.
Our basic conclusions can be summarized as follows:
a. Short-run
In the short-run, at a Tacoma price in excess of 27.5c/lb, (in 1978
dollars), Duval and other Southwestern mines, presently supplying
"clean" concentrates to Tacoma (i.e., accounting for 46,500 short
tons/year of Tacoma's production of contained metal, representing
46.5% of its total output and 59.6% of its output from
sulfur-bearing materials), would in all likelihood switch to Japanese
smelters. This trigger point does take into account that the mines
involved would quite likely have to make a "distress payment" to
Japanese smelters to accept these concentrates. This represents the
first-line of defense that the "clean" concentrate mines would be
expected to exercise, in the short-run, against price increases at
Tacoma. Nevertheless, with domestic smelter capacity constraints,
Tacoma could "pass on" to this group of its customers a modest portion
of its cost increases in real terms (i.e., no more than a few
cents/lb).
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b. Long-run
Over the longer-run the switch to Japanese smelters would still be
triggered at a 27.5<:/lb price at Tacoma. In addition, at Tacoma
prices above roughly 31.5c/lb, Duval would find it attractive to build
a new smelter. Given the fact that Duval at present (1978 base
conditions) accounts for about 26% of Tacoma's total output and 33%
of Tacoma's output from sulfur-bearing materials, Duval's departure
would almost certainly threaten Tacoma's economic viability.
It should be noted, in this connection, that if Duval follows this
option, it would not be "safe" for Asarco-Tacoma to assume that Duval
can necessarily be replaced by other mines, for two basic reasons.
(1) If Duval were to build its own minimum efficient-size smelter
(i.e., about 100,000 short tons/year of output of contained metal), it
would in all likelihood discontinue its current shipments to Asarco's
El Paso and Hayden facilities. This would, in turn, create a smelter
capacity slack which would have "first call" on any overflow
concentrates, which might otherwise be diverted to replace Duval at
Tacoma.
(2) Over most of the impact analysis period in question (post-1984
period), new smelter capacity expected to come on-stream, most probably
located in the Southwest, would render hazardous such an expectation or
assumption.
c. Suppliers of Scrap and Precipitates
The suppliers of scrap and precipitates have a perfectly elastic demand
schedule for Tacoma's services. Hence, at Tacoma prices in excess of
22.7c/lb (in 1978 dollars) Tacoma would risk losing this group of its
customers. This condition would hold both in the short-run and in
the long-run.
d. Suppliers of "Dirty" (High-Impurity) Concentrates
The suppliers of "dirty" (high-impurity) concentrates, with perfectly
inelastic demand schedules (at least over the short-run), are in the
least favorable position, in terms of any "cost pass on" by Tacoma.
They would have to absorb a higher share of any increase in Tacoma's
real costs on a per unit basis (i.e., not necessarily a larger absolute
share of total increment in Tacoma's real costs, since these mines
account for only 40% of Tacoma's output from sulfur-bearing materials).
At any rate, the price increase on a per unit basis (cents/lb) which
these mines could absorb in the short-run, will depend on the absolute
level of copper prices at any time. In the longer-run (i.e., after
1981), they can switch to the new Philippines smelter. Under certain
conditions, Lepanto may find it advantageous to supply both Tacoma
and the new Philippines smelter after 1980.
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C. OUTLOOK FOR COPPER PRICES
The long-term outlook for domestic copper prices over the period 1978-
1995 covered in this study basically depends upon the long-run cost of
copper production which allows a normal rate of return on invested capital,
the growth in demand conditioned by the pace of macroeconomic growth,
relative prices of other products which are substitutable for copper
(e.g., aluminum), as well as on international economic developments
affecting the demand for and the supply of copper and copper substitutes
in the rest of the world. These long-run factors include, also, the
combined effects of pollution control costs and constraints on capacity
growth imposed by pollution control regulations. Domestically, for
example, the U. S. copper industry is expected to face smelter capacity
constraints until about 1983-1985. These constraints are a result of
the way in which the Tall Stack Guidelines and the New Source Performance
Standards (including the modification and reconstruction provisions)
interact to prevent small increments of capacity at existing smelters.
The impact of federal air pollution regulations on the U. S. copper
industry is currently being examined in another study by Arthur D.
Little, Inc., under contract with the U. S. Environmental Protection
Agency.1 Preliminary analyses, using an econometric simulation model
of the U. S. copper industry developed as part of this study shows that
compliance costs associated with domestic federal air pollution regula-
tions, combined with the constraints on capacity growth imposed by these
regulations, will result in higher domestic prices for copper and in-
creased imports over the period 1978-1995 compared with what would be
expected under alternative sets or combinations of hypothesized baseline
conditions. The final results of this analysis are not yet available for
inclusion in this report.
However, for illustrative purposes only, preliminary results on domestic
copper prices under two different sets of baseline conditions have been
tabulated in Table IV-1. These forecasts are somewhat optimistic in that
they reflect relatively high LME price assumptions.
It should be noted that these forecasts represent interim results only,
developed in connection with the study for EPA just noted and do not
necessarily represent our final estimates that we expect will be contained
in our forthcoming final report to EPA on this study.
D. TACOMA'S PRODUCTIVE CAPACITY AND RAW MATERIALS SUPPLY FOR 1978 AND BEYOND
1. Productive Capacity
Tacoma's productive capacity has undergone several changes since the
early 1970's. These changes are discussed below since they determine
Tacoma's future capacity under the baseline and alternative pollution
*Refer to Arthur D. Little, Inc. (ADL), Economic Impact of Environmental
Regulations on the U. S. Copper Industry, draft report submitted to
U. S. Environmental Protection Agency (EPA), under Contract No. 68-01-
2842 (October, 1976) .
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TABLE IV-1
FORECASTS OF DOMESTIC COPPEK PRICES UNDER ALTERNATIVE
MACROECONOMIC GROWTH SCENARIOS, 1978-19853
Description
1978
1979
1980
1981
1982
1983
1984
1985
(In 1974 prices, c/lb)
MACRO Ib
MACRO IIC
78.6
67.6
80.8
67.5
80.4
69.2
82.7
69.2
84.4
69.5
82.3
68.5
85.3
69.3
84.2
69.1
(In 1978 prices, c/lb)
MACRO Ib
MACRO IIC
104.6
90.0
107.5
89.8
107.0
92.1
110.1
92.1
112.3
92.5
109.5
91.2
113.5
92.3
112.1
92.0
Notes and Sources: a.
b.
d.
These forecasts are derived from the Econometric Simulation and Impact Analysis Model of the
U. S. Copper Industry developed by Arthur D. Little as part of a study of the economic impact
of federal air pollution control regulations on nonferrous industries, with primary emphasis
on the U. S. copper industry, under Contract No. 68-01-2842.
Refer to Arthur D. Little, Inc. (ADL), Economic Impact of Environmental Regulations on the
U. S. Copper Industry, draft report submitted to the U. S. Environmental Protection Agency
(EPA), under Contract No. 68-01-2842 (October, 1976).
Reflects a relatively high macroeconomic growth scenario for the United States over the
1976-1985 period, with 80c/lb LME copper prices in the 1980's (in constant 1974 prices).
Reflects a low macroeconomic growth scenario for the United States, with 80c/lb LME copper
prices in the 1980's (in constant 1974 prices).
Expressed in 1978 prices by using the Wholesale Price Index (WPI) for industrial
commodities:
(1967 = 100.0) X Change per Year (1974 = 100.0)
1974
19 75
1976
1977 (assumed)
1978 (assumed)
153.8
171.5
182.3
1974-1975
1975-1976
1976-1977
1977-1978
11.5
6.2
6.0
6.0
100.0
111.5
118.5
125.6
133.1
Source: Survey of Current Business (October, 1976), pp. S-8, S—9; also,
May, 1977, p. 5-9.
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control scenarios.
The Tacoma smelter has employed professional meteorologists since 1969
for SCS (production curtailment during adverse weather). This SCS
approach, after an initial learning period, reached the limit of its
effectiveness in 1972 for meeting national ambient air quality standards
(NAAQS) and in 1973 for meeting local standards. The SCS system is
able to meet NAAQS most of the time. The local standards are still
violated and the number of violations reached a constant level starting
in 1973. Until 1974 only about 17% of the input sulfur was being
recovered in the acid plant. The addition of the liquid SO2 plant
in 1974 increased the constant emission control from 17 to about 48%
but this did not decrease the number of violations of local standards.
Until 1972, Tacoma had the ability to operate both the reverbs
simultaneously and we understand that such operations were normal
during the winter months. In 1972, Tacoma decided to reroute reverb
gases to increase the degree of particulate control by using existing
electrostatic precipitators. While the need for SCS at Tacoma may
have had a bearing on this decision, the fact remains that since 1972,
Tacoma has not had the ability to use both reverbs simultaneously
without additional capital investment.
Table IV-2 shows anode production at Tacoma and scrap plus precipitate
receipts. The difference between these numbers is a measure of the
copper produced from sulfur-bearing materials. The table also shows
"tons of material not smelted" as estimated by Asarco. As we under-
stand it, this figure is calculated on the basis of any decrease below
a planned smelting rate during a SCS episode, when production is curtailed
to meet NAAQS. It appears that this accounting system only measures
deviations from a plan during SCS episodes and does not indicate
whether the plant can make up for this loss or not. (As discussed
below, there is empirical evidence to suggest that some of this
"loss" can be made up during good weather.)
Table IV-2 suggests the following:
0 In changing from a two-reverb operation to a single-reverb operation
in 1972, there might have been a decrease in capacity.
• In 1973, with 17% permanent control, one reverb in operation, and
an effective SCS system, Asarco was able to produce at close to
the nominal capacity of the smelter. This high production was
achieved in spite of the fact that the recorded curtailment
was the highest in 1973.
• In 1974 and 1975, with about 48% permanent control (as a result
of the liquid SO2 plant), the production has been less. This suggests
that increasing sulfur recovery from 17% to 48% has not signifi-
cantly improved the productive capcity of the smelter. The
decreased production in 1974 and 1975 might have been a result
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TABLE IV-2
ANODE PRODUCTION AND SCRAP USAGE AT THE TACOMA SMELTER
Precipitates,
Difference:
Tons of Charge
H
<
I
Year
Anode and Blister
Production
(tons)
Low Grade and No. 2
Scrap Receipts
(tons)
Copper from
Sulfur-Bearing
Materials
Not Smelted
Because of
SCS Curtailment
1975
72,300
5,400
66,900
54,000
1974b
86,600
17,700
68,900
78,000
1973
95,500
15,800
79,700
85,000
1972
99,800
13,400
86,400
-
1971°
88,200
7,400
80,800
—
% SO2 Removed
via Permanent
Control
51
51
17
17
17
Notes; a. As measured by Asarco.
b. Five-week strike
c. Eight-week strike.
Source: Asarco, Inc. data—rounded off by Arthur D. Little, Inc.
IT
C
n>
5"
n
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of the recession and the slowdown in the copper market starting in
1974. (There was a five week strike in 1974). The operating
problems at the liquid SO2 plant might have also had some effect.
• The table indicates that SCS has not had any effect on copper
production in periods of high demand and that there is perhaps
sufficient flexibility in the system to make up for lost time so
that overall, there is no discernible effect on copper production.
Two questions regarding Tacoma's productive capacity are relevant to
this study: what is Tacoma's production capacity under the baseline
(no incremental pollution control)? What will be Tacoma's productive
capacity if the additional SO2 controls are installed which would
increase sulfur recovery to about 70% or over 90%?
Based on the data in Table IV-2, we estimate Tacoma's productive
capacity to be about 78,000 tons/year (of contained copper) for
sulfur-bearing materials. Additional production would have to come
from sulfur-free materials such as scrap and precipitates. Just
as an increase in permanent sulfur control from 17% to 48-51% has
had no impact on productive capacity, we believe that an increase
in sulfur control to 70% will not significantly alter the capacity.
If an electric smelter is built at Tacoma, this would be "Best
Available Control Technology." According to the Tall Stack Guidelines
(41FR7450) such a smelter can use unlimited stack height but not SCS.
The PEDCo report did not estimate costs for alternative taller stacks
and thus the cost data are consistent only with the use of the existing
stack for dispersion of SO2 emissions. Cramer considered a new stack
of about the same height but in a different location.
The Cramer report states that with the present source configuration,
the maximum stack emissions should be about 2,500 lb S02 per hour
in order to meet PSAPCA five-minute and one-hour standards. The
emission rate for PEDCo's "maximum control" option, Section 3.5.4;
electric furnace smelting (using existing stack) is estimated by
PEDCo to be about twice the Cramer figure. This suggests that the
electric smelter using the current stack would have to have a smaller
capacity in order to comply with the Tall Stack Guidelines. Any
increase in capacity would require a taller stack whose height would
have to be estimated by diffusion modeling.
The impact analysis assumes that the smelter capacity will not
decrease if the reverb is replaced with an electric furnace. While
this assumption is consistent with PEDCo's cost data, it is somewhat
optimistic in the context of the discussion above and to the extent
that the capacity of the electric furnace smelter could be less than
100,000 tons/year, it results in an understatement of economic
impact results.
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Arthur D Little, Inc
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2. Future Raw Material Supply
Tacoma's mix of raw materials has remained quite constant for many
years and may be expected to continue in the future—all else
equal—except for the situations mentioned below.
Impure concentrates would continue to come from Lepanto and Northern
Peru as they have in the past. These concentrates are unacceptable
to other smelters, except perhaps in very small quantities, for
metallurgical reasons because of the contained impurities. The
construction of the Philippine smelter will provide Lepanto or both
with another outlet for these concentrates after 1980. Depending on
the circumstances they could increase mine production to ship
concentrates to both smelters. Otherwise Lepanto or possibly both
suppliers would be lost.
Lead smelter byproducts would continue to come from East Helena—all
else equal. The size of this stream would shrink after the El Paso
antimony plant is in operation. In addition, Asarco has several
other potential options for handling this stream as discussed in
Chapter III, Section E.
Clean concentrates for Tacoma are likely to come from Duval-Battle
Mountain and from mines in Southern Arizona, including other Duval
mines. The shipment of these concentrates would continue—all else
equal. In the short run, these mines can ship their concentrates to
other smelters, i.e., smelters in Japan. In the long-run, other
alternatives are available. These are: ship to Japan, ship to a new
Arizona smelter, build hydrometallurgical treatment plants, etc.
Duval alone produces sufficient concentrates to support a smelter.
They also have a hydrometallurgical plant rated at 40,000 tons/year
copper.
Another potential source of low impurity concentrates is British
Columbia. In the past, Tacoma has not been able to compete for
copper concentrates from British Columbia against the Japanese
smelters, including concentrates from Granduc. (Granduc is a 50/50
joint venture between Asarco and Newmont and is operated by Newmont.
For accounting purposes, Asarco consolidates its interest in Granduc.)
(See also Appendix I.) This suggests that the Japanese offer more
favorable terms than Tacoma. The provincial government in British
Columbia is interested in the industry being integrated forward into
smelting and has reportedly subsidized1 the construction of a small
smelter of 25,000 tons/year based on the Top-Blown-Rotary-Converter.
This smelter is being built by Afton Mines Ltd. to treat a concentrate
high in native copper. The other mines in British.Columbia
Engineering & Mining Journal, December, 1975, pp. 40-45.
IV-18
Arthur D Little, Inc
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have done studies which suggest that it is cheaper to ship concentrates
to Japan.1 Thus, chances are that Asarco could, at best, procure
limited quantities of concentrates from British Columbia for a limited
period of time. Furthermore, chances are that such concentrates would
be purchased on a "spot" basis, i.e., a one-time purchase of
concentrates reflecting short-term excess supply rather than under
long-term contracts for continuing supply of concentrates for several
years.
Table IV-3 shows the quantities of sulfur-bearing materials that
Tacoma might smelt in 1978 and beyond. The quantity of each concentrate
is usually consistent with historical operating data over 1973-1976,
and has been adjusted when future plans were known. For example, the
intake of Lepanto and Northern Peru has been adjusted downwards to be
consistent with the reduced production rates. The East Helena byproducts
stream is expected to shrink after 1977 but was retained at about the
historical average since we were unable to estimate the effect of the
new antimony plant. We have assumed, however, that the arsenic trioxide
output will decrease by 10% as a result of this change. Tacoma smelts
considerable amounts of Southwest concentrates from Duval's mines and
other mines such as Twin Buttes. Other miscellaneous shipments would
include spot purchases and concentrates acquired under exchange
agreements such as Similkameen.
Tacoma also smelts non-sulfur bearing materials such as scrap and
precipitates. The smelting rate of these materials has varied much
more than that for sulfur-containing materials and depends on the
price/availability of these materials. In the 1971-1976 period,
the scrap and precipitate receipts varied from 5,400 tons/year to
17,700 tons/year.
For the impact analysis, we have used the scrap and precipitate
smelting rate of 22,000 tons/year. This results in a productive
smelter capacity of 100,000 tons/year. For the sensitivity analysis,
we have also used an alternate basis of 17,000 tons/year of scrap and
a total production rate of 95,000 tons/year.
E. PRODUCTION COSTS AND REVENUES AT ASARCO-TACOMA
Table IV-4 shows estimated 1978 costs and income for Asarco-Tacoma.
Income from the smelting and refining margin and from byproduct
sales is based on recent performance adjusted to a 1978 basis. Because
of the structure of the smelting and refining contracts (see
Appendix A), the smelting and refining margin at any custom or toll
Petals Week, November 1, 1976.
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TABLE IV-3
<
i
fO
O
EXPECTED AVERAGE INPUT OF SULFUR-BEARING MATERIALS INTO THE TACOMA SMELTER
Concentrates Contained Copper
tons/year % tons/year %
1. High Impurity Concentrates
Lepanto 60,000 22 19,200 25
Northern Peru 18,000 7 5,760 7
- East Helena 12,000 4 6,600 8
2. Low Impurity Concentrates
- Duval Battle Mountain 36,000 13 9,000 11.5
- Other Southwestern concentrates 114,000 41 28,500 37
Other miscellaneous shipments 36,000 13 9,000 11.5
276,000 100 78,060 100
Source: Arthur D. Little, Inc. estimates, based on information from Asarco, Inc.
rr
c
fD
n
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TABLE IV-4
1978 COSTS FOR TACOMA
100,000 Tons/yeara
$ MM c/lb
Income
Gross margin from smelting
and refining
Byproduct sales
Variable Costs
Fuel and power
Miscel]aneous
materials and
supplies
Direct operating
labor
Plant indirects
Fixed Costs
G&A Tacoma
G&A (New York
allocation)
Depreciation
Pretax profit
Subtotal
45.4
3.6
Total 49.0
10.4
9.6
17.0
4.0
Subtotal 41.0
1.0
2.5
1.2
3.3
8.0
22.7
1.8
24.5
20.5
Total 49.0
4.0
24.5
95,000 Tons/year
$ MM C/lb
43.1
3.6
46.7
9.9
9.1
17.0
4.0
40.0
1.0
2.4
1.2
2.1
6.7
46.7
22.7
1.9
24.6
20.0
3.6
24.6
Notes: a. Based on 100,000 short tons a year; 78,000 tons from
sulfur-bearing materials; 22,000 tons from scrap and
precipitates.
b. Based on 95,000 short tons a year; 78,000 tons from
sulfur-bearing materials; 17,000 tons from scrap and
precipitates. These costs are used for a sensitivity
analysis.
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smelter is essentially independent of the level of copper prices.
The operating costs were estimated by breaking down current operating
costs into its major components and estimating how they would change
in 1978. Asarco's pretax profit at Tacoma over the past 10 years
has been about $1.9 million.1 Based in part on the higher byproduct
credits we estimate this to be about $3.3 million in 1978.
The table also shows our estimates of revenues and costs if the
smelting and refining rate is 95,000 tons/year. These numbers are
used for a sensitivity analysis.
The projected 1978 baseline depreciation-cashflow structure we developed
for Tacoma would seem to result in conservative estimates when compared
to the earnings actually reported for the period 1965-1974. These
latter figures were referred to as Exhibit M in material from Asarco's
December 5, 1975 Application for Variance from Regulation 1, Puget Sound
Air Pollution Control Agency, and sent to us by EPA Region X.
That is, our pre-tax baseline earnings estimate for Tacoma is $3.3
million/year in 1978 dollars. In comparison, the 1965-1974 average
pre-tax earnings reported was $1.85 million, in current dollars.
(If we adjust the latter for inflation and express it in equivalent
1978 dollars, it would be roughly $2.8 million).
A discussion of the sensitivity of results to variations in the
depreciation and cashflow assumptions is presented in Chapter V,
Section G.
1
Simon D. Strauss, oj). cit. , p. 473.
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V. ECONOMIC IMPACT ANALYSIS
A. INTRODUCTION
In this chapter, we present an analysis of the economic impact of the
various pollution control options being considered at the Tacoma
smelter/refinery, to determine on rational financial/economic grounds
whether the management of Asarco-Tacoma would be expected to invest
in additional control and continue production at Tacoma or decide to
discontinue operations, given, clearly, that the Tacoma smelter/refinery
will not be able to continue operations into the distant future in its
present state, in view of the PSAPCA (Puget Sound Air Pollution Control
Agency) SO2 emission regulations as well as other, basically in-plant,
environmental regulations.
This chapter is hence structured to address the complex set of decision-
variables, present as we]l as future conditions and uncertainties,
methodological issues and approaches that are required, and the set
of theoretically plausible circumstances under which the various
control options and other alternatives would be scrutinized by the
management.
We start, in Section B, with a brief description of the relationship
between the Cramer, PEDCo and Arthur D. Little reports, in order to
identify at the outset the extent to which this report uses certain
data generated in these two earlier reports and the manner in which
such data are used.
Next, Section C presents estimates of incremental compliance costs
and their time-phasing under various control options.
The following four sections are exclusively devoted to impact analysis,
starting with Section D which describes the methodological framework used
in our analysis. Section E then presents a cash flow analysis of
incremental pollution control options under base conditions. This is
followed, in Section F, by a financial and economic discussion of
Tacoma's shutdown. The analysis performed and conclusions reached
under base conditions are next extended by conducting a sensitivity
analysis in Section G; we examine here the extent to which the
conclusions reached earlier need to be modified, by considering a wide
range of conditions, including the adoption by Tacoma of a discriminatory
monopolistic pricing strategy in the future.
Section H discusses other issues relevant to decision-making at Tacoma.
Finally, Section I contains a discussion of the limitations to the
analysis presented in this chapter.
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Arthur D Little, Inc
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B. RELATIONSHIP BETWEEN CRAMER, PEDCo AND ARTHUR D. LITTLE REPORTS
1. The Cramer Report1
The Cramer study used diffusion modeling to determine the degree of constant
emission control2 necessary to meet NAAQS and PSAPCA standards. (These
standards are shown in Table V-l.) The study also assessed the reliability
of the Asarco SCS system for maintaining both types of air quality standards.
Cramer's findings are as follows:
a. Constant Emission Control
Of the alternatives studied, the six control alternatives shown in
Table V-2 provide sufficient degree of permanent control necessary to meet
National Ambient Air Quality Standards. The first four of these alterna-
tives also meet PSAPCA standards. The remaining two show marginal compliance,
i.e., infrequent violations are possible. Table V-2 shows that with the
present stack or a new stack of about the same height, a total emission
rate of 2470-1900 lb S02/hr is necessary to meet all the applicable standards.
This corresponds to 95-96% constant emissions control based on the current
production rate. However, this is about half the emission rate that can
be obtained through the installation of PEDCo's "maximum control" options.
b. Supplementary Control System
(1) National Standards
The effectiveness of the Asarco SCS in preventing violations of the
National standards is shown in Table V-3 which lists the total number of
violations per year observed at the PSAPCA monitor located at N26th and
Pearl Streets. This monitor has been in operation continuously since 1968
and is the monitor most frequently affected by Asarco emissions. Table V-3
*H. E. Cramer Co., Inc. (July 1976) "Assessment of the Air Quality Impact
of SO2 Emissions from the Asarco-Tacoma Smelter", EPA 910/9-76-028.
2
The Stack Height Increase Guidelines (41FR7450) require the use of con-
stant emission limitations as the primary means for achieving ambient
air quality standards. When installation of constant controls onto an
existing source may be extremely onerous for economic reasons or ill-
advised for engineering or siting reasons, techniques could be employed
as interim measures provided reasonably available control technology is
first installed. Under these conditions, the source in question would
be required to conduct a research program to develop new and more eco-
nomical forms of BACT-caliber technology. The above interpretation of
these guidelines is by Arthur D. Little and should not be construed as
EPA policy.
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Arthur D Little Inc
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TABLE V-l
SO? AIR QUALITY STANDARDS APPLICABLE TO THE ASARCO SMELTER
National Standards (ppm) Washington DOE PSAPCA
Time Period Primary Secondary Standards (ppm) Standards (ppm)
5 minutes - - - 1.00^
1 hour - - 0.403 0.40b
1 hour - - 0.25° 0.25°
3 hours - 0.50a
24 hours 0.14a - 0.10a 0.10b
30 days - - 0.04b
Annual 0.03b - 0.02b 0.02b
Notes: a. Not to be exceeded more than once per year.
b. Never to be exceeded.
c. Not to be exceeded more than two times in any seven
consecutive days.
d. Not to be exceeded more than once in any eight consecutive hours.
Source: Cramer (July 1976) op. cit.
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Arthur D Little, Inc
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TABLE V-2
ASARCO CONTROL ALTERNATIVES WHICH WILL MEET NAAQS
Control
Alternative
Total SO2
Emission
Rate (lb/hr)
1,900
1,900
2,240
10
20
2,240
2,470
21
2,230
Percent
Constant
Emissions
Control
96
96
96
96
95
96
Description
Electric arc furnace with acid
plant on roasters and part of
converter stream after enrichment
by SO2 injection, liquid SO2
plant on remainder of converter
stream, existing main stack and
modifications outlined in Asarco
variance applications.
Same as Control Alternative 7 with
a new main stack.
Existing configuration with
scrubber on roaster and reverb
streams, existing main stack and
modifications outlined in Asarco
variance application.
Same as Control Alternative 9 with
a new main stack.
Existing emissions controls on
converter stream, roaster and re-
verb stream to new acid plant
following enrichment by S02
injection, existing main stack.
Existing emissions controls on
converter stream, electric arc
furnace stream combined with
roaster stream to a new acid plant
following enrichment by SO2
injection, existing main stack.
Source: Cramer (July 1976) op. cit.
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Arthur D Little, Inc
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TABLE V-3
TOTAL NUMBER OF VIOLATIONS OF THE NATIONAL AIR QUALITY
STANDARDS FOR SO? AT N26TH AND PEARL
Number of Violations*
Year
3-Hour Secondary Standard
24-Hour Primary
1976**
3
(4)
3
(4)
1975
0
(0)
0
(0)
1974
0
(1)
0
(0)
1973
0
(0)
0
(0)
1972
0
(0)
0
(0)
1971
1
(2)
1
(2)
1970
5
(6)
1
(2)
1969
5
(6)
4
(5)
1968
0
(1)
1
(2)
Total number of observations above the standard are enclosed
by parentheses.
1976 data provided by EPA.
Source: Cramer (July 1976) op. cit.
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Arthur D Little, Inc
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shows that no violations of the National standards were observed at the
monitor after 1971 (the SCS was started in 1970) until 1976. In 1976,
the 3-hour standard was exceeded four times and the 24-hour standard was
exceeded three times with one observation equal to standard. According
to Cramer, the success of the Asarco SCS in preventing almost all viola-
tions of the National short-term standards is in part due to the curtail-
ment actions and stack-heater operations undertaken in attempting to meet
the more stringent PSAPCA short-term standards.
(2) PSAPCA Standards
Table V-4 shows the number of violations of the PSAPCA standards as
recorded by the same monitor. It shows that the number of violations of
the PSAPCA short-term standards decreased from 1970 through 1973. Since
1973, however, no appreciable decrease in the number of violations has
occurred in spite of the addition in 1974 of a liquid SO2 plant which
increased the constant emissions control from 17-48%. Cramer, et al,
conclude that the Asarco SCS reached a limit of effectiveness during 1973
and 1974. They also conclude that it is extremely unlikely (emphasis
added) that any further significant reductions in the number of violations
of the PSAPCA five-minute and one-hour standards can be achieved by SCS
techniques with the present source configuration and 51% constant emissions
control.
According to Cramer, there is an inherent minimum time delay, which varies
from about 20 minutes to one hour or longer, between the time a curtail-
ment decision is made and the time the decision is implemented and the
reduction in emissions can affect ambient air quality at S02 monitors in
the Tacoma area. It follows that it is generally not possible for the
Asarco SCS to prevent violations of the PSAPCA five-minute and one-hour
standards on the basis of telemetered air quality observations from the
Asarco and PSAPCA monitoring networks. Instead, occurrences of high
five-minute and one-hour concentrations at monitor locations must be
anticipated and curtailment decisions must be made by the Asarco SCS at
least 20 minutes to one hour in advance of such occurrences. Although
the Asarco meteorologists have become highly skilled in anticipating the
occurrence of high SO2 concentrations, many violations of the PSAPCA
five-minute and hourly standards continue to occur. The time-delay con-
straint in the operation of the Asarco SCS is generally not limiting in
the case of the 3-hour and 24-hour National standards and thus telemetered
air quality monitor observations can normally be used effectively as a
basis for curtailments required to meet these standards.
(3) Fugitives
Cramer, et al, suggest that an increase in the density of the existing SO2
monitoring network to detect low-level fugitives would result in a signi-
ficant increase in the number of violations of the PSAPCA five-minute and
one-hour air quality standards and appropriate revisions in SCS operating
procedures.
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Arthur D Little, Inc
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TABLE V-4
TOTAL NUMBER OF VIOLATIONS OF THE PSAPCA AIR
QUALITY STANDARDS FOR S07 AT N26TH AND PEARL
Number of Violations
Year
5-Minute
Standard of
1.0 ppm
1-Hour
Standard of
0.10 ppm*
1-Hour
Standard of
0.25 ppm
24-Hour
Standard of
0.10 ppm*
1976**
20
18
20
5
1975
8
6
35
0
1974
10
6
21
1
1973
16
4
27
0
1972
27
11
34
0
1971
39
20
52
3
1970
169
62
140
4
1969
199
84
219
15
1968
124
56
125
10
This appears to be a typographical error in the Cramer report.
The one hour standard is 0.40 ppm.
1976 data provided by EPA; violations are only shown in instances
when standard was exceeded by 10% or more.
Source: Cramer (July 1976) op. cit.
V-7
Arthur D Little, lnc
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2. The PEDCo Report1
The PEDCo report considered various alternatives for increasing the de-
gree of constant control for reducing SO2 emissions. The control options
in this report fall into three categories which can be labelled as
"minimum", "intermediate", and "maximum" controls using either cost or
the incremental SO2 recovered as criteria.
3. Arthur D. Little Report
As explained in the next section, we selected (based on discussions with
the EPA), three specific options to represent the "minimum", "intermediate",
and "maximum" control categories.
None of the alternatives considered by PEDCo have emissions sufficiently
low to meet the requirements for constant emission control. As noted
earlier, the emissions from the "maximum" control electric furnace alter-
native are about twice the level necessary to meet the requirements of
constant emission control. As noted in Chapter IV, Section C, we have
assumed that if an electric furnace smelter is built in Tacoma, it would
have the same capacity as the current plant and not have a smaller
capacity. To the extent that the capacity of the electric smelter would
be less because of the requirements of the Stack Height Increase Guidelines,
the economic impact results are understated.
C. COMPLIANCE COSTS AT ASARCQ-TACOMA UNDER ALTERNATIVE CONTROL OPTIONS
1. Control Costs
Based on discussions with the EPA, the following costs were selected as
representative of three cost categories:
• "Minimum" control: Costs for the Browder improvements (PEDCo Section
3.3.2) .
• "Intermediate" control: Costs from the PEDCo report (Section 3.4.2)—
"Roaster Gas Enrichment with SO2 Injection and Acid Plant Consolidation
(at 100% gas flow)."
s "Maximum" control: Costs from the PEDCo report (Section 3.5.4) for
electric furnace smelting.
In addition, there are other incremental costs which will be incurred in
the future but which are not related to incremental SO2 control. These are:
• Particulate control costs: These relate to improvements in the
particulate control system agreed to by Asarco as a part of the
variance granted in 1976.
^PEDCo-Environmental (September 1976) "Evaluation of Sulfur Dioxide and
Arsenic Control Techniques for the Asarco-Tacoma Smelter", EPA 68-02-1321 -
Task Order No. 35.
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Arthur D Little, Inc
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• OSHA costs for inorganic arsenic: These relate to the costs for meeting
the proposed OSHA standard of 0.004 mg As/m^ for inorganic arsenic.
The capital investment (in 1978 dollars) and operating and maintenance
costs or variable costs (i.e.,direct operating costs exclusive of fixed
charges) for all approaches are shown in Table V-5. Appendix M discusses,
in detail, the procedures used to convert the annualized costs into O&M
costs.
2. Definitions of Alternative Control Options
For purposes of economic impact analysis, four alternative control options
at Asarco-Tacoma have been defined as follows, with and without (i.e.,
including and not including) compliance with OSHA-related arsenic emission
regulations:
• OPTION 1: Electric furnace smelting; acid plant consolidation;
particulate control1
• OPTION 2: Roaster gas enrichment; acid plant consolidation;
particulate control1
• OPTION 3: Improve existing acid plant; roaster gas enrichment;
subsequent acid plant consolidation; particulate
control1
• OPTION 4: Improve existing acid plant; particulate control1
These four alternative control operations, without and with OSHA-related
regulations, are designated here as follows:
•
Option
1.1 - Option
1, without OSHA
Option
1.2 - Option
1, with OSHA
•
Option
2.1 - Option
2, without OSHA
Option
2.2 - Option
2, with OSHA
•
Option
3.1 - Option
3, without OSHA
Option
3.2 - Option
3, with OSHA
•
Option
4.1 - Option
4, without OSHA
Option
4.2 - Option
4, with OSHA
All options include particulate control (i.e., baghouses), as a prerequisite;
the without-OSHA, with-OSHA designations are used for analytical purposes
This refers to particulate control measures to be provided by Asarco as
a part of the 1976 variance.
V-9
Arthur D Little Inc
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TABLE V-5
INCREMENTAL COSTS AT ASARCO-TACOMA FOR VARIOUS OPTIONS
(1978$)
Incremental SO? Control
Minimum Control
Approach
Improve Existing
Acid Plant
Operating and
Capital Investment Maintenance Costs
(millions)
1.5
(millions)
0.2
Intermediate Control
Roaster Gas En-
richment - Acid
Plant Consolidation
34.9
5.5
Maximum Control
Baseline Costs
Electric Furnace
Smelting - Acid
Plant Consolidation
55.9
5.8
Particulate Control
OSHA
Asarco Variance
Application
0.004 mg As/m^
Arthur Young Costs
5.6
36.0
0.8
4.8
-------
only, to keep account of economic impacts due to not only alternative
options to reduce SO2 emissions but also to comply with OSHA's proposed
standard for inorganic arsenic.1
3. Estimates of Incremental Pollution Abatement Expenditures under
Alternative Control Options
Estimates of incremental pollution abatement expenditures at Asarco-Tacoma
under alternative control options, with and without OSHA, are tabulated
in Table V-6, based on the PEDCo and Arthur Young & Company estimates,
expressed in 1978 dollars. It should be noted that there is little syner-
gism between OSHA and EPA costs and these costs are additive. These
incremental expenditures (both total capital investment and annual oper-
ating and maintenance costs) are normalized around an average annual
smelting/refining which is about the same as the historical average.
Thus, this is consistent with the assumption that the productive capacity
of Asarco-Tacoma will remain constant during the impact analysis period.
4. Time-Phasing of Incremental Pollution Abatement Expenditures at Asarco-
Tacoma under Alternative Control Options
Tables V-7 through V-10 show the time-phasing of incremental pollution
abatement expenditures at Asarco-Tacoma, over the 1978-1995 period, under
the four alternative control options, with and without OSHA. In this
connection, the following assumed timetables for incremental capital in-
vestment should be noted:
• Electric furnace smelting: 1980-1983;
• Particulate control: 1978-1979;
o Roaster gas enrichment; acid plant consolidation: 1978-1981
(Option 2) and 1981-1984 (Option 3);
• Improvement of existing acid plant: 1978-1979; and
• OSHA-related capital investment: 1978-1983.
U. S. Department of Labor, Occupational Safety and Health Administration
(OSHA) proposed that average exposure levels during an eight-hour period
should not exceed 0.004 mg As/m . In arriving at this standard, OSHA con-
sidered other alternatives (i.e., 0.1 mg As/nr and 0.005 mg As/m3, where
the latter is the existing permissible level). For a detailed review,
refer to OSHA's inflationary impact statement on arsenic, entitled,
"Technological Feasibility Analysis and Inflationary Impact Statement
for the Proposed Standard for Inorganic Arsenic (40FR3392)", Final Report,
1976 (prepared by Arthur Young & Company). Also refer to the record of
OSHA's arsenic hearing in September-October 1976.
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Arthur D Little, Inc
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TABLE V-6
INCREMENTAL COSTS AT ASARCO-TACOMA UNDER ALTERNATIVE CONTROL OPTIONS
(millions of 1978 dollars)
WITHOUT OSHA
WITH OSHA
Capital
Operating and
Capital
Operating and
Control Options
Investment
Maintenance Costs
Investment
Maintenance Costs
(Total)
(per year)
(Total)
(per year)
36.0
4.8
OPTION 1
Electric furnace smelting; acid
plant consolidation
55.9
5.8
-
-
Particulate control
5.6
0.8
-
-
TOTAL
61.5
6.6
97.5
11.4
OPTION 2
Roaster gas enrichment; acid plant
consolidation
34.9
5.5
-
-
Particulate control
5.6
0.8
-
-
TOTAL
40.5
6.3
76.5
11.1
OPTION 3
Improve existing acid plant
1.5
0.2
—
_
Roaster gas enrichment; acid plant
consolidation
34.9
5.5
—
-
Particulate control
5.6
0.8
-
-
TOTAL
42.0
6.5
78.0
11.3
OPTION 4
Improve existing acid plant
1.5
0.2
-
-
Particulate control
5.6
0.8
-
-
TOTAL
7.1
1.0
43.1
5.8
Source: Based on Table V-5.
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TABLE V-7
TIME-PHASING OF INCREMENTAL POLLUTION ABATEMENT EXPENDITURES
AT ASARCO-TACOMA UNDER CONTROL OPTION 1
(millions of 1978 dollars)
Description
1978 1979 1980 1981 1982 1983 1984 1985
1995
OPTION 1, WITHOUT OSHA (1.1)
Capital Investment
Electric furnace smelting -
Particulate control 2.80
TOTAL 2.80
Operating and Maintenance Costs
Electric furnace smelting
Particulate control -
TOTAL
OPTION 1, WITH OSHA (1.2)
Capital Investment
Subtotal Without OSHA (See above) 2.80
OSHA 6.00
TOTAL 8.80
Operating and Maintenance Costs
Subtotal Without OSHA (See above)
OSHA
TOTAL
13.98 13.98 13.98 13.98
2.80 -
2.80 13.98 13.98 13.98 13.98
2.80
6.00
8.80
0.80
0.80
13.98
6.00
19.98
0.80
0.60
1.40
0.80
0.80
13.98
6.00
19.98
0.80
1.20
2.00
0.80
0.80
13.98
6.00
19.98
0.80
2.40
3.20
0.80
0.80
13.98
6.00
19.98
0.80
3.60
4.40
5.80
0.80
6.60
6.60
4.80
11.40
5.80
0.80
6.60
6.60
4.80
11.40
5.80
0.80
6.60
6.60
4.80
11.40
ft)
5"
n
Source: Refer to Table V-6 for the total amounts used before time-phasing them; assumptions underlying the
time-phasing of the various types of incremental pollution abatement expenditures are explained in
the accompanying text.
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TABLE V-8
TIME-PHASING OF INCREMENTAL POLLUTION ABATEMENT EXPENDITURES
AT ASARCO-TACOMA UNDER CONTROL OPTION 2
(millions of 1978 dollars)
Description
1978 1979 1980 1981 1982 1983 1984 1985
1995
OPTION 2, WITHOUT OSHA (2.1)
Capital Investment
Roaster gas enrichment; acid
plant consolidation 8.73 8.73
Particulate control 2.80 2.80
TOTAL 11.53 11.53
Operating and Maintenance Costs
Roaster gas enrichment; acid
plant consolidation - -
Particulate control - -
TOTAL
OPTION 2, WITH OSHA (2.2)
Capital Investment
Subtotal Without OSHA (See above) 11.53 11.53
OSHA 6.00 6.00
TOTAL 17.53 17.53
Operating and Maintenance Costs
Subtotal Without OSHA (See above)
OSHA
TOTAL
8.73 8.73
8.73 8.73
0.80
0.80
8.73
6.00
14. 73
0.80
0.80
8.73
6.00
14. 73
0.80 0.80
0.60 1.20
1.40 2.00
5.50
0.80
6.30
6.00
6.00
6.30
2.40
8.70
5.50
0.80
6.30
6.00
6.00
6.30
3.60
9.90
5.50
0.80
6.30
6.30
4.80
11.10
5.50
0.80
6.30
6.30
4.80
11.10
5.50
0.80
6.30
6.30
4.80
11.10
Source: Refer to Table V-6 for the total amounts used before time-phasing them; assumptions underlying the
time-phasing of the various types of incremental pollution abatement expenditures are explained in
the accompanying text.
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TABLE V-9
TIME-PHASING OF INCREMENTAL POLLUTION ABATEMENT EXPENDITURES
AT ASARCO-TACOMA UNDER CONTROL OPTION 3
(millions of 1978 dollars)
Description
1978 1979 1980 1981 1982 1983 1934 1985
1995
OPTION 3, WITHOUT OSHA (3.1)
Capital Kxpenditures
Improve existing acid plant
Roaster gas enrichment; acid
plant consolidation
Particulate control
TOTAL
Operating Maintenance Costs
Improve existing acid plant
Roaster gas enrichment; acid
plant consolidation
Particulate control
TOTAL
OPTION 3, WITH OSHA (3.2)
Capital Investment
Subtotal Without OSHA (See ab>jve)
OSHA
TOTAL
Operating and Maintenance Costs
Subtotal Without OSHA (See above)
OSHA
TOTAL
0.75 0.75
2.80 2.80
3.55 3.55
3.55
6.00
9.55
3.55
6.00
9.55
8.73 8.73 8.73 8.73
8.73 8.73 8.73 8.73
0.20 0.20 0.20 0.20 0.20 0.20
0.80 0.80 0.80 0.80
1.00 1.00 1.00 1.00
6.00
6.00
8. 73
6.00
14.73
8.73
6.00
14.73
8.73
6.00
14.73
1.00 1.00
0.60 1.20
1.60 2.20
1.00 1.00
2.40 3.60
3.40 4.60
0.80
1.00
8. 73
8. 73
1.00
4.CO
5.80
5.50
0.80
6.50
6.50
4.80
11. 30
0.20
5.50
0.80
6.50
6.50
4.80
11.30
Source: Refer to Table V-6 for the total amounts used before time-phasing them; assumptions underlying the
time-phasing of the various types of incremental pollution abatement expenditures are explained in
the accompanying text.
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TABLE V-10
TIME-PHASING OF INCREMENTAL POLLUTION ABATEMENT EXPENDITURES
AT ASARCO-TACOMA UNDER CONTROL OPTION 4
(millions of 1978 dollars)
Description
1978 1979 1980 1981 1982 1983 1984 1985
1995
OPTION 4, WITHOUT OSHA (4.1)
Capital Investment
Improve existing acid plant 0.75 0.75
Particulate control 2.80 2.80
TOTAL 3.55 3.55
Operating and Maintenance Costs
Improve existing plant - -
Particulate control - -
TOTAL
OPTION 4, WITH OSHA (4.2)
Capital Investment
Subtotal Without OSHA (See above) 3.55 3.55
OSHA 6.00 6.00
TOTAL 9.55 9.55
Operating and Maintenance Costs
Subtotal Without OSHA (See above) - -
OSHA
TOTAL
0.20 0.20
0.80 0.80
1.00 1.00
6.00
6.00
1.00
0.60
1.60
6.00
6.00
1.00
1.20
2.20
0.20
0.80
1.00
6.00
6.00
1.00
2.40
3.40
0.20
0.80
1.00
6.00
6.00
1.00
3.60
4.60
0.20
0.80
1.00
1.00
4.80
5.80
0.20
0.80
1.00
1.00
4.80
5.80
0.20
0.80
1.00
1.00
4.80
5.80
Source: Refer to Table V-6 for the total amounts used before time-phasing them; assumptions underlying the
time-phasing of the various types of incremental pollution abatement expenditures are explained in
the accompanying text.
-------
Incremental capital investment over these periods is assumed to take place
in equal amounts in various years. Operating and maintenance costs are
assumed to take effect upon completion of the particular pollution abate-
ment investment program (except in the case of OSHA-related operating and
maintenance costs which are assumed to start in 1980 and gradually build
up to the expected annual average level by 1984).
It can be seen from Tables V-8 and V-9 that the main difference between
Options 2 and 3 involves the time-phasing of capital investment for roaster
gas enrichment and acid plant consolidation (1978-1981 under Option 2 and
1981-1984 under Option 3).
All major reconstruction projects require that the work proceed at a
particular pace or cadence. While the estimated impact would be less if
these expenditures were spread over a much longer period of time, the
estimated compliance costs would not necessarily remain constant under
these conditions. They would increase because of inefficiencies and in-
terference within the operating plant.
5. Variability in Estimates of Incremental Pollution Abatement Expendi-
tures and Selection of Control Options/Compliance Cost Estimates for
Economic Impact Analysis
The incremental pollution abatement expenditures and their timetables
given in Tables V-6 through V-10 represent "base case" estimates which may
vary within a range of -5 and +25%. This range is representative of the
variability in cost estimating procedures normally used for preparing
such estimates.
Table V-ll shows the levels, ranges, and time-phasing of incremental
pollution abatement expenditures at Asarco-Tacoma under the four alter-
native control options, with and without OSHA. The -5% and +25% range
around the "base" estimates are assumed only for incremental pollution
abatement capital expenditures; the estimated operating and maintenance
costs under a given control option are assumed to be the same for the
compliance cost ranges A (25% above base), B (base), and C (5% below base).
OSHA-related capital expenditures, although not reflecting PEDCo estimates1,
are also assumed to be subject to the same range of variability. This
assumption reduces the number of analytical options to a manageable level.
An inspection of Table V-ll reveals 24 distinct analytical options: four
alternative control options, each with two sub-options (without OSHA,
with OSHA), where each sub-option, in turn, has three variants A, B, and
C. Clearly, conducting an economic impact analysis of each one of these
24 analytical options, each defining a control option/compliance cost
''"They are based on Arthur Young & Company estimates.
V-17
Arthur D Little, Inc
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TABLE V-ll
LEVELS, RANGES, AND TIME-PHASING OF INCREMENTAL POLLUTION ABATEMENT EXPENDITURES
AT ASARCO-TACOMA UNDER ALTERNATIVE CONTROL OPTIONS, WITH AND WITHOUT OSHA
(millions of 1978 dollars)
Description
Total 1978 1979
1961 1982 1983 1984
OPTION 1, WITHOUT OSHA (1.1)
Capital Inveataent
Option 1.1A: 25% Above Base
Option 1.1B: Base3
Option 1.1C: 5X Below Base
Operating and Maintenance Costs *
OPTION 1, WITH OSHA (1.2)
Capital Investment
Option 1.2A: 251 Above Base
Option 1.2B: Base3
Option 1.2C: 5% Below Base
Operating and Maintenance Costsb
OPTION 2. WITHOUT OSHA (2.1)
Capital Investtaent
Option 2.1A: 25% Above Base
Option 2.IB: Base3
Option 2.1C: 5% Below Base
Operating and Maintenance Costsb
OPTION 2, WITH OSHA (2.2)
Capital Investment
Option 2.2A: 25% Above Ba6e
Option 2.2B: Base3
Option 2.2C: 5% Below Base
Operating and Maintenance Costsb
OPTION 3, WITHOUT OSHA (j.l)
Capilal Investment
Opt ion 3.1A
Opt ion 3. IB
Option 3.1C
25% Above Base
Base3
5% Below Base
Operating and Maintenance Costs
OPTION 3, WITH OSHA (3.2)
Capital Investment
76.9
61.5
58.4
121.9
97.5
92.6
50.6
40.5
38.5
3.50
2.80
2.66
11.00
8.80
8.36
14.41
11.53
10.95
3.50
2.80
2.66
11.00
8.80
8.36
14.41
11.53
10.95
17.47
13.98
13.23
17.47
13.98
13.28
17.47
13.98
13.28
17.47
13,98
13.28
0.B0 0.80 0.80 0.80 6.60 6.60
6.60
24.98
19.98
18.98
24.98
19.98
18.98
24.98
19.98
18.98
24.98
19.98
18.98
1.40 2.00 3.20 4.40 11.40 11.40
11.40
10.91
8.73
8.29
10.91
8.73
8.29
0.80 0.80 6.30 6.30 6.30 6.30
6.30
95.6
21.91
21.91
18.41
18.41
7.50
7.50 -
76.5
17.53
17.53
14.73
14.73
6.00
6.00 -
72.7
16.65
16.65
13.99
13.99
5.70
5,70 -
-
-
-
1.40
2.00
8.70
9.90 11.10 11.10
11.10
52.5
42.0
39.9
4.44
3.55
3.37
4 .44
3.55
3.37
10.91
8. 73
8.29
10.91
8.73
8.29
10.91 10.91
8.73 8.73
8.29 8.29
1.00
1.00 1.00 1.00 1.00
6.50
: 25% Above Base
97
5
11
94
11
94
7
50
18
41
18
41
18.41
10.91
-
: Base3
78
0
9
55
9
55
6
00
14
73
14
73
14.73
8.73
.
: 5% Below Base
74
1
9
07
9
07
5
70
13
99
13
99
13.99
8.29
.
Maintenance Costs^
1
60
2
20
3
40
4.60
5.80 11.30
11.30
Option 3.2C
Operating and
OPTION 4, WITHOUT OSHA (4.1)
Capital Investment
Option 4.1A: 25% Above Base
Opt ion 4.IB : Base3
Option 4.1C: 5% Below Base
Operating and Maintenance CosLs^
OPTION 4, WITH OSHA (4.2)
Capital Investment
8.9
7.1
6.7
4.44
3.55
3.37
4.44
3.55
3.37
I.00 1.00 1.00 1.00 1.00 1.00
1.00
Option
4.2A: 25% Above Base
53.9
11.94
11.94
7.50
7.50
7.50
7.50
-
-
.
Opt ion
4.2B: Basea
43.1
9.55
9.55
6.00
6.00
6.00
6.00
-
-
.
Option
4.2C: 5% Below Base
40.9
9.07
9.07
5.70
5.70
5.70
5.70
-
-
.
Ope ratin^
» and Maintenance Costs*5
-
-
-
1.60
2.20
3.40
4.60
5.80
5.80
5.80
Notes and Sources: a.
b.
From Tables V-6 through V-10.
Assumed to be the same under the compliance cost ranges
A, B, C for each control option (with or without OSHA).
V-18
Arthur D Little, Inc
-------
combination, would prove a largely repetitious and time-consuming method
of assessing the economic impacts of the four alternative control options.
A limited, representative number of these 24 analytical options can be
selected for impact analysis purposes, in order to address fully and
efficiently the spectrum of impacts associated with these 24 analytical
options.
The following five options out of the full range of 24, have been selected
for impact analysis purposes (Note: required incremental capital invest-
ment levels are given in parentheses, expressed in millions of 1978
dollars):
e Option 1.2B (97.5), which represents Option 1 with OSHA (base case),
broadly covers the following control option/compliance cost combination:
1.2A (121.9)
3.2A ( 97.5)
• Option 1.1B (61.5), which represents Option 1 without OSHA (base
case) , broadly covers the following control option/compliance cost
combinations:
1.1A (76.9)
2.2B (76.5)
3.2C (74.1)
2.2C (72.7)
• Option 3.2B (78.0), which represents Option 3 with OSHA (base case),
broadly covers the following control option/compliance cost combina-
tions :
2.2A (95.6)
1.2C (92.6)
• Option 3.IB (42.0), which represents Option 3 without OSHA (base
case), broadly covers the following control option/compliance cost
combinations:
2.IB (40.5)
4.2C (40.9)
3.1C (39.9)
2.1C (38.5)
• Option 4.2B (43.1), which represents Option 4 with OSHA (base case),
broadly covers the following control option/compliance cost combina-
tions :
1.1C (58.4)
4.2A (53.9)
3.1A (52.5)
2.1A (50.6)
V-19
Arthur D Little, lnc
-------
Three remaining control option/compliance cost combinations are omitted
from consideration, by inspection as analytically "trivial" cases:1
• 4.1A (8.9)
• 4.IB (7.1)
0 4.1C (6.7)
The selection of Options 1.2B, 1.1B, 3.IB, 3.2B and 4.2B to bracket the
problem analytically for impact analysis purposes reflects the following
basic considerations:
o If Asarco-Tacoma cannot successfully undertake the incremental
pollution abatement expenditures programs specified under
Options 1.2B, 1.1B, 3.IB, 3.2B and 4.2B (in the sense that it
would face a shutdown decision now or in the future precipitated
by a combination of factors due to these options), then it is
highly unlikely that Asarco-Tacoma would survive the control
option/compliance cost combinations enumerated above by these
respective options.
• Conversely, if Asarco-Tacoma can successfully meet Option 1.2B,
1.1B, 3.2B, 3.IB and 4.2B, then it is highly likely that it can
also meet the control option/compliance cost combination covered
by these options.
Differences in time-phasing and levels of operating and maintenance costs
under the various control option/compliance cost combinations may possibly
render the selection of Options 1.2B, 1.1B, 3.2B, 3.IB and 4.2B somewhat
less than perfect. Nevertheless, we believe they provide an appropriately
representative set of options to use for impact analysis purposes. It
may be noted, in this respect, that Options 2 and 3 are virtually inter-
changeable, and differ mainly in terms of the time-phasing of the incre-
mental capital investment associated with roaster gas enrichment and acid
plant consolidation. Under Option 3, incremental capital expenditures are
spread over the years 1981-1984, whereas under Option 2 they take place
over the period 1978-1981. In other words, for all practical purposes,
Option 3 provides a "gradual" version of Option 2, and includes some re-
dundancy such that should Asarco-Tacoma fail to meet Option 3, then it
quite likely will fail to meet Option 2. (This implies that Option 2
would warrant additional impact analysis should Asarco-Tacoma appear to
meet Option 3.)
*That is to say, these cases would warrant analysis only if Asarco-Tacoma
would clearly fail to meet even the lowest cost of the five options
selected for analysis.
V-20
Arthur D Little Inc
-------
6. Translation of Incremental Pollution Abatement Expenditures to
Annual O&M Costs and Annualized Compliance Costs for Impact
Analysis Purposes
a. General
Tables V-12 through V-16 translate the incremental pollution abatement
capital expenditures and operating and maintenance costs under Options 1.2B,
1.1B, 3.2B, 3.IB and 4.2B into annualized compliance costs (i.e., annualized
fixed costs, operating and maintenance costs per year, and total annualized
compliance costs).
b. Cash Flow Analysis
Capital outlays and year-by-year O&M costs are used for the cash flow
analysis. The table includes capital outlays for pollution abatement
replacement investment at 3% of total pollution abatement investment in
place, taking place after the plant is in operation following the in-
stallation of the pollution abatement machinery and equipment under the
various control options (i.e., starting in 1984 or 1985, depending on the
control option).
The estimate of annual replacement at 3% of original investment, for a
new plant and equipment, is based on established engineering practice in
such studies and is typical of the copper industry.
c. Annualized Costs
Annualized costs are necessary for the alternative approach for impact
analysis discussed in Appendix L.
The capital investment is converted into annualized fixed costs by multi-
plying the investment by a fixed charge coefficient. A fixed charge co-
efficient of 17% was used in our analysis. This is about the same as the
17.65% figure used by PEDCo.
D. METHODOLOGY OF IMPACT ANALYSIS
1. Introduction
Under any incremental pollution control scenario, Asarco-Tacoma faces
increased costs of production over the foreseeable future. The costs
of compliance under these conditions, defined narrowly to include both
capital expenditures (fixed costs) and operating and maintenance
expenses (variable costs), cause an upward shift in Tacoma's pertinent
V-21
Arthur D Little, Inc
-------
TABLE V-12
ANNUALIZED COMPLIANCE COSTS AT ASARCO-TACOMA UNDER OPTION 1.2B
(CONTROL OPTION 1, WITH OSHA, BASE CASE) 1978-1996
(millions of 1978 dollars)
Years when
fixed costs
are faced
Years when pollution
abatement capital expenditures
(dollar outflows) takes
>lacea
Annualized
Fixed
Costs k
Operating
and
Maintenance
Costs
a
by Year
Total
Annualized
Compliance
Costs
by Year
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
8.80
8.80
19.98
19.98
19.98
19.98
2.93
2.93
2.93
2.93
2.93
2.93
2.93
2.93
2.93
2.93
2.93
2.93
by Year
1978
-
-
-
1979
1. 50
1.50
-
1.50
1980
1.50
1.50
3.00
1.40
4.40
1981
1.50
1.50
3.40
6.40
2.00
8.40
1982
1.50
1.50
3.40
3.40
9.80
3.20
13.00
1983
1.50
1.50
3.40
3.40
3.40
13.20
4.40
17.60
1984
1.50
1.50
3.40
3.40
3.40
3.40
16.60
11.40
28.00
1985
1.50
1.50
3.40
3.40
3.40
3.40
.50
17.10
11.40
28.50
1986
1.50
1.50
3.40
3.40
3.40
3.40
.50
.50
17.60
11.40
29.00
1987
1.50
1.50
3.40
3.40
3.40
3.40
.50
.50
.50
18.10
11.40
29.50
1988
1.50
1.50
3.40
3.40
3.40
3.40
.50
.50
.50
.50
18.60
11.40
30.00
1989
1.50
1.50
3.40
3.40
3.40
3.40
.50
.50
.50
.50
.50
19.10
11.40
30.50
1990
1.50
3.40
3.40
3.40
3.40
.50
.50
.50
.50
.50
.50
18.10
11.40
29.50
1991
3.40
3.40
3.40
3.40
.50
.50
.50
.50
.50
.50
.50
17.10
11.40
28.50
1992
3.40
3.40
3.40
.50
.50
.50
.50
.50
.50
.50
.50
14.20
11.40
25.60
1993
3.40
3.40
.50
.50
.50
.50
.50
.50
.50
.50
.50
11.30
11.40
22.70
1994
3.40
.50
.50
.50
.50
.50
.50
.50
.50
.50
.50
8.40
11.40
19.80
1995
.50
.50
.50
.50
.50
.50
.50
.50
.50
.50
.50
5.50
11.40
16.90
1996
.50
.50
.50
.50
.50
.50
.50
.50
.50
.50
.50
5.50
11.40
16.90
Notes k Reflect the following major assumptions: (1) capital recovery period of 11 years; (2) fixed charge coefficient of 0.17 (i.e.,
17 0%)- (3) capital outlays for pollution abatement replacement investment at 3% of total pollution abatement investment in
place,'taking place after the plant is in operation following the installation of the pollution abatement machinery and equip-
ment under the various control options (i.e., starting in 1984 or 1985, depending on the control option).
-------
TABLE V-13
ANNUALIZED COMPLIANCE COSTS AT ASARCO-TACOMA UNDER OPTION 1.1B
(CONTROL OPTION 1, WITHOUT OSHA, BASE CASE), 1978-1996
(millions of 1978 dollars)
<
i
ho
OJ
Years when
fixed costs
are faced
Years when pollution abate
-ment
capital expenditures (do]
lar c
utflc
ws)
ake place
a
Annualized
Fixed
Costs
by Year
Operating
and
Maintenance
Costs
by Year3
Total
Annualized
Compliance
Costs
by Year
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
2.80
2.80
13.98
13.98
13.98
13.98
1.85
1.85
1.85
1.85
1.85
1.85
1.85
1.85
1.85
1.85
1.85
1.85
1978
-
-
-
1979
.48
.48
-
.48
1980
.48
.48
.96
.80
1.76
1981
.48
.48
2.38
3.34
.80
4.14
1982
.48
.48
2.38
2.38
5.72
.80
6.52
1983
.48
.48
2.38
2.38
2.38
8.10
.80
8.90
1984
.48
.48
2.38
2.38
2.38
2.38
10.48
6.60
17.08
1985
.48
.48
2.38
2.38
2.38
2.38
.31
10.79
6.60
17.39
1986
.48
.48
2.38
2.38
2.38
2.38
.31
.31
11.10
6.60
17.70
1987
.48
.48
2.38
2.38
2.38
2.38
.31
.31
.31
11.41
6.60
18.01
1988
.48
.48
2.38
2.38
2.38
2.38
.31
.31
.31
.31
11.72
6.60
18.32
1989
.48
.48
2.38
2.38
2.38
2.38
.31
.31
.31
.31
.31
12.03
6.60
18.63
1990
.48
2.38
2.38
2.38
2.38
.31
.31
.31
.31
.31
.31
11.86
6.60
18.46
1991
2.38
2.38
2.38
2.38
.31
.31
.31
.31
.31
.31
.31
11.69
6.60
18.29
1992
2.38
2.38
2.38
.31
.31
.31
.31
.31
.31
.31
.31
9.62
6 60
16.22
1993
2.38
2.38
.31
.31
.31
.31
.31
.31
.31
.31
.31
7.55
6.60
14.15
1994
2.38
.31
.31
.31
.31
.31
.31
.31
.31
.31
.31
5.48
6.60
12.08
1995
.31
.31
.31
.31
.31
.31
.31
.31
.31
.31
.31
3.41
6.60
10.01
1996
.31
.31
.31
.31
.31
.3.
.31
.31
.31
.31
.31
3.41
6.60
10.01
>
—t
I—f
rr
c
o
Notes and Sources: a.
b.
Reflect the following major assumptions: (1) capital recovery period of 11 years; (2) fixed charge coefficient o . ( .
17 0%)- (3) capital outlays for pollution abatement replacement investment at 3% of total pollution abatement investment n
place 'taking place after the plant is in operation following the installation of the pollution abatement machinery and equip-
ment under the various control options (i.e., starting in 1984 or 1985. depending on the control option).
-------
TABLE V-14
ANNUALIZED COMPLIANCE COSTS AT ASARCO-TACOMA UNDER OPTION 3.2B
(CONTROL OPTION 3, WITH OSHA, BASE CASE), 1978-1996
(millions of 1978 dollars)
Years when
fixed costs
are faced
Years when pollution abatement capital expenditures
(dollar outflows) take place3
Annualized
Fixed
Costs
by Year
i
Operating
and
Maintenance
Costs a
by Year
Total
Annualized
Compliance
Costs
by Year
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
9.55
9.55
6.00
14. 73
14.73
14. 73
8. 73
2.34
2.34
2.34
2.34
2.34
2.34
2.34
2.34
2.34
2.34
2.34
1978
-
-
-
1979
1.62
1.62
-
1.62
1980
1.62
1.62
3.24
1.60
4.84
1981
1.62
1.62
1.02
4.26
2.20
6.46
1982
1.62
1.62
1.02
2.50
6.76
3.40
10.16
1983
1.62
1.62
1.02
2.50
2.50
8.26
4.60
13.86
1984
1.62
1.62
1.02
2.50
2.50
2.50
11.76
5.80
17.56
1985
1.62
1.62
1.02
2.50
2.50
2.50
1.48
13.24
11.30
24.54
1986
1.62
1.62
1.02
2.50
2.50
2.50
1.48
.40
13.64
11.30
24.94
1987
1.62
1.62
1.02
2.50
2.50
2.50
1.48
.40
.40
14.04
11.30
25.34
1988
1.62
1.62
1.02
2.50
2.50
2. 50
1.48
.40
.40
.40
14.44
11.30
25.74
1989
1.62
1.62
1.02
2.50
2.50
2.50
1.48
.40
.40
.40
.40
14.84
11.30
26.14
1990
1.62
1.02
2.50
2.50
2.50
1.48
.40
.40
.40
.40
.40
13.62
11.30
24.92
1991
1.02
2.50
2.50
2.50
1.48
.40
.40
.40
.40
.40
.40
12.40
11.30
23. 70
1992
2.50
2.50
2.50
1.48
.40
.40
.40
.40
.40
.40
.40
11.78
11.30
23.08
1993
2.50
2.50
1.48
.40
.40
.40
.40
.40
.40
.40
.40
9.68
11.30
20.98
1994
2.50
1.48
.40
.40
.40
.40
.40
.40
.40
.40
.40
7.58
11.30
18.88
1995
1.48
.40
.40
.40
.40
.40
.40
.40
.40
.40
.40
5.48
11.30
16.78
1996
.40
.40
.40
.40
.40
.40
.40
.40
.40
.40
.40
4.40
11.30
15.70
Notes and Sources: a. From Table V-ll.
b. Reflect the following major assumptions: (1) capital recovery period of 11 years; (2) fixed charge coefficient of 0.17 (i.e.,
17.0%); (3) capital outlays for pollution abatement replacement investment at 3% of total pollution abatement investment in
place, taking place after the plant is in operation following the installation of the pollution abatement machinery and equip-
ment under the various control options (i.e., starting in 1984 or 1985, depending on the control option).
-------
rs wl
:ed C(
e fai
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
Sour
TABLE V-15
ANNUALIZED COMPLIANCE COSTS AT ASARCO-TACOMA UNDER OPTION 3.IB
(CONTROL OPTION 3, WITHOUT OSHA, BASE CASE), 1978-1996
(millions of 1978 dollars)
Years when pollution abatement capital expenditures (dollar outflows) take place
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
Fixed
Costs
by Year
Maintenance
Costs
Compliance
Costs
3.55
3.55
-
8.73
8.73
8.73
8.73
1.26
1.26
1.26
1.26
1.26
1.26
1.26
1.26
1.26
1.26
1.26
by Year3
by Year
.60
.60
-
.60
.60
.60
1.20
1.00
2.20
.60
.60
-
1.20
1.00
2.20
.60
.60
-
1.48
2.68
1.00
3.68
.60
.60
-
1.48
1.48
4.16
1.00
5.16
.60
.60
-
1.48
1.48
1.48
5.64
6.50
12.14
.60
.60
-
1.48
1.48
1.48
1.48
7.12
6.50
13.62
.60
.60
-
1.48
1.48
1.48
1.48
.21
7.33
6.50
13.83
.60
.60
-
1.48
1.48
1.48
1.48
.21
.21
7.54
6.50
14.04
.60
.60
-
1.48
1.48
1.48
1.48
.21
.21
.21
7.75
6.50
14.25
.60
.60
-
1.48
1.48
1.48
1.48
.21
.21
.21
.21
7.96
6.50
14.46
.60
-
1.48
1.48
1.48
1.48
.21
.21
.21
.21
.21
7.57
6.50
14.07
-
1.48
1.48
1.48
1.48
.21
.21
.21
.21
.21
.21
7.18
6.50
13.68
1.48
1.48
1.48
1.48
.21
.21
.21
. 21
.21
.21
.21
7.39
6.50
13.89
1.48
1.48
1.48
.21
.21
.21
.21
.21
.21
.21
.21
6.12
6.50
12.62
1.48
1.48
.21
.21
.21
.21
.21
.21
.21
.21
.21
4.85
6.50
11.35
1.48
.21
.21
.21
.21
.21
.21
.21
.21
.21
.21
3.58
6.50
10.08
.21
.21
.21
.21
.21
.21
.21
.21
.21
.21
.21
2.31
6.50
8.81
Annualized
Operating
and
Total
Annualized
a. From Table V-ll.
b. Reflect the following major assumptions: (1) capital recovery period of 11 years; (2) fixed charge coefficient of 0.17 (i.e.,
17.0%); (3) capital outlays for pollution abatement replacement investment at 3% of total pollution abatement investment in
place, taking place after the plant is in operation following the installation of the pollution abatement machinerv and equip-
ment under the various control options (i.e., starting in 1984 or 1985, depending on the control option)
-------
•e fa
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
TABLE V-16
ANNUALIZED COMPLIANCE COSTS AT ASARCO-TACOMA UNDER OPTION 4.2B
(CONTROL OPTION 4, WITH OSHA, BASE CASE), 1978-1996
(millions of 1978 dollars)
Years when pollution abatement capital expenditures (dollar outflows) takes place
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
Fixed
Costs
Maintenance
Costs
Compliance
Costs
9.55
9.55
6.00
6.00
6.00
6.00
1.29
1.29
1.29
1.29
1.29
1.29
1.29
1.29
1.29
1.29
1.29
1.29
by Year
by Year3
by Year
1.62
1.62
-
1.62
1.62
1.62
3.24
1.60
4.84
1.62
1.62
1.02
4.26
2.20
6.46
1.62
1.62
1.02
1.02
5.28
3.40
8.68
1.62
1.62
1.02
1.02
1.02
6.30
4.60
10.90
1.62
1.62
1.02
1.02
1.02
1.02
7.32
5.80
13.12
1.62
1.62
1.02
1.02
1.02
1.02
.22
7.54
5.80
13.34
1.62
1.62
1.02
1.02
1.02
1.02
.22
.22
7.76
5.80
13.56
1.62
1.62
1.02
1.02
1.02
1.02
.22
.22
.22
7.98
5.80
13.78
1. 62
1.62
1.02
1.02
1.02
1.02
.22
.22
.22
.22
8.20
5.80
14.00
1.62
1.62
1.02
1.02
1.02
1.02
.22
.22
.22
.22
.22
8.42
5.80
14.22
1.62
1.02
1.02
1.02
1.02
.22
.22
.22
.22
.22
.22
7.02
5.80
12.82
1.02
1.02
1.02
1.02
.22
. 22
.22
.22
.22
.22
.22
5.62
5.80
11.42
1.02
1.02
1.02
.22
.22
.22
.22
.22
.22
.22
.22
4.82
5.80
10.62
1.02
1.02
.22
.22
.22
.22
.22
.22
.22
.22
.22
4.02
5.80
9.82
1.02
.22
.22
.22
.22
.22
.22
.22
.22
.22
.22
3.22
5.80
9.02
.22
.22
.22
.22
.22
.22
.22
.22
.22
.22
.22
2.42
5.80
8.22
.22
.22
.22
.22
.22
.22
.22
.22
.22
.22
.22
2.42
5.80
8.22
Annualized
Operating
and
a. From Table V-ll. #
b. Reflect the following major assumptions: (1) capital recovery period of 11 years; (2) fixed charge coefficient of 0.1/ (i.e.,
17.0%): (3) capital outlays for pollution abatement replacement investment at 3% of total pollution abatement investment in
place, taking place after the plant is in operation following the installation of the pollution abatement machinery and equip-
ment under the various control options (i.e., starting in 1984 or 1985, depending on the control option).
-------
cost schedules, thus directly affecting its financial performance and
economic viability. How precisely compliance costs would affect
Tacoma's production costs becomes, therefore, analytically important
for economic impact analysis1. Compliance costs, serving generally as
the central causal instrument, hence represent an input into economic
impact analysis; compliance costs and economic impacts are, in this
case, not synonymous.
In general, a custom smelter and refinery such as Tacoma can respond
in five basic ways to incremental pollution abatement costs:
a. absorb the costs internally;
b. pass these costs back to the mines by increasing the smelting
and refining charges;
c. pass the costs forward to purchasers of copper; and/or to
purchasers of byproducts;
d. change raw materials (e.g., switch to low-impurity concentrates);
1
For a review of how the cost schedules of a firm or an industry are
affected by compliance costs, refer to Technical Appendix to Arthur
D. Little report, Econometric Simulation and Impact Analysis Model of
the U. S. Copper Industry, Supporting Paper 5: "Effects of Pollution
Abatement and Control Costs on Industry-Wide Cost Functions".
As indicated here, in the short-term (e.g., a year), the case of
pollution abatement cost impact is perfectly analogous to the case
of a specific tax levied on the output of the firm (e.g., x cents per
pound of refined copper) only in the restricted instance of an upward
shift in the firm's total variable cost function. Consequently, the
average variable cost (AVC), average total cost (ATC), and marginal
cost schedules (curves, functions) shift upward by a constant.
However, in the case of pollution abatement and control capital invest-
ment only, average fixed cost (AFC) and ATC schedules shift upward
(which increases in severity at lower levels of capacity), while the
AVC and MC schedules are not affected.
If compliance costs involve both capital expenditures and variable
costs, then assuming linear total cost, total fixed cost, and total
variable cost functions, the AVC, MC, AFC and ATC schedules all shift
upward; while AVC and MC shift upward by a constant, the shift in AFC
and ATC becomes increasingly severe at lower levels of production.
Given a typical downward-sloped demand schedule, these results have
different implications for the firm's price-output determination
behavior and therefore impact results, depending on market structure.
V-27
Arthur D Little, Inc
-------
e. shut the plant down (e.g., parts of the Tacoma complex or the
entire complex, and shift production to other plants) and
recover working capital plus the salvage value of the
equipment.
Of course, the first four of these response modes are not necessarily
mutually exclusive.
Tacoma, as a producer of only about 7% of the U. S. copper, cannot
selectively increase copper prices to cover increased costs. This
largely eliminates option (c) above. The bulk of our economic impact
analysis will therefore concentrate on the remaining options, based
on both microeconomic and financial analysis.
It should be noted that Option (b) has been used by Asarco in the past.
Starting in May .1970, Asarco instituted a pollution control surcharge
of lc/lb. for copper prices less than or equal to 50c/lb. and 1.5
-------
2. The Basic Approach
The basic approach taken in determining and assessing the impact of
incremental pollution control was twofold: financial and microeconomic.
The financial analyses were performed for the future operations at
Tacoma, within an internally consistent microeconomic framework as to
the customer base and revenues deriving therefrom. The financial
analysis focused on the net present value of cash flows at Tacoma,
treating Tacoma as a stand-alone business—i.e., a profit center
within the Asarco accounting structure, with explicit recognition
of costs directly assignable to the on-going conduct of Tacoma's
business.
In effect, the objective of the analysis was to simulate Asarco
decision-making with respect to investment and operating strategies
appropriate for Tacoma, where Asarco would be confronted with the cash
flow patterns resulting from a particular pollution control option.
This clearly assumes that Asarco's decision would be based on these
principles.
The presumption is that Asarco management represents risk-averse
investors who seek to maximize the wealth and, hence, value of the
firm by maximizing the present value of its expected future cash flows.
Modern financial theory and managerial economics characterize this
type of problem as one of investment decision-making under uncertainty.
Within this classification, we are dealing with the simulated capital
budgeting process at a particular firm—Asarco.
The techniques of capital budgeting employ several basic concepts, viz:
(1) There is a time value of money, such that a unit of money received
today is worth more than one received at a later date, the difference
being exactly equal to the return one can earn on the investment of
the money until that date. In other words, one imputes value to money
invested in accordance with the annual compound interest formula
(or in certain cases, the continuous compounding formula).
(2) The present value PV(t) of a sum of money or cash flow (CF)
received _t years in the future is defined as and obtained from the
discounting of that sum by the amount its present value would earn
with compound interest at the discount rate, d. Thus,
(PV) =
^ ;t (l+d)fc
For a sum of cash flows over a period N year
pu - E (CF)t
PV ~ t=0 JiTdfr
The cash flows may be either positive (net receipts) or negative (net
outlays). They may occur continuously or intermittently. In the
analysis herein, cash flows are assumed to occur annually, with t=0
set at January 1, 1978. Thus, the present value of $1 received on
that date would be exactly +$1, and of $1 spent on that date, exactly
V-29
Arthur D Little, Inc
-------
-$1. The present value of $1 received on January 1, 1979 would be worth
$0.91 on January 1, 1978.
For economic analysis, all cash flows are first expressed in real terms
in constant (1978) dollars. This, in effect, cancels the effect of
inflation or the decrease in purchasing power.
The term Net Present Value, NPV, refers to the algebraic sum of the
present value of cash investments (outlays) with the present value
from future receipts generated from the business.
(3) The internal rate of return, d^, from a set of cash flows is the
discount rate which makes the net present value zero:
N rrn
NPV " 0 for t»o (1^
(4) The so-called discounted cash flow (DCF) analyses employing PV
and NPV implicitly assume that opportunities are in fact always
available for reinvestment of the cash flows at the same rate as the
discounted rate employed. (This is analogous to the concept employed
in standard tables giving the present value of an annuity, bond yields
to maturity, and so forth). However, by defining a minimum interest
rate or opportunity cost, one can think in terms of a hurdle rate d^>
which is usually synonymous with the discount rate employed in new
venture analysis. That is, projects are considered if they produce
a rate of return greater than or equal to the hurdle rate.
(5) If there are no constraints on the size of the capital expenditures,
i.e., if those considered do not require the firm to resort to unreasonable
external financing, then capital budgeting decisions will be chosen
from among a set of alternatives in order of increasing NPV for a given
d^, or in order of decreasing R for a given investment outlay.
(6) Other things equal, a strategy or option which involves positive
cash returns to be received in the distant future is, by definition,
riskier than one where such cash flows are received earlier. Also,
by definition, a project whose cash flows are highly uncertain is
riskier than one where they are predictable. An example of the first
type is an investment in a new low-grade mine without any long-term
contracts for its output; an example of the second would be a first
mortgage on prime commercial property.
(7) Relatedly, investors must be compensated for incurring risk, so
that, when comparing investment alternatives, the riskier the project,
the higher must be its expected (ex ante) return. The concept of a
risk-adjusted rate of return is thus employed to compare projects with
different risk characteristics; this is facilitated by thinking in
terms of a higher discount rate than the firm's opportunity cost of
capital for projects which are significantly riskier than its average
investment.
V-30
Arthur D Little, Inc
-------
(8) Associated with the concept of a risk-adjusted discount rate is
an additional concept: the excess return per unit of risk which is
defined as the expected return minus the risk free rate of interest,
divided by the standard deviation of the returns realized from similar
projects.
The excess return, p, is also called the risk premium. Thus, if r
denotes the risk free rate of interest, the appropriate discount rate
to use incorporates the risk premium:
d = p + r.
(For an investment in U. S. Treasury obligation, p is equal to zero.)
Given equilibrium conditions in the economy and the capital markets,
a firm will earn at a rate d on its investments, and d will be equal
to its cost of new capital.
The presumption is that for rational, risk-averse investors, the
expected return on any equity or industrial investment is always
greater than the risk-free rate of interest (i.e., U. S. Treasury
obligations). It is assumed that the decisions of a firm reflect the
wealth-maximizing behavior of risk-averse investors, and it is
assumed that transactions in the capital markets result in costs of
capital to the firm which reflect the risk-return characteristics of
its securities.
Turning now to the alternatives facing Asarco at Tacoma, the approach
was to calculate the net present value of Tacoma's cash flow under
various scenarios, starting with baseline conditions and continuing
with variations on the baseline conditions. The NPV's of different
options were obtained by superposition of the incremental capital
expenditures and O&M costs associated with the option. The NPV's of
each option were also noted vis-a-vis the NPV of two boundary
conditions, viz: (1) the continuation of Tacoma "as is" under baseline
cash flow and no incremental environmental control costs, and
(2) shutdown of Tacoma.
The presumption with respect to the first comparision is that Asarco
management will strive for revenue conditions under incremental environ-
mental control which restore Tacoma to a baseline cashflow condition.
The presumption with respect to the second comparision is that, from
the standpoint of financial criteria at least, and given no hope of
condition (1), Asarco will tend to consider shutting down Tacoma if
the net present value of the option appears to be less than the present
value associated with shutdown. Formally, the following inequality
V-31
Arthur D Little, Inc
-------
r £ (C.F.)t- ,
t=0 (ltd) Option
r f (C.F.
t=G (ltd') shutdown
» 0
must hold, to unambiguously keep Tacoma operating under the posited
pollution control option conditions.
Note that in the above formulation, the time horizon is infinite.
In actual calculations, the series of terms was truncated at the year
1995, a procedure which introduces little error at the discount rates
employed, and, in any case, one which closely approximates the type
of projection that might be used in industry.
The discount rate, d', under a shutdown scenario, denotes that there
could be a difference in the degree of cash flow uncertainty, and
hence, risk, as perceived by Asarco, between the alternatives. We
have assumed this difference to be minor, i.e.,
As developed and discussed in the next section, we have used discount
rates of 10% and 15% on an after-tax basis in computing NPV's.
3. Asarco's Cost of Capital and Estimated Hurdle Rate for Tacoma
In computing the present value of alternative investment strategies,
an appropriate discount rate to use is the corporation's perception
of its risk-adjusted opportunity cost of equity capital. It is never
easy to establish this with precision. For this reason, we have used
several different approaches for estimating the hurdle rate or the
appropriate discount factor for evaluating alternative courses of
action at Tacoma.
• Asarco's historical performance: The nonferrous metals business
is highly cyclical and erratic and is hence considered risky.
We believe Asarco's management, like that of other metals/mining
companies, traditionally used an ex ante equity rate of return
criterion, or hurdle rate, of 12-15% for evaluating investments
of average risk in the business and economic environment of the
1960's when inflation was 3% or less. (This implies a hurdle rate
in constant dollar terms of 9%-12%.) For the period 1965-1976
inclusive Asarco realized long-term return on equity of 12-13%,
in current dollars. However, for the last five years, its return
was only about 9-1/2%. (If the recession year 1975 is eliminated
Asarco's return for the latter period was 11% on average). When
one adjusts this return for inflation, the result is that the
ex post real rate of return achieved was only 5%. In 1976 Asarco's
corporate-wide return on total capital employed was 6%. In a
"normal" year, we estimate Asarco's total earnings would be higher
and interest charges lower than in 1976 and that return on total
capital would be 7-8%.
d
option
d
shutdown
V-32
Arthur D Little, Inc
-------
Under baseline conditions of Chapter IV, we estimate that Tacoma
would earn on average approximately $1.78 million net after taxes
(in 1978 dollar terms) and be responsible for $1.5 million per
year in interest payments. We estimate the related sum of Tacoma
net plant and working capital to be $44.3 million, so that return
on total capital would be about 7.4%. Thus, our estimate for Tacoma
is higher than Asarco's present return, and comparable to Asarco's
overall expected return on capital.
Today, high grade bonds are available which yield 7-9% pre-tax, and
high grade preferred stocks are available which yield about 7.5%
after-tax. Stockholders of Asarco by definition are risking all
or a portion of their wealth in the expectation of earning more than
the returns available on these relatively risk-free investments.
Thus we think Asarco management and stockholders today think in
terms of a hurdle rate greater than the return allowed regulated
electric utilities, who are being allowed 12-3/4-16% return on
equity1. In real terms, with 5% expected inflation, this suggests
to us a minimum Asarco hurdle rate of 10% (in constant dollars)
and an average hurdle rate of 15%, which would apply to investments
of normal business risk to Asarco.
• Cost of New Equity Capital: Besides Asarco's own hurdle rate,
another measure is the market cost of new equity capital.
This may be approximated by the reciprocal of the price-to-
earnings ratio on its stock. (Still another model, appropriate
for a stock whose earnings grow at a predictable rate and whose
dividend payout is constant, is the sum of the dividend yield plus
the growth rate2). Note for comparison that the P/E equivalent
for a bond today is about 1/8 or 12.5%; thus, one might expect
stocks of companies like Asarco to command a P/E ratio less
than that on a bond. Indeed, the median P/E ratio of Value Line
Investment Survey's broad list of stocks is about 8.0. And, using
the 5-year average earnings for Asarco as a proxy for its
earning power, the P/E for Asarco today would be about:
$20/share _ g
$67 million average earnings per year
26.7 million shares
^ee, for example, Blyth Eastman Dillon & Co., Inc., Investment
Research "Electric Utilities Market Service", Volume V, No. 2,
April 1977; and Testimony of Mr. Eugene Meyer of Kidder Peabody & Co.,
Docket 761-8, New Jersey Board of Public Utility Commissioners, 1976.
2
See Weston and Brigham, "Managerial Finance", Chapter 12, Third
Edition, 1969 (Holt Rinehart & Winston).
V-33
Arthur D Little, Inc
-------
Thus, if the above calculation accurately reflected investor
perceptions, Asarco's cost of new equity would be about 1/8 = 12.5%
in current dollar terms. With 5% inflation, the constant dollar
cost would be about 7.5%.
The Value Line Investment Survey, a well regarded investment
service, has estimated 1977 earnings per share for Asarco
which translate into a current P/E of 6-7; this would be
equivalent to a cost of capital of 14-16%. (Alternatively,
using the second model of dividend yield plus growth, with
Value Line estimates of average future earnings growth about 6%
per year and "normal" dividends of 6.2%, the equivalent idealized
cost of capital in a future environment would then be 12-13%).
• New projects versus on-going businesses: We believe that for new,
risky projects the after-tax hurdle rate to be employed in present
value/rate of return analyses re Tacoma should be greater than
the inflation-adjusted after-tax cost of equity capital associated
with the normal, on-going diversified business of Asarco as a
whole. Thus, we have used 10% as the minimum constant dollar
hurdle rate, and 15% as a more representative rate.
It should be noted that Asarco and other nonferrous metals
companies have made significant use of tax-exempt pollution
control revenue bond financing. However, the possibility of
pollution control bond financing at Tacoma to lower the cost of
capital is foreclosed because the State of Washington has
disallowed this type of financing1.
4. Illustrative Example
Table V-17 illustrates the calculation of the NPV associated with
Control Option 4.2B (minimum control, with OSHA) under baseline
revenue conditions. The calculation is done year-by-year to obtain
each year's net cash flow after taxes. The algebraic sum of all
cash flows is discounted year-by-year to compute the net present
values (under two different discount rate assumptions) from
operations over the period 1978-1995.
Tacoma's revenues are shown in column 2. Baseline revenues of $49
million were used throughout the period. The capital expenditures
are shown in column 3. The year-by-year operations and maintenance
costs in column 4, are for both the baseline and for incremental
pollution control.
*See Port of Longview vs. Taxpayers of same, 84 Washington, 2d
475,527, p. 2d 263 (1974); Opinion and Modified Rehearing Denied,
85 Washington, 2d 216,533, p. 2d 128 (1975).
V-34
Arthur D Little, lnc
-------
1
Years
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
Notes;
TABLE V-17
CONTROL OPTION 4.2B (MINIMUM CONTROL, WITH OSHA)
AFTER-TAX CASH FLOW ANALYSIS UNDER BASELINE
REVENUE CONDITIONS
(in millions of 1978 dollars)
2
3
4
5
Depreciation
(Accelerated)
6
7
8
9
10
11
12
13 1 14
Revenues
CapLtal
Expenditures
O&M Cost.
Plus <1&A
Pre-Tax
Profits
Federal Tax
@ 482
ITC0,h
Net redernl Tax^1
After-Tax
_ , h
Prof it
(ash Flow.
_ h
A tor Tax
'WlLU'f
Parent
Stand
Alone®
Willi
Parent1
st.ind
Alorn.'^
W11U j-
Parcnt
Si. and
Alone**
49.0
10.75
44.5
1.20
3.30
1.58
( .54)
1.04
1.04
2.26
2.26
-7.29
-7.29
49.0
10. 75
44.5
2.94
1.56
.75
( 54)
.21
.21
1.35
1.35
-6 .46
-6.46
49.0
7. 20
46.1
4.36
-1.46
( -70)
( .36)
(1.06)
(1.06)
( .40)
( .40)
-3.24
-3.24
49.0
7.20
46.7
4.99
-2 69
(1.29)
( .36)
(1.65)
( -19)
(1.04)
(2.50)
-3.25
-4.71
49.0
7.20
47.9
5.60
-4.50
(2.16)
( -36)
(2.52)
-0-
(1.98)
(4.50)
-3 58
-6.10
49.0
7.20
49.1
6.11
-6.21
(2.98)
( .36)
(3.34)
-0-
(2.87)
(6.21)
-3.96
-7.30
49.0
2.46
50.3
6.53
-7.83
(3.76)
( .12)
(3.88)
-0-
(3.95)
(7.83)
-1.20
-3.76
49.0
2.46
50.3
6.02
-7.32
(3.51)
( • i2)
(3.63)
-0-
(3.69)
(7.32)
-1.3
-3.76
49.0
2.46
50,3
5.59
-6.89
(3.31)
( -12)
(3.43)
-0-
(3.46)
(6.89)
- .33
-3.76
49.0
2.46
50.3
5.13
-6.43
(3.09)
( .12)
(3.21)
-0-
(3.22)
(6.43)
- .55
-3.76
49.0
2.46
50.3
4.65
-5.95
(2.86)
( .12)
(2.98)
-0-
(2.97)
(5.95)
- .78
-3.76
49.0
2.46
50.3
4.14
-5.44
(2.61)
( .12)
(2.73)
-0-
(2.71)
(5.44)
-1.03
-3.76
49.0
2.46
50.3
3.61
-4.91
(2.36)
( -12)
(2.48)
-0-
(2.43)
(4.91)
-1.28
-3.76
49.0
2.46
50.3
3.21
-4.51
(2.16)
( .12)
(2.28)
-0-
(2.23)
(4.51)
-1.48
-3.76
49.0
2.46
50.3
2.93
-4.23
(2.03)
( .12)
(2.15)
-0-
(2.08)
(4.23)
-1.61
-3.76
49.0
2.46
50.3
2.72
-4.02
(1.93)
( .12)
(2.05)
-0-
(1.97)
(4.02)
-1.71
-3.76
49.0
2.46
50.3
2.58
-3.88
(1.86)
( .12)
(1.98)
-0-
(1.90)
(3.88)
-1.78
-3. 76
49.0
2.46
50.3
2.51
-3.81
(1.83)
( -12)
(1.95)
-0-
(1.86)
(3.81)
-1.81
-3.76
Summarv
¦ NET PRESENT VALUE
(? 10 Z
-S25.5
-$40.0
@ 15*
-S21.3
-$31.1
a. Includes capital expenditures required under this control option plus annual replacement investment on basic plant and equipment
(l.e , $1.2 million/year) regardless of any control option.
b. Operating and maintenance costs plus general and administrative expenses (baseline) plus operating and maintenance costs required
under the control option considered.
c. Calculated by using an accelerated depreciation schedule (refer to the text and associated tables for further detail).
d. Federal corporate income tax liability, computed at an assumed marginal rate of 48 percent against pre-tax profits.
e. Income tax credit, estimated at 52 of total capital expenditures in each accounting period (refor to Lh«i text Cor explanation, refer
to footnote "h" below for the interpretation of figures given in parentheses).
f. Assumes that tax credits associated with ITC and/or losses at Tacoma will be utilized by the parent company (Asarco, Inc.) as offsets
against Its corporate income tax liability in its consolidated Income tax return.
g. Assumes that tax credits from continuing losses at Tacoma will not be utilized bv chc parent i.omp«iny (As.irru, Inc.) as offsets against
its corporate income cax liability.
h. Figures in parentheses indicate tax offsets
V-35
Arthur D Little, Inc
-------
Column 5 presents the depreciation schedule assumed. In this case,
11-year accelerated depreciation was used for calculating income
taxes. This schedule is shown in Table V-18. A sensitivity analysis
was performed to compare accelerated depreciation and straight-line
depreciation. Table V-19 shows the depreciation schedule when straight
line depreciation is used. This latter approach results in a higher
tax liability, other things equal, and thus reduces after-tax (but
not pre-tax) cash flows by $0.48 per dollar of incremental depreciation.
A comparison of the two depreciation methods and their effect on NPV is
shown in Table V-20. Because the effect of the depreciation method
was minor on a present value basis (and easily computed in the event
the results of an option were ambiguous), the calculations for the
remaining options were done using straight-line depreciation.
Column 6 computes the pre-tax profit by year, by subtracting costs
and depreciation from revenues. Column 7 computes federal income
tax liability using a 48% marginal tax rate.
The investment tax credit (ITC) in column 8 is subtracted from the taxes in
column 7 to yield the net federal tax shown in columns 9 and 10. The
ITC was computed with the assumption that 50% of the capital expendi-
tures made in each year (in column 3) would qualify for a tax credit
equal to 10% of the expenditure.
Columns 9 through 14 present calculations on two different tax bases,
i.e., "With Parent" and "Stand Alone". The meaning of this is as
follows:
"With Parent" assumes that any tax credits arising from operating losses
and/or the ITC for Tacoma will be utilized as offsets by the parent,
Asarco, Inc., in computing its tax liability when filing a consolidated
federal income tax return. "Stand Alone" connotes Tacoma being
assessed as a separate profit center and assumes that tax credits
from any continuing operating losses at Tacoma and excess ITC credits
will not be utilized by the parent company Asarco, Inc. (In accordance
with the current provisions of the Internal Revenue Code, the ITC and
operating losses can be carried back 3 years or carried forward 7
years in computing tax liability). Columns 11 and 12 show after-tax
profit, subtracting columns 9 and 10, respectively from column 6.
Columns 13 and 14 compute cash flow after taxes, which is obtained
by adding depreciation to the after-tax profits, and subtracting the
capital expenditures in the same year from the result. In these
calculations, all cash flows in a year are assumed to occur at the
end of the year.
The annual net cash flows (CF)t were discounted at two different
rates, 10% and 15%, which represent the estimated range for the
cost of capital associated with the investments. The sum of these
discounted cash flows equals the net present value shown at the
bottom of the table.
V-36
Arthur D Little, Inc
-------
TABLE V-18
ESTIMATED DEPRECIATION SCHEDULE FOR TACOMA, 1978-1995, FOR CONTROL OPTION 4.2B
(MINIMUM CONTROL, WITH OSHA), UNDER THE 11-YEAR ACCELERATED DEPRECIATION APPROACH3
(in millions of 1978 dollars)
Years when
BASE*5
Years
when
pollution a
^atement
capital ex
pendit
ures
[dollar outflows) take place
depreciation
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990 1991 1992 1993 1994
1995
TOTAL
is faced
9.55
9.55
6.00
6.00
6.00
6.00
1. 29
1.29
1.29
1.29
1.29
1. 29
1.29 1.29 1.29 1.29 1.29
1.29
Depreciation
1978
1. 20C
-
1.20C
1979
1.20
1.74
-
2.94
1980
1.20
1.42
1.74
-
4.36
1981
1.20
1.28
1.42
1.09
-
4.99
1982
1.20
1.14
1.28
.89
1.09
-
5.60
1983
1.20
.99
1.14
.80
.89
1.09
-
6.11
1986
1.20
.85
.99
.71
.80
.89
1.09
-
6.53
1985
1. 20
.71
.85
.62
.71
.80
.89
.24
-
6.02
1986
1.20
.57
.71
.54
.62
.71
.80
.20
.24
-
5.59
1987
1.20
.43
.57
.45
.54
.62
. 71
.17
.20
.24
-
5.13
1988
1.20
.29
.43
.36
.45
.54
. 62
.15
.17
.20
.24
-
4.65
1989
1. 20
.14
.29
.27
.36
.45
.54
.13
.15
.17
.20
.24
-
4.14
1990
1.20
-
.14
.18
.27
.36
.45
.12
.13
.15
.17
.20
.24
-
3.61
1991
1. 20
.09
.18
.27
. 36
.10
. 12
.13
. 15
. 17
. 20
.24
3.21
1992
1.20
.09
.18
.27
.08
.10
.12
.13
.15
.17
.20 .24
2.93
1993
1.20
.09
.18
.06
.08
. 10
. 12
.13
.15
.17 .20 .24
2.72
1994
1.20
.09
.04
.06
.08
. 10
.12
.13
.15 .17 .20 .24
2.58
1995
1.20
.02
.04
.06
.08
.10
.12
.13 .15 .17 .20 .24
-
2.51
Notes: a. The depreciation schedule used reflects "double declining balance" (DDB) over the first two years, then "sum of the years' digits" (SOYD)
remaining life, given below. (The figures below are in percent of original cost);
11 years life
Start Value 100.00 Remainder
1
18.18
81.82
2
14.88
66.94
3
13.39
53.55
4
11.90
41. 65
5
10.41
31.24
6
8.93
22. 31
7
7.44
14.88
8
5.95
8.93
9
4.46
4.46
10
2.98
1.49
11
1.49
0.00
Note; Capital expenditures incurred in a given accounting period start being depreciated in the following period.
b. Tacoma's base depreciation is assumed at $1.2 million/year, in equilibrium, associated with replacement Investment to keep the basic
plant and equipment in operation, regardless of the various control options. In equilibrium, replacement investment is assumed to
equal depreciation.
c. Reflects capital expenditures for replacement incurred the previous year (i.e., 1977).
-------
TABLE V-19
ESTIMATED DEPRECIATION SCHEDULE FOR TACOMA, 1978-1995, FOR CONTROL OPTION 4.2B
(MINIMUM CONTROL, WITH OSHA), UNDER THE 11-YEAR STRAIGHT-LINE DEPRECIATION APPROACH3
(millions of 1978 dollars)
<
I
00
Years when
depreciation
is faced
BASEb
Years when pollution abatement capital expenditures (dollar outflows) take place
1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
TOTAL
9.55 9.55 6.00 6.00 6.00 6.00 1.29 1.29 1.29 1.29 1.29 1.29 1.29 1.29 1.29 1.29 1.29 1.29
Depreciation
1978
1.20C
1.20°
19 79
1.20
0.88
2.08
1980
1.20
0.88 0.88
2.98
1981
1.20
0.88 0.88 0.55
3.51
1982
1.20
0.88 0.88 0.55 0.55
4.06
1983
1.20
0.88 0.88 0.55 0.55 0.55
4.61
1984
1.20
0.88 0.88 0.55 0.55 0.55 0.55
5.16
1985
1.20
0.88 0.88 0.55 0.55 0.55 0.55 0.12
5.28
1986
1.20
0.88 0.88 0.55 0.55 0.55 0.55 0.12 0.12
5.40
1987
1.20
0.88 0.88 0.55 0.55 0.55 0.55 0.12 0.12 0.12
5.52
1988
1.20
0.88 0.88 0.55 0.55 0.55 0.55 0.12 0.12 0.12 0.12
5.64
1989
1.20
0.88 0.88 0.55 0.55 0.55 0.55 0.12 0.12 0.12 0.12 0.12
5.76
1990
1.20
0.88 0.55 0.55 0.55 0.55 0.12 0.12 0.12 0.12 0.12 0.12
5.00
1991
1.20
0.55 0.55 0.55 0.55 0.12 0.12 0.12 0.12 0.12 0.12 0.12
4.24
1992
1.20
0.55 0.55 0.55 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12
3.81
1993
1.20
0.55 0.55 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12
3.38
1994
1.20
0.55 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12
2.95
1995
1.20
0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12
2.52
Notes: a. Computed by dividing each year's pollution control capital expenditures by 11; capital expenditures incurred in a given accounting
period; start being depreciated in the following period,
b. Tacoma's base depreciation is assumed at $1.2 million/year, in equilibrium, associated with replacement investment to keep the
basic plant and equipment in operation, regardless of the various control options. In equilibrium, replacement investment is
assumed to equal depreciation.
)J> c. Reflects capital expenditures for replacement incurred the previous year (i.e., 1977).
-n
rr
c
-t
O
r-
n
-------
TABLE V-20
DEPRECIATION ESTIMATES FOR TACOMA UNDER CONTROL OPTION 4.2B
(MINIMUM CONTROL, WITH OSHA): DIFFERENCES BETWEEN RESULTS
OBTAINED BY USING ACCELERATED AND STRAIGHT-LINE METHODS
(millions of 1978 dollars)
Depreciation
Difference
in Tax
Benefit
Present Value
at Discount
Rate of
Years
Accelerated
StraiRht-line
to Tacoma3
10%
15%
1979
2.94
2.08
.41
.34
.31
1980
4.36
2.96
.67
.50
.44
1981
4.99
3.51
.71
.48
.41
1982
5.60
4.06
.74
.46
.37
1983
6.11
4.61
.72
.41
.31
1984
6.53
5.16
.66
.34
.25
1985
6.02
5.28
.36
.17
.12
1986
5.59
5.40
.09
.04
.03
1987
5.13
5.52
-.19
-.07
-.05
1988
4.65
5.64
-.48
-.17
-.10
1989
4.14
5.76
-.78
-.25
-.15
1990
3.61
5.00
-.67
-.19
-.11
1991
3.21
4.24
-.49
-.13
-.07
1992
2.93
3.81
-.42
-.10
-.05
1993
2.72
3.38
-.32
-.07
-.03
1994
2.58
2.95
-.18
-.03
-.02
1995
2.51
2.52
-.005
- 0
0
Summary: PRESENT VALUE OF THE DIFFERENCE
IN TAX BENEFIT AT
10% DISCOUNT RATE: $1.73 million
15% DISCOUNT RATE: $1.66 million
Notes: a. The difference in federal corporate income tax benefit is computed
as follows:
AB = 0.48 Da - 0.48 DS
t t t
= 0.48 (D* - D®)
where
AB^ : difference in tax benefit in year t;
a
: accelerated depreciation in year t;
: straight-line depreciation in year t;
0.48 : the assumed, marginal tax rate.
V-39
Arthur D Little, I nc
-------
It should be noted that these calculations were assumed to be
relevant only over a finite period, i.e., 1978-1995 inclusive.
This span is relatively long for business planning under conditions
of uncertainty, and were the calculations to be extended further,
it would be appropriate to consider raising the discount rate to
reflect greater risk associated with the outcome.
Implicit in this methodology is the assumption that Tacoma would
continue operations beyond 1995 but given the discount rates the
present value of future cash flows beyond 1995 is sufficiently small
and can be ignored. An alternative approach would have been to assume
that the plant is shut down at the end of this period of analysis and
to add in the salvage value of the plant. The salvage value in 1996
would not vary much from option to option and would result in a small,
constant offset in the net present values shown here. For example,
the net present value of $20 million in 1996 is only $1.4 million at
a 15% discount rate, whereas, the net present value for option 4.2B
is $-21 to $-31 million at the same discount rates.
E. CASH FLOW ANALYSIS OF INCREMENTAL POLLUTION CONTROL OPTIONS UNDER
BASE CONDITIONS
We present, in this section, a cash flow analysis of the various
incremental pollution control options under base conditions. We
first present a recapitulation of base conditions, followed by our
analysis and conclusions.
1. Recapitulation of Base Conditions
Very briefly, the base conditions assume annual production of 100,000
short tons of refined copper, all derived from Tacoma-produced blister
(i.e., the smelter and refinery production levels are the same).
Tacoma's effective productive capacity is determined by its ability
to process sulfur-bearing materials. Tacoma's feedstock sources
consist of "clean" concentrates, i.e., Duval and other southwestern
suppliers, "dirty" concentrates, i.e., Lepanto; Northern Peru, and,
East Helena. In addition, Tacoma is assumed to process a large
amount of precipitates and scrap. Metallurgical conditions at
Tacoma require a mix of "dirty" and "clean" feedstocks roughly in
the ratio indicated by the baseline materials mix.
Asarco-Tacoma is primarily a copper smelter/refiner, deriving its
revenues mainly by providing smelting/refining services essentially
on a toll basis. Its byproduct revenues, assumed at $3.6 million/year,
comprise a small fraction of its total "base" revenues of about $49.0
million/year, estimated at an average smelting/refining toll rate of
22.7^/lb. This assumes that Tacoma will continue to follow a
"contractual pricing" approach during this period, as in the past
and Tacoma's toll covers its processing costs and allows for a
normal profit margin. This assumed toll rate reflects anticipated
cost conditions in 1978 and beyond and allows for pretax profits
V-40
Arthur D Little, Inc
-------
of about $3.3 million/year at Tacoma, which amounts to roughly a 6.7%
rate of return on total sales, higher than that for Asarco as a whole
in recent years. If, alternatively, Tacoma were to set a toll rate
consistent with a given target rate of return on total sales, say
at 10% of total sales, neither the assumed toll rate nor the resulting
profit margin are altered significantly. At any rate, the effect of
such variations in baseline toll rate, profit, revenue, etc., on our
impact conclusions under the various control options is examined in
detail in Section G.
The assumed toll rate of 22.7^/lb. is also broadly congruent with
long-run copper floor prices at around 80c/lb., such that, under these
copper price and toll conditions, all of Tacoma's suppliers would be
expected to continue remaining in business as they would cover their
long-run costs, including a "normal" rate of return on investment.
2. Analysis
The same methodology illustrated for Option 4.2B previously has been
used for analyzing the economic impact of other control options on
Tacoma under baseline conditions. These options are:
• Option 4.IB: Minimum SO2 control (1978-1979)5 particulate
control (1978-1979)
• Option 3.IB: Minimum SO2 control (1978-1979); particulate
control (1978-1979); roaster gas enrichment—acid plant
consolidation
® Option 3.2B: Option 3.IB'plus OSHA (1978-1983)
e Option 1.1B: Maximum SO2 control (1980-1983); particulate
control (1978-1979)
e Option 1.2B: Option 1.1B plus OSHA (1978-1983)
In each case, year-by-year cash flows were estimated including the
investment tax credit and the net present value of these cash flows
was calculated at discount rates of 10% and 15%. Tables V-21 and
V-2.2 respectively present the net after-tax cash flows for each
alternative under "with parent" and "stand alone" assumption. Table V-23
summarizes these results. Fundamentally, the net present value approach
requires the comparison of net present values of alternative courses of
action. Since one such alternative is to shut down Tacoma, Table
V-23 also includes the net present value of this shut down alternative.
This alternative is discussed in detail in Section F.
V-41
Arthur D Little Inc
-------
TABLE V-21
SUMMARY OF AFTER-TAX CASH FLOW ANALYSIS RESULTS FOR THE VARIOUS
CONTROL OPTIONS EXAMINED WHERE TACOMA IS CONSIDERED AS PART OF
THE PARENT COMPANY, ASARCO, INC.a»b
(after-tax cash flow, in millions of 1978 dollars)
Years
Option 4.1B-
Mlnimum,
No OSHA
Option 4.2B-
Minimum
With OSHA
Option 3.IB- Option 3.2B- Option 1.1B-
Intermedlate; Intermediate; Maximum
Delay; No OSHA Delay; With OSHA No OSHA
Option 1.2B
Maximum
With OSHA
1978
- 1.59
- 7.29
- 1.59
- 7.29
- .88
- 6.6
1979
- 1.44
- 6.46
- 1.44
- 6.88
- .76
- 6.2
1980
1.35
- 3.24
1.56
- 3.92
-11.7
-17.2
1981
1.36
- 3.25
- 6.73
-12.3
-11.1
-16.6
1982
1.37
- 3.58
- 6.35
-12.2
-10.5
-16.4
1983
1.38
- 3.96
- 5.97
- 6.5
- 9.9
-16.1
1984
1.39
- 1.20
- 8.45
- .7
- .8
- 2.6
1985
1.40
- 1.30
- 0.98
- 3.4
- .7
- 2.6
1986
1.41
- 0.33
- 0.93
- 3.4
- .5
- 2.5
1987
1.42
- 0.55
- 0.87
- 3.3
- .5
- 2.5
1988
1.43
- 0.78
- 0.78
- 3.2
*
*
1989
1.44
- 1.03
- 0.77
*
*
*
1990
1.30
- 1.28
- 0.87
*
*
*
1991
1.15
- 1.48
- 0.97
*
*
*
1992
1.15
- 1.61
- 0.92
*
*
*
1993
1.15
- 1.71
- 1.24
*
*
*
1994
1.15
- 1.78
- 1.57
*
*
*
1995
1.15
- 1.81
- 1.90
*
*
*
*
Year-by-year details omitted
Summary
NET PRESENT
VALUE
@102
6.1
-25.5
-21.1
Min.° - 41
Min.C - 32 Min
c - 60
@15%
3.6
-21.3
-16.2
Min.C - 34
Min.C - 26 Min
c - 50
Notes: a. Assumes that tax credits' associated with ITC and/or losses at Tacoma will be utilized by the
parent company (Asarco, Inc.) and offsets against its corporate Income tax liability in its
consolidated income tax return.
b. The results presented in this table have been obtained by performing the same computations
reported in connection with Option 4.2B presented earlier to provide an example. It should be
noted that whereas the results given for Option 4.2B reflect the use of accelerated depreciation
the results given for all other options involve the use of straight-line depreciation. It will
be recalled from a discussion given earlier that the use of one or the other method of estimating
depreciation has^little effect on the results.
c. The net present value figures shown here represent the most optimistic outcomes (i.e., if the
net present value figures are computed more fully, beyond the certain number of year considered
here, the results would be even more negative).
V-42
Arthur D Little, Inc
-------
TABLE V-22
SUMMARY OF AFTER-TAX CASH FLOW ANALYSIS RESULTS FOR THE VARIOUS
CONTROL OPTIONS EXAMINED WHERE TACOMA IS CONSIDERED
ON A STAND-ALONE BASIS3»D
(after-tax cash flow, in millions of 1978 dollars)
Years
Option 4.1B-
Minlmum,
No OSHA
Option 4.2B-
Mlnlmum,
With OSHA
Option 3.1B-
Intermediate;
Delay, No OSHA
1978
- 1.59
- 7.29
- 1.59
1979
- 1.44
- 6.46
- 1.44
1980
1.35
- 3.24
1.56
1981
1.36
- 4.71
- 6.73
1982
1.37
- 6.10
- 6.35
1983
1.38
- 7.30
- 5.97
1984
1.39
- 3.76
-10.24
1985
1.40
- 3.76
- 4.46
1986
1.41
- 3.76
- 4.46
1987
1.42
- 3.76
- 4.46
1988
1.43
- 3.76
- 4.46
1989
1.44
- 3.76
- 4.46
1990
1.30
- 3.76
- 4.46
1991
1.15
- 3.76
- 4.46
1992
1.15
- 3.76
- 4.46
1993
1.15
- 3.76
- 4.46
1994
1.15
- 3.76
- 4.46
1995
1.15
- 3.76
- 4.46
Option 3.2B-
Intermedlate;
Delay; With OSHA
*
Option 1.IB-
Maximum;
No OSHA
A
Option 1.2B-
Maximum;
With OSHA
*
* Year-by-year details omitted
Summary:
NET PRESENT
VALUE
@10%
@15%
6.1
3.6
-40.0
-31.0
-33.5
-23.7
Min. - 41
Min. - 34
Min. - 32
Min.
26
Min. - 60
Min. - 50
Notes: a. Assumes that continuing losses at Tacoma will not be utilized, on a continuous basi6, by the
parent company (Asarco, Inc.) as tax credits (offsets) against its corporate income tax liability.
b. The results presented in this table have been obtained by performing the same computations
reported in connection with Option 4.2B presented earlier to provide an example. It should be
noted that whereas the results given for Option 4.2B reflect the use of accelerated depreciation
the results given for all other options involve the use of striight-line depreciation. It will
be recalled from a discussion given earlier that the use of one or the other method of estimating
depreciation has little effect on the results.
c. The net present value figures shown here represent the most optimistic outcomes (i.e., if the net
present value figures are computed more fully, beyond the certain number of years considered here,
the results would be even more negative).
V-43
Arthur D Little, Inc
-------
TABLE V-23
ESTIMATED NET PRESENT VALUES:
POLLUTION CONTROL
-a
SUPERIMPOSED ON BASELINE CONDITIONS
(in millions of 1978 dollars)
Options Considered
4.IB (Minimum control, no OSHA)
4.2B (Minimum control, with OSHA)
3.IB (Intermediate; delay, no OSHA)
3.2B (Intermediate; delay; with OSHA)
1.1B (Maximum control; no OSHA)
1.2B (Maximum control, with OSHA)
Tacoma Shutdown
Net Present Value at Discount Rate of
10%
15%
+6
-26 to -40
-21 to -36
Min. - 41
Min. - 32
Min. - 60
+4
-21 to -31
-16 to -24
Min. - 34
Min. - 26
Min. - 5 0
+17 to +20 ->-
Notes: See Tables V-20 and V-21
-------
3. Conclusions
Tables V-21 through V-23 indicate that Option 4.IB is the only one for
which there is a significant positive net present value. However,
when compared with shutdown, (Table V-23), it cannot be stated that
Option 4.IB would be unambiguously preferred over shutdown. All other
options have relatively large negative NPV's and suggest without much
ambiguity that a shutdown decision would be preferred, if financial
criteria alone are the test.
It might be argued that Tacoma's revenues would be influenced by changes
in market conditions facing Tacoma and its suppliers. This would be
especially true if copper prices rise well above 80c/lb. (in 1978
prices) for any reason such as a domestic smelter capacity bottleneck
scenario for the next five to seven years. In such a situation, it is
theoretically possible for Tacoma to follow a discriminatory monopolistic
pricing strategy, pushing each mine/supplier to the limit, to maximize
its smelting/refining revenues. Some of Tacoma's suppliers (e.g.,
Lepanto and Northern Peru) are highly dependent upon Tacoma in the
short-term (i.e., 1978-1980). Overall, these suppliers have other
alternatives: the suppliers of clean concentrates can switch to Japan
in the short and the long-term if Tacoma's prices exceed certain "trigger"
prices. The suppliers of impure concentrates can switch to the new
Philippines smelter expected to start operations in 1981 or they can
exercise the option of closing down, if they are unable to cover their
variable costs. Hence there are limits to Tacoma's pricing behavior,
even if it were to follow a discriminatory monopolistic pricing
strategy. This is why we have chosen to start with "baseline" conditions
which best reflect normal pricing behavior, and the normal relationship
between a toll smelter/refinery and its suppliers that is consistent
with long-run considerations which basically or typically govern the
decisions and interrelationships of the nonferrous metals companies.
Also, historically, individual smelters/refiners, having very little,
if any, influence on copper prices, may understandably not have
followed a monopolistic pricing strategy, not knowing, ex ante, what
the copper price would exactly be over the next contract cycle. Given
the wide band of variability in copper prices in the future, it is
hazardous to hypothesize a unique set of revenue forecasts for Tacoma
under one or another assumed pricing strategy on the part of Tacoma.
With these considerations in mind, we have nonetheless performed
a series of sensitivity analyses under hypothesized discriminatory
monopolistic pricing behavior on the part of Tacoma, to explore a
reasonably large range of possibilities.
V-45
Arthur D Little, Inc
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F. SHUTDOWN
If Tacoma could continue operating under the 1978 baseline conditions
in perpetuity, it would yield net cash flow equal to about $3.0 million
per year after taxes. At a discount rate of 10%, the present value
of this cash flow would be about $30 million; at 15%, it would be
about $20 million. When incremental pollution control is required, the
continuation of the baseline operation in perpetuity is no longer
a viable alternative. The plant has to comply with this requirement
either by spending funds for pollution control equipment or by
closing the plant down. Thus should Asarco-Tacoma perceive the
costs and uncertainties associated with continued operation of
Tacoma to be too high in comparison with the revenues which may be
expected, it would be expected to analyze the consequences of a
shutdown. Indeed, Asarco has shutdown many plants in the past for
economic reasons, e.g., the Murray, Leadville and Selby lead smelters,
Selby lead refinery, Amarillo zinc smelter and the Baltimore and
Perth Amboy copper refineries. Thus, this would not be the first
time that Asarco has faced a decision of this type.
We have attempted to estimate the financial consequences of shutting
down Tacoma as one alternative open to Asarco and have estimated
the net present value of such an approach for comparison.
In general, the metals in process (metals in the "pipeline") would
be released upon shutdown of Tacoma. This would yield a positive
cashflow which would be offset by costs and obligations such as
severance pay, demolition, site cleanup, etc. Also, one has to
allow for a redeployment of some of this working capital to the
extent Asarco merely transfers the same business elsewhere and
consider the tax consequences of the write-off of Tacoma's net plant
and equipment.
Table V-24 is a projected balance sheet for Tacoma as of December 31,
1977 when such a shutdown might occur. The balance sheet indicates
our estimated allocation between Tacoma (inventory assets) and customers
(metals accounts payables), and the net working capital position. Of
the total projected current assets of about $46 million, projected
current liabilities are estimated at $23 million; the current ratio
is 2 to 1, and net working capital $23 million.
At the present time, we believe that Tacoma is carrying extraordinarily
high inventories of copper, as is the entire industry. Thus, the
$23 million net working capital is about $10-11 million in excess
of that normally financed by Asarco. We believe the net working
capital normally associated with Tacoma's on-going operations to
be about $12 million (1978 dollars). This amount is the portion
financed by Asarco above that amount financed by the shippers.
V-46
Arthur D Little, Inc
-------
TABLE V-24
PROJECTED BALANCE SHEET ITEMS FOR TACOMA
AS OF DECEMBER 31, 1977
(in millions of dollars)
Current Assets
Current Liabilities
Normal inventories of metals 30
Accounts Receivable 6
Sub-Total - Normal
Current Assets
Excess Inventories
Total Current Assets
36
10
46
Metals Payables0 16
Other Accounts Payable 2
Deferred Toll Revenues 5
Total Current Liabilities 23
Memo
(1) Net Working Capital
(2) Current Ratio
13 (normal basis)
2.0 (current basis)
Debt and Equity Capital 55
Net Plant and Equipment
Total Assets
32
78
Total Liabilities
78
Notes: a. Normal inventory pipeline is 40% of the metals (copper, gold
and silver) value produced @ 100,000 tons copper per year,
worth an estimated $200 million in 1977 prices. Tacoma assumed
to finance 15%, the mines 25% of this 40%.
b. 100,000 short tons x 50% (custom) x 120 days payment cycle/year
equals about 16,000 tons; 16,000 x 2000 lbs. short tons x $0.50
/lb. net equals $16 million.
c. At 80,000 tons/year, the approximate recent production rate,
Tacoma has to finance 5000 tons additional pipeline requirements,
or about $10 million.
V-47
Arthur D Little, Inc
-------
We also estimate that at least six months worth of pre-tax earnings
and a full year's depreciation charges would be available for cash
flow in the year of shutdown.
In shutting down, our impression is that Tacoma would face severance
pay plus on-going medical plan payments on behalf of workers, with a
present value of approximately $3 million in 1978 dollars. We think
that the extra recovery of precious metals accretions, plus average
value of equipment, would be almost exactly offset by the probable
cost of contract services for demolition at the plant site and
additional costs of a caretaker crew.
The final major item would be future pension fund payments, to
employees, a financial obligation of Asarco. The assumptions
regarding pension plan liability are important since they can
significantly affect the NPV. For example, this could be handled by
the purchase of an annuity from an insurance company. We estimate
the cost of this approach to be approximately $5-8 million in current
dollars. The $5 million figure is obtained by taking the ratio of
Tacoma employment to total Asarco employment times the reported
actuarially computed value of vested pension benefits. The $8 million
figure represents the prorated unfunded past service liability in
Asarco's retirement plan. On the other hand, assuming Asarco guarantees
the pension payments itself and funds them over 20 years (the same
period over which the obligation is likely to be amortized for
financial accounting purposes) there would be no lump sum purchase of
an annutiy. Instead, it would be based on Asarco's discount rate,
which is higher. Using $400,000/year as an estimate of average
required payments, and discounting at 10% for 20 years, the present
value would only be $3.4 million which is $1.6 to 4.6 million lower than
the amount needed for the purchase of an annuity. The difference is
even greater if higher discount rates are used.
For Table V-24, we assumed that the depreciated book value, less
salvage value, would be roughly $26 million at the end of 1978.
Suppose one were to use an even lower figure of roughly $20 million,
and the 48% marginal tax rate, then assuming Asarco has taxable income
to offset in 1978 and 1979, the write-off of the net Tacoma plant
and equipment could produce a tax credit which would increase Asarco's
cash flow in 1978 and/or 1979, with a present value on the order of
nearly $10 million.
Thus, we estimate that the shutdown of Tacoma in 1978 would produce
the following net present value (NPV) in millions of dollars:
V-48
Arthur D Little, lnc
-------
NPV $23 net working capital
+ 3 cashflow from final operations
5 to 8 pension fund liability (could be lower)
8 present value for installation of matte and
speiss treatment facilities
3 severance pay, etc.
+ 10 tax credit from shutdown
$17-20
Given the shutdown alternative, one can then calculate and compare
how long Tacoma would have to operate "as is" with the base case
after-tax cashflow of $3.0 million/yoar (i.e., with no incremental
pollution control), to exceed the net present value of shutting down
in 1978—say roughly $15-20 million. The results are:
@ $20 Million @ $15 Million
@ 10% discount rate, 11.5 years 7.3 years
@ 15% discount rate, Forever 10.0 years
Of course, this should not be construed to suggest that shutdown is
an attractive alternative in and of itself. Obviously, ceteris paribus,
Asarco-Tacoma would lose the present value associated with an ongoing
operation. It is only when it is recognized that Tacoma probably
cannot expect to maintain the status quo that the shutdown calculation
arises—then it is in the context of comparison with the alternative
environmental control investment options which are available.
G. SENSITIVITY ANALYSIS
The economic impact analysis reported above was performed under a set
of assumed base conditions. In this section, we report on an analysis
of the sensitivity of the conclusions reached under base conditions
to progressive relaxation of the hypothesized base conditions.
Specifically, we examine here the sensitivity of the conclusions
reached earlier to the following: (a) the hypothesis that Tacoma
adopts a discriminatory monopolistic pricing behavior to maximize
its revenues during the 1978-1995 period, (b) consideration of other
environmental regulations and costs of compliance associated with them,
(c) variability in the transportation costs and "distress" payments,
(d) variability in estimates of capital expenditures for pollution
control, and (e) alternative ways of time-phasing capital expenditures
for pollution control.
V-49
Arthur D Little, Inc-
-------
The sensitivity of the conclusions reached under base conditions,
as well as the sensitivity of those reached under the relaxation of
the base conditions to still other variations in assumptions (e.g.,
lower production levels at Tacoma, higher "base" profits and cash-
flow at Tacoma, etc.) are explored by inspection and/or deduction.
1. Sensitivity Analysis under the Hypothesis that Tacoma Adopts a
Discriminatory Monopolistic Pricing Behavior during the Period
1978-1995
One set of sensitivity analyses can be performed under the hypothesis
that Tacoma adopts a discriminatory monopolistic pricing strategy over
the period 1978-1995. We have explained in some detail in Chapter IV
how the relevant market in which Tacoma operates consists of participants
who are interdependent, exhibiting characteristics of bilateral oligopoly.
That is to say, we have here a situation where a few buyers (i.e., mines
or suppliers of concentrate/scrap, buying smelting/refining services)
confront a few sellers (i.e., Tacoma, Japanese smelters and the new
Philippines smelter scheduled to start operations at the beginning of
1981, selling smelting/refining services). The concept of discriminatory
monopolistic pricing strategy, in the context used here, can be described
essentially as follows: what is the maximum smelting/refining toll
charge Tacoma can exact from each mine or supplier of feedstocks in
order to maximize its total revenues, over the period 1978-1995, taking
into consideration expected (hypothesized) copper prices, each supplier's
costs of production, Tacoma's potential competition in terms of the
availability of smelting/refining services provided by others and their
respective costs (including differential transportation costs). This
helps define, under each hypothesized copper price, the degree of
freedom available to, and the constraints operating upon, each one of
Tacoma's suppliers. From this evolves an internally consistent set of
conditions defining precisely how much in the way of smelting/refining
charges Tacoma can hope to extract from each supplier over time, by
pushing each supplier to the brink of closing down or switching to an
alternative smelter/refiner. In short, under such a pricing strategy,
Tacoma exercises whatever market power it possesses at any time to its
own full advantage, both short-term and long-term, which includes
charging the various suppliers at different (discriminatory) rates
specifically tailored to exploit each supplier to the maximum.
a. Estimates of Tacoma's Expected Revenues under Discriminatory
Monopolistic Pricing Strategy
For purposes of sensitivity analysis, we have computed total expected
annual revenues, over the period 1978-1995, that Tacoma could
theoretically attain at various assumed copper prices by adopting a
discriminatory monopolistic pricing strategy. The results of this
analysis are summarized in Table V-25. The detailed results,
corresponding to various assumed copper price levels, are tabulated
in Tables V-26 through V-29. The technical notes given at the end
of these tables explain the rationale of the numerical estimates
V-50
Arthur D Little Inc
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TABLE V-25
SUMMARY: TOTAL EXPECTED ANNUAL REVENUES AT TACOMA. 1978-1995.
FOR SENSITIVITY ANALYSIS UNDER DISCRIMINATORY
MONOPOLISTIC PRICING AT VARIOUS ASSUMED COPPER PRICES
(millions of 1978 dollars)
Description (see text)
Total Expected Annual Revenues at Tacoma
Copper Prices (c/lb.; in 1978 prices)
80 85 go 100
Version A: Lepanto Drops Out After 1980
1978 - 1980
1981 - 1995
65.63
56.34
68.79
56.34
71.94
56.34
78.25
56.34
Version B: Lepanto Stays After 1980
1978 - 1980
1981 - 1995
58.18
59.18
61.11
59.18
64.26
59.18
70.57
59.18
Source: Refer to Tables V-26 to V-29.
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TABLE V-26
EXPECTED MAXIMUM ANNUAL REVENUES AT ASARCO-TACOMA, 1978-1995, FOR SENSITIVITY ANALYSIS
(millions of 1978 dollars)
Key Assumptions: (1) Domestic/LME copper price at 80.0c/lb., 1978-1995
(2) Asarco-Tacoma exercises market power and adopts monopolistic
discriminatory pricing strategy
(3) Lepanto is pushed to the limit in 1978-1980 and, for reasons
explained m the texL , discontinues shipments in 1981 but is
replaced by suppliers of domestic clean concentrates (Version A);
or Lepanto is priced by Asarco-Tacoma to retain it as a long-term
c1lent/source (Version B)
N. Revenues
From
•ears
Duval and other
Southwestern mines
with clean
concentrates a
1978-1980:
93.0 x 106 lbs./yr.
1981-1995:
131.A x 106 lbs./vr.
Lepanto
1978-1980:
38.4 x 106 lbs./yr.
1980-1995:
0.0 lbs./vr.
Northern
Peru
6
11.52 x 10 lbs./vr.
East
Helena
6
13.2 x 10 lbs./vr.
Precipitates
and scrap
sources c
6
22.0 x 10 lbs./vr.
Expected
annual
byproduct
revenue^
TOTAL
ANNUAL
REVENUES
80c/lb.; Version A
1978-1980
25.575
16.128b
k .838b
5.540b
9.944
3.600
65.625
1981-1995
36.135 i
o
o
3.802f
4.356f
9.944
2.1006
56.337
80c/lb.; Version B
1978-1980
25.575
8.6788
4.838b
5.540b
9.944
3.600
58.175
1981-1995
25.575
11.904h
3.802f
4.356f
9.944
3.600
59.181
Note: Footnotes are given at the end of the tables.
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TABLE V-27
EXPECTED MAXIMUM ANNUAL REVENUES AT ASARCO-TACOMA, 1978-1995, FOR SENSITIVITY ANALYSIS
(millions of 1978 dollars)
Key Assumptions: (1) Domestic/LME copper price at 85.0c/lb., 1978-1995
(2) Asarco-Tacoma exercises market power and adopts monopolistic
discriminatory pricing strategy
(3) Lepanto is pushed to the limit in 1978-1980 and, for reasons
explained in the text, discontinues shipments in 1981 but is
replaced by suppliers of domestic clean concentrates (Version A);
or Lepanto is priced by Asarco-Tacoma to retain it as a long-term
client/source (Version B)
n. Revenues
From
'icars
Duval and other
Southwestern mines
with clean
concentrates^
1978-1980:
93.0 x 106 lbs./yr.
1981-1995:
131.4 x 106 lbs./yr.
Lepanto
1978-1980:
38.4 x 106 lbs./yr.
1980-1995:
0.0 lbs./vr.
Northern
Teru
e
11.52 x 10 lbs./vr.
East
Helena
6
13.2 x 10 lbs./vr.
Preclpitates
and scrap
c
sources
6
22.0 x 10 lbs./vr.
Expected
annual
byproducj
revenues
TOTAL
ANNUAL
REVENUES
1 85c/lb.: Version
1978-1980
25.575
18.048b
5.414b
6.204b
9.944
3.600
68.785
1981-1995
36.135*
0.0
3.802f
4.356f
9.944
2.1006
56.337
85c/lb.; Version I
|1978-1980
25.575
10.3688
5.414b
6.204b
9.944
3.600
61.105
1981-1995
25.575
h
11.904
f
3.802
4.356f
9.944
3.600
59.181
Note: Footnotes are given at the end of the tables.
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TABLE V-28
EXPECTED MAXIMUM ANNUAL REVENUES AT ASARCO-TACOMA, 1978-1995, FOR SENSITIVITY ANALYSIS
(millions of 1978 dollars)
Key Assumptions: (1) Domestic/LME copper price at 90.0c/lb., 1978-1995
(2) Asarco-Tacoma exercises market power and adopts monopolistic
discrminatory pricing strategy
(3) Lepanto is pushed to the licit in 1978-1980 and, for reasons
explained in the text, discontinues shipments in 1981 but is
replaced by suppliers of domestic clean concentrates (Version A);
or Lepanto is priced by Asarco-Tacoma to retain it as a long-term
client/source (Version B)
\ Revenues
n. From
^ ":ears
Duval and other
Southwestern mines
with clean
a
concentrates
1978-1980:
93.0 x 106 lbs./yr.
1981-1995:
131.4 x 106 lbs./vr.
Lepanto
1978-1980:
38.4 x 106 lbs./yr.
1980-1995:
0. 0 lbs./vr.
Northern
"Peru
6
11.52 x 10 lbs./vr.
East
Helena
6
13.2 x 10 lbs./vr.
Precipitates
and scrapc
sources
6
22.0 x 10 lbs./vr.
Expec ted
annual
byproductj
revenues
TOTAL
ANNUAL
REVENUES
90c/lb.;Version A
1978-1980
25.575
19.968b
5.990b
6.864b
9.944
3.600
71.941
1981-1995
36.135*
0.0
3.802 f
4.356f
9.944
2.100e
56.337
90c/lb.;Version B
1978-1980
25.575
12.288®
5.990b
6.864b
9.944
3.600
64.261
1981-1995
25.575
11.904h
3.802 f
4.356f
9.944
3.600
59.181
Note; Footnotes are given at the end of the tables.
>
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TABLE V-29
EXPECTED MAXIMUM ANNUAL REVENUES AT ASARCO-TACOMA, 1978-1995, FOR SENSITIVITY ANALYSIS
(millions of 1978 dollars)
Key Assumptions: (1) Domes t ic/LME copper price at 100.0c/lb., 1978-1995
(2) Asarco-Tacoma exercises market power and adopts monopolistic
discriminatory pricing strategy
(3) Lepanto is pushed to the limit in 1978-1980 and, for reasons
explained in the text, discontinues shipments in 1981 but is
replaced by suppliers of domestic clean concentrates (Version A);
or Lepanto is priced by Asarco-Tacoma to retain it as a long-term
client/source (Version B)
N. Revenues
From
':^ars
Duval and other
Southwestern mines
with clean
concentrates3
1978-1980:
93.0 x 106 lbs./yr.
1981-1995:
131.4 x 106 lbs./vr.
Lepanto
1978-1980:
38.4 x 106 lbs./yr.
1980-1995:
0.0 lbs./vr.
Northern
Teru
6
11.52 x 10 lbs./vr.
East
Helena
6
13.2 x 10 lbs./vr.
Precipitates
and scrap
sources0
6
22.0 x 10 lbs./vr.
Expected
annual
byproduct
revenues
TOTAL
ANNUAL
REVENUES
100c/lb;Version A
j1978-1980
25.575
23.808b
7.142b
8.184b
9.944
3.600
78.253
1981-1995
36.1351
0.0
3.802f
4.356f
9.944
2.100e
56.337
lOOc/lb;Version B
1978-1980
25.575
16.128g
7.142b
8.184b
9.944
3.600
70.573
1981-1995
25.575
11.904h
3.802f
4.356f
9.944
3.600
59.181
Footnotes are given at the end of the table.
>
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NOILS ACCOMPANYING IA Bl I S \'-Zh lliKOUCH V-_"(
At 27.5c/lb., which defines the estimated "trigger" puim for Uuval and other Southwestern supplu r
PT + C,
<
I
Ln
On
>
D~
C
—i
r~
n
l 1 enn mm entr.iU's, derived .is follows
J
: i < p + c- + d
n 1978 prices)
smelting/refining charge at Tacoma (cents per pound of copper concent),
weighted average t ransporta t ion cost from Battle Mountain and the Southwest (e.g , Sxerrita) to Li.oru, .-.si miuil it 3 3c/ ll>
weighted average transportation cost to Japan from Battle Mountain and the Southwest, estimated at about 5c/1b ;
"distress payment" to Japanese smelters, for au omniocJ.it 1 ng foieinn loiiu iilmu-s, estiruud .iL jbum 4c/lb.«
the average smelting/refining change at Japanese smelters, estimated at 22c/1 b.,
pT + 3.5c/Lb. ; 2.20c/lb. + 5.0c/lb + 4.0c/lb.
pT.< 22.0 + 5.0+4.0 - 3.5
pT ( 27.5c/lb.
T
p must be less than or equal to 27.5c/lb a«; j condition lor Duval and other southwestern suppliers of cK-an concent ratos not to shift to Japan.
Estimated from the following conditions:
cu / T , . avc
will-re U /lb.
T
P •
ci
C?
d :
J
P "
then,
c )
i
ci
avc
where (c/lb., in constant 1978 prices):
price of copper,
smelting/refining charge at Tacoma for mine/mill i (i = 1, . .., m);
estimated transportation cost from mine/mil 1 1 (i «= 1, . . . , m) to Tacoma;
estimated average (unit) operating and maintenance costs (i.e., average variable costs) at mine/mill l (i = 1, .., m), where operating and
maintenance costs are defined to include estimated required interest payments.
This inequality says that at a given copper price, Tacoma will charge the mine as high as possible but just short of causing the mine to shut down (i.e.,
the mine is barely able to cover its variable costs, including estimated required Interest payments).
Using our estimates of and c^VC, we can solve for for the various mines as follows under given levels of pCU (for t - 1978, 1979 and 1980);
T cu avc
p * pi - ci - s •
For Lepanto and Northern Peru, estimates of c and c^ are as follows:
c^ = 3.0c/lb. (in 1978 prices)
cavc o 35.0c/Lb. (in 1978 prices).
i
Then, estimates of p (maximum charges that can be exacted by Tacoma) under various copper price levels can be derived as follows*
1 * cu
At p
(c/lb. ; in 1978 prices)
80.0
85.0
90.0
100.0
T
P is
(c/lb.; in 1978 prices)
42.0
47.0
52.0
62.0
These results for Lepanto and Northern Peru are also assumed to hold for East Helena (p is the same for three mines).
Estimated at 22.6c/lb., since the demand schedule of the precipitate and scrap suppliers for Tacoraa's services is assumed perfectly elastic (i.e., Tacoma
will be unable to charge them more than 22.6c/lb., as they can readily switch to alternative processing plants and pay no more than an estimated 22.6c/lb.)
Same as expected annual byproduct revenues assumed under "base" conditions, described earlier.
The drop of $1.5 million/year in expected byproduct revenues is due to Lepanto's falling out in 1981. Under "base" conditions, Lepanto is estimated to
account for about $1.5 million of Tacoma's roughly $2.7 million per year revenues from arsenic sales.
With the potential (planned) availability of a new ocean-front smelter In the Philippines as of the beginning of 1981, with enough extra capacity to
accommodate both Northern Peru and (in principle) East Helena, we have estimated the maximum charge that Tacoma could exact (in the case of Northern
Peru) from the following inequality which defines Northern Peru's "trigger" point, effective after 1980.
T P
P + c3 P + cu
where (c/lb., in 1978 prices):
: smelting/refining charge at Tacoma;
C3 : transportation cost from Northern Peru (Quiruvilca Mine) to Tacoma (estimated at 3c/lb.);
pP : smelting/refining charge at the new Philippines smelter (estimated as 33.0c/lb );
Ci. : transportation cost from Northern Peru (Quiruvilca Mine) to the new ocean-front Philippines smelter (estimated as 3.0c/lb)
Since c-, and c. fall out (i.e., C3 ° ci,) ~ we have pT .< p (i.e , pT cannot exceed 33.0c/lb.). We have assumed, to simplify matters, that this boundary
condition also holds for East Helena. For these revenue calculations is hence set at 33.0c/lb.
-------
NOTES: ACCOMPANYING TABLES V-26 THROUGH V-29 (Continued)
cu
-5
Derived from the following inequality:
T cu ate
p < p - c5 - c
where (c/lb.; in 1978 prices):
T
p : smelting/refining charge at Tacoma;
price of copper;
transportation cost from Lepanto to Tacoma (estimated as 3.0c/lb.)i
catc : Lepanto's average total cost (unit cost), which includes boch fixed and variable costs, where fixed costs are defined to include a "normal" rate
of return on invested capital. It is estimated as 55.0c/lb.
T
p can thus be computed for various levelized copper prices as follows:
. cu T
At p p is
(c/lbs.; in 1978 prices) (c/lb. ; in 1978 prices)
80.0 22.0 (not used; see note below)
85.0 27.0
90.0 32.0
100.0 42.0
At pCU = 80c/lb., we have not used the resulting p"^ = 22.0c/lb. but rather chose to price Lepanto at the "base" smelting/refining charge of
pT = 22.6p/lb.
h. For the period after 1980, the maximum amount Tacoma can charge Lepanto is calculated from the following set of conditions:
T , P ,
P + c5 < p 4- c6
where (c/lb.; in 1978 prices)
T
p : smelting/refining charge at Tacoma;
c5 : transportation cost from Lepanto to Tacoma (estimated as 3.0c/"lb.);
p
p : smelting/refining charge at the new Philippines smelter (estimated as 33.0c/lb.);
Cg : transportation cost from Lepanto to the new Philippines smelter (estimated as 1.0c/lb.).
T
We can hence solve for p as follows:
pT + 3.Oc/lb. < 33.Op/lbs. + l.Oc/lb.
pT .< 33.0 + 1.0 - 3.0
pT N< 31.0c/lb.
T
What next remains to be demonstrated is that at p = 31.0c/lb., both necessary and sufficient conditions will be met by Lepanto to remain open. It can be
seen, by inspection, that the mining/milling cost to Lepanto, plus che transportation cost, is 34.0c/lb. Then, Lepanto's realized concentrate netback
is as follows under different copper prices:
Copper price (pCU) Lepanto netback on concentrate
(C/lb.) (C/lb.)
80.0 46.0
85.0 51.0
90.0 56.0
100.0 66.0
Given our estimate of Lepanto's costs (i.e., average variable costs of 35.0c/lb., including estimated required interest payments; and» average total
cost—or unit cost—of 55.0c/lb.» which includes a "normal" rate of return on invested capital), it would appear that, at copper prices of 80.0c/lb.
and 85c/lb., Lepanto may stay open with difficulty and/or considerable reluctance on what would seem to be a long-run basis. The revenue stream
resulting for Tacoma from this analysis would hence look highly favo-rable under any of the control options studied.
The analysis presented above is favorably inclined towards Tacoma for a related yet still another reason. Lepanto, anticipating such an outcome after
1980 under a levelized copper price of 80.0c/lb. (or 85.0c/lb.), might decide, after all, not to expand its capacity over the period 1978-1980 in order
to feed both Tacoma and the new smelter. The analysis is hence strained, in favor of Tacoma staying open under the various control options, by
hypothetically imputing an investment behavior to Lepanto, under a perceived long-run price of copper in the 80.0 - 85c/lb. range, which in reality may
not come to pass.
Reflects the assumption that if, under this scenario (Version A), Lepanto falls out after 1980, it will be replaced by domestic clean concentrates.
-------
presented in these tables.
For this analysis, we have hypothesized a future "state of the world"
where domestic smelter capacity growth is effectively constrained
through 1983 at the earliest, but where sufficient Japanese smelter
capacity will continue to be available to absorb some "overflow"
U. S. concentrates (e.g., Duval and other suppliers of domestic clean
concentrates), and where a new Philippines smelter potentially
competing with Tacoma, especially with respect to "dirty" concentrates,
is scheduled to commence operations at the beginning of 1981.
Our revenue calculations under the hypothesized "state of the world"
and discriminatory monopolistic pricing behavior on the part of Tacoma
consider two variations: (1) Lepanto is pushed to the limit during
the period 1978-1980 and, for reasons indicated below, discontinues
shipments to Tacoma after 1980 (Version A)1, and (2) Lepanto is priced
by Tacoma to retain it as a long-term client/source, even after Lepanto
has its own home smelter starting in 1981 (Version B). These two
different ways of considering the Lepanto-Tacoma relationship, which
result in two different expected revenue streams for Tacoma over the
period 1978-1995 under each hypothesized copper price level, arise
basically from the following set of factors.
As we interpret the situation, Lepanto is officially obligated to have
a substantial quantity of its concentrates processed at the new
Philippines smelter scheduled to start operations at the beginning of
1981. This means Lepanto faces the following decision before 1981:
(a) expand concentrate production capacity not only to supply Tacoma
at the base rate (i.e., 19,200 short tons/year), but also to supply
the new home smelter after 1980; or (b) do not expand mine capacity;
discontinue shipments to Tacoma after 1980 in order to feed the new
home smelter. Which course Lepanto might take would depend, in
substantial measure, on Tacoma's pricing behavior vis-&-vis Lepanto.
If Tacoma prices Lepanto as a short-run profit-maximizing monopolist
over the period 1978-1980, Tacoma would attempt to extract the maximum
toll from Lepanto under a given copper price level which would result
in Lepanto barely staying open let alone considering any expansion
program. In other words, under such a situation, Lepanto would be
barely covering the out-of-pocket costs (i.e., operating and maintenance
expenses, including required interest payments). Thus, not being
in a profitable position to expand its capacity, Lepanto would be
forced to divert all its concentrate supply to the new home smelter;
since Lepanto is officially committed to supply the new smelter,
and discount pricing by Tacoma to keep any part of Lepanto's feed
after 1980 would not alter this basic conclusion.
1
It is assumed, in this case, that Lepanto is replaced by domestic
suppliers of clean concentrates.
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For Tacoma, there is an alternative to the short-run monopolistic
pricing of Lepanto over the 1978-1980 period. Tacoma will most likely
conclude that if its objective is to retain Lepanto as a long-term
client/source, then the pricing strategy consistent with this objective
would be as follows: Tacoma would price Lepanto over the 1978-1980
period in such a way that Lepanto will in fact be able to expand its
capacity and, beyond 1980, charge Lepanto no higher than it would
cost Lepanto at the new smelter, taking into account transportation
cost differentials.
Thus, under the conditions described above, discriminatory monopolistic
pricing behavior may be hypothesized for Tacoma for a sensitivity
analysis. While such behavior is theoretically plausible, such a
pricing strategy implies or directly involves the following:
• It represents a sharp reversal of how smelting/refining services
have traditionally been priced and performed in the past in this
country and abroad among nonferrous metals companies which
typically deal with each other, in terms of joint investments or
in terms of buyer-seller relationships (as here) on the basis
of long-run considerations which also typically have been devoid
of deliberate or manipulative profit-maximizing behavior such as
basically hypothesized here for Tacoma.
• It would require, as far as we can discern, that Tacoma (or
Asarco, Inc.) invoke the force majeure clause in its existing
smelting/refining contracts. Without passing on the legality
of such action on the part of Tacoma (or Asarco, Inc.), it must
be noted that this might be considered by Tacoma's suppliers—some
of which (e.g., Duval) have a wider set of relationships with
Asarco, Inc., which transcend the limited set of relationships
concerning Tacoma specifically—as being tantamount to abrogation
of contract.
• It represents a mode of behavior on the part of Tacoma (or
Asarco, Inc.), towards the various suppliers, quite different
from that displayed in a similar but far less serious recent
situation, when one supplier (i.e., Cyprus Mines) dropped out
and the remaining ones (e.g., Duval, Lepanto) "complained."
Historical analogies are hazardous at best, but it may be
instructive to review, briefly, this recent, similar situation
involving Tacoma with relatively minor dimensions of cost pass-on
but nevertheless with potentially instructive consequences.
As indicated earlier in this chapter, starting in 1970 Asarco
instituted a pollution control surcharge of lc/lb. when copper
prices remained less than or equal to 50c/lb. and 1.5c/lb. when
copper prices rose above 50c/lb. This arrangement applied to
all suppliers of concentrates for toll smelting to the three
Asarco copper smelters (Tacoma, Hayden, El Paso). This surcharge,
instituted to help finance pollution control costs at the three
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smelters, was phased out at the end of 1975.
Two points should be noted in this connection. First, Asarco
did not invoke force majeure; the surcharge was instituted
after informal negotiations with the suppliers, when Asarco's
position was one of "sharing" the pollution control cost burden
with the suppliers. Of course, in the present instance, neither
Asarco (or Tacoma) nor such suppliers as Duval may be as inclined
to seek a cooperative arrangement when the pollution control cost
burden might be far greater. This basically supports the main
points made earlier.
Second, the decision of Cyprus Mines to discontinue supplying
Tacoma when faced with a surcharge of no more than 1.5c/lb.,
may also serve to illustrate a point. Considerations of production
costs, as well as the availability of alternative smelters
(i.e., Phelps Dodge's) at lower cost must have all played a role.
At the same time, we should like to underscore, without proof,
the point that real world decisions or reactions may at times
bear little relationship to those expected from various participants •
on the basis of rational behavior consistent with economic principles,
as posited here. In other words, actual decisions/reactions in
response to Tacoma's hypothesized discriminatory monopolistic
pricing behavior might end up being far more "jerky" or discontinuous
than indicated by theory, such that various participants may take
decisions (e.g., Duval switching to a Japanese smelter) even before
the limits suggested by theory (e.g., Duval's "trigger" point of
27.5
-------
• Under each assumed copper price level, Version A provides the
upper bound front-end revenue streams which provide the most
generous revenue conditions for any of the control options.
• This allows us to explore the "threshold" conditions for any of
the control options to be considered viable. That is, if a given
control option appeared viable, for example, at an assumed copper
price level of 85
-------
TABLE V-30
SENSITIVITY ANALYSIS RESULTS UNDER THE HYPOTHESIS THAT TACOMA
ADOPTS A DISCRIMINATORY MONOPOLISTIC PRICING BEHAVIOR
DURING THE PERIOD 1978-1995 UNDER ALTERNATIVE
ASSUMED COPPER PRICE LEVELS3^5
TACOMA IS CONSIDERED AS PART OF THE PARENT COMPANY, ASARCO, INC.
(in millions of 1978 dollars)
Net Present Value (NPV) of After-Tax Cash Flow, 1978-1995,
at different assumed price levels and discount rates
Options Considered
80c/lb.
@10%
@15%
85c/lb.
@10*
@15%
90c/lb.
@10%
@15%
100c/lb.
@10%
@15%
Control Option 4.IB-Minimum
Control, No OSHA
Control Option 4.2B-Minimum
Control, with OSHA
Control Option 3.IB-Intermediate;
Delay; no OSHA
Control Option 3.2B-Intermediate;
Dcilay; with OSHA
Control Option 1.IB-Maximum,
No OSHA
Control Option 1.2B-Maximum,
with OSHA
+49
^
+38
Feasible
+19
+14 +23 +18
marginally feasible
+22
+18
marginally feasible
Feasible
Feasible
not feasible
+2 lower
+10 +12
^ not feasible
+18 +14
max. max
marg mal ly
<—= —~
feaslble
+18 +16
max. max.
marginally feasible
-14
-11
not feasible
<-1
<-1
TACOMA SHUTDOWN
+17 to +20
+17 to +20
+17 to +20
+17 to +20
Notes: a. For purposes of the sensitivity analysis reported here, we have used the expected revenue estimates under
Version A (i.e., Lepanto falls out after 1980) which yields higher revenues in earlier years than are
obtained under Version B (i.e., Lepanto stays after 1980).
b. The results presented in this table have been obtained by performing the same computations reported in
connection with Option 4.2B presented earlier as an example. It should be noted that whereas the results
given for Option 4.2B contain accelerated depreciation the results given for all other options involve the
use of straight-line depreciation. It will be recalled from a discussion given earlier that the use of one
or the other method of estimating depreciation has little effect on the results.
c. Assumes that tax credits associated with ITC and/or losses at Tacoma will be utilized by the parent company
(Asarco, Inc.) as offsets against its corporate income tax liability in its consolidated income tax return.
d. The net present value figures shown here represent the most optimistic outcomes (i.e., if the net present
value figures are computed more fully, beyond the certain number of years considered here, the results
would be even more negative).
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2. Other Environmental Regulations and Associated Compliance Costs
The baseline analysis in Section E specifically takes into account
the costs for meeting the proposed OSHA standard for Inorganic
Arsenic of 0.004 mgAs/m3. This standard has yet to be promulgated and
a possibility remains that another standard requiring less expenditures
could be promulgated instead or that the expenditures could be stretched
out over a period of time much longer than the six year period assumed
by us. While either of these two possible variations on our earlier
"base" assumptions on both costs and time-phasing concerning OSHA
regulations would lead to less serious economic impacts, it is
difficult to assess the probability that either of these two alternative
cases might in fact occur, before their relative effect on the impact
results can be determined.
At any rate, while the lower-cost and longer time-phasing considerations,
or both taken together, might lead to lower economic impacts, it should
also be noted that Tacoma faces other possible regulations and compliance
costs, such as OSHA in-plant lead and S02 standards, EPA ambient lead
and arsenic standards and so on. These potential future regulatory
costs and related uncertainty could affect Asarco's perception of risk
and of the future viability of Tacoma. This, in turn, could affect
the perceptions of the viability of additional SO2 control.
3. Transportation Costs and "Distress" Payment
The various "trigger prices" used in our analysis can be reestimated
on the basis of an alternative (higher) set of transportation costs
presented in Appendix J and a different amount for "distress payment".
a. "Distress Payment" of 4$/lb.
o Duval and other Southwestern suppliers of clean concentrates:
T J
p +ci^p +C£ + d
PT + 5.6 ^ 22 + 4 + 4
PT < 24.4c/lb.
(baseline analysis value = 27.5
-------
e Northern Peru after 1980
T P ^
P + C3 ^ p + CI+
pT + 4 33 + 4
pT s< 33c/lb.
(baseline analysis value = 33c/lb.)
o Lepanto after 1980
T T
P + c5 p + c6
pT + 4 < 33 + 1.5
pT < 30.5c/lb.
(baseline analysis value = 31(?/lb.)
It can be seen by comparison with the baseline analysis values that the higher
transportation costs result overall in lower revenues to Tacoma. Thus
the cashflows and resultant NPV's would be lower than under the baseline
analysis. These same conclusions apply to findings under Tacoma's
hypothesized discriminatory monopolistic pricing behavior.
b. Other "Distress Payments"
Since the switching of Duval and other Southwestern mines to Japan
would be on a continuing basis, one can hypothesize that the distress
payment could be negotiated to a lower value, say 3c/lb. Under these
conditions, the "trigger" point for these mines would be 26.5f/lb.
under baseline transportation costs and 23.4c/lb. under the higher costs.
Alternatively, under the higher transportation cost scenario, the
distress payment would have to be as high as 7c/lb. in order for
Tacoma's revenues from this source (i.e., clean concentrates) equal to
those considered for baseline analysis.
4. Alternate Production Costs and Cash Flows
Several alternate production costs and alternate cash flow scenarios
have been hypothesized for sensitivity analysis.
a. Production of 95,000 Tons/Year
Table IV-4 presented our estimates for this option. The pre-tax profit
is reduced from $3.3 million to $2.1 million. Thus this would decrease
NPV of the "baseline" options by $6 million at a 10% discount rate
and by $4 million at a 15% discount rate. The results are less
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favorable than under the baseline analysis.
b. Decrease in Variable Costs
We have arbitrarily increased pre-tax profit to 10% of sales (i.e.,
to $4.9 million); we further assumed that this increase is achieved
via a decrease in variable cost by $1.6 million.
This would increase after-tax cash flow by $0.8 million/year compared
to the baseline analysis, and increase the NPV by +$7 million at a
10% discount rate and by +$5 million at a 15% discount rate. This does
not alter the conclusions.
c. Different Depreciation Rates
We used 11-year straight-line depreciation for all pollution control
options studied; and, additionally, we examined Option 4.2B in detail
using accelerated depreciation. The use of these schedules is
consistent with our understanding of Asarco's policy with regard
to the ADR lives approved by IRS for nonferrous metals smelting and
refining equipment.
A longer depreciation schedule would reduce the NPV of an option by
the present value of the $0.48 tax savings foregone, per dollar of
incremental depreciation.
The use of accelerated instead of straight-line depreciation added
less than $2 million to the NPV's calculated for Option 4.2B. This
difference is not large enough to affect the characterization of the
feasibility space. Similar results would be obtained with respect
to the other options studied.
d. Different Baseline Depreciation and Cash Flow Assumptions
Our methodology assumes baseline depreciation (i.e., in the absence
of incremental control) normalized to an equilibrium in which the
depreciation charge is exactly offset by ongoing replacement
Investment requirements. We estimated depreciation (and replacement
investment) under the baseline conditions as $1.2 million/year. This
resulted in an after-tax cash flow net of replacement requirements of
$1.7 million/year. If we had assumed a higher depreciation rate of
$2 million/year and an ongoing replacement investment rate of $2
million/year, the net after-tax cash flow would have been $1.3
million/year or $0.4 million/year less than under our baseline analysis.
The effect of such a difference on the net present value figures
is -$3.3 million at a 10% discount rate and -$2.5 million at a 15%
discount rate. While the results are less favorable than under the
baseline, the conclusions are not sensitive to differences of such
magnitude.
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Alternatively, if we had assumed a higher depreciation rate of
$2 million/year and an ongoing replacement investment rate of
$1.2 million/year, the net after-tax cash flow (net of replacement
investment) would have been $2.1 million/year or $0.4 million/year
higher than under the baseline analysis. The effect of such a
difference on the net present value figures is +$3.3 million at a
discount rate of 10% and +$2.5 million at a discount rate of 15%.
e. Historical Level of Cash Flow at Tacoma
Since pre-tax profit is the difference between two relatively large
numbers—revenues and costs—its magnitude is sensitive to errors
in estimation of either revenues or costs or both. An independent
check on the validity of the profit and cash flow presented in Table
IV-4 and used for the baseline analysis is a comparison with
Tacoma's historical performance.
Asarco's December 5, 1975 Application for Variance to PSAPCA (supplied
to us by EPA Region X) shows Tacoma's earnings over the period
1965-1974. The average pre-tax earnings for these 10 years were
$1.85 million/year and gross earnings were $3.34 million/year.
The average pre-tax earnings of $1.85 million/year (in current dollars),
after adjustment for inflation (i.e., expressed in 1978 dollars) is
below the assumed baseline pre-tax earnings of $3.3 million/year
(in 1978 dollars). This suggests that the projected profit (and
cash flow) under baseline conditions is on the high side compared to
the historical performance.
In general, any combination of circumstances or errors resulting in a
baseline after-tax cash flow difference of $1 million per year would
affect the NPV calculations by $8 million at a 10% discount rate and
$6 million at a 15% rate. Since the difference between the NPV for
Option 4.2B (minimum SO2 control, with OSHA) under baseline analysis
and the NPV associated with the shutdown Option is about $40 million,
baseline cash flow would have to increase by $5 million/year at a
10% discount rate and by over $6 million/year at a 15% discount
rate before Option 4.2B becomes unambiguously feasible1.
1
This condition is approximately attained at 90c/lb copper price
level if Tacoma adopts a hypothesized discriminatory pricing behavior.
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5. Capital Investment
Estimates of pollution control capital investment can vary significantly
depending on the skills of the estimators, the degree of detail employed
for the estimate (e.g., estimates based on preliminary layouts versus
those based on detailed construction drawings) and the purpose of the
estimate (e.g., an estimate prepared for a "paper" study versus that
prepared for a fixed price construction bid). Thus it is important
to examine the sensitivity of the findings to changes in capital
investment. A range of +25% and -5% may typically be expected for
projects of this type as noted earlier in Section C.
We examine below Option 4.2 (minimum S02 control, with OSHA) under
base capital costs (Option 4.2B) and reduced capital costs (Option
4.2C) to see whether the findings change when the capital investment
is reduced. The difference between the after-tax cash flows under
these two control cost variants is the difference between the capital
investment levels. Therefore, the net present value of this
difference can be estimated separately. At a 10% discount rate,
the NPV is $1.8 million and at a 15% discount rate, the NPV is
$1.7 million. Thus, on a "with parent" and "stand alone" basis,
respectively, the overall net present value for Option 4.2C is
-$24.2 to -$38.2 million at a 10% discount rate and -$19.3 to -$29.3
million at a 15% discount rate. The observed differences from
findings under base conditions are not significant enough to change
the conclusions already reported for Option 4.2B or for any of the
other higher cost options.
6. Time Phasing
The time phasing of the pollution control capital expenditures
presented in Section C above was based on professional judgment.
It can be argued that the same expenditures spread over a much
longer time-period would show a less adverse impact, all else equal.
While this argument is theoretically correct, all else does not re-
main "equal" when significant capital expenditures are stretched out
over many years. A stretch-out of this type at Tacoma would
increase the time-period over which the construction activity would
interfere with production, thus resulting in higher costs of production.
Moreover, construction projects of this type involve efficiency
considerations in terms of scheduling, which would require, in this
case, a project duration of 2-4 years for the efficient functioning
of the construction team. A stretchout would introduce significant
inefficiencies and increase total cost. Finally, the stretchout
of a project into the distant future increases risk and uncertainty.
This, in turn, requires the use of a higher discount rate to adjust
for increased risk. The higher discount factor would tend to reduce
any apparent benefits arising from such a stretchout.
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7. Summary of Sensitivity Analysis Results
Table V-3X summarizes the results of the sensitivity analysis. Of
all the factors considered, it can be seen that only two affect the
conclusions derived under baseline conditions. These are persistently
high copper prices starting in 1978 and Asarco's willingness (based
on a perception that these price levels are persistent) to take
advantage of this situation through discriminatory monopolistic
pricing behavior.
H. OTHER ISSUES
I. A New Smelter in the Northwest
Since there might be a need for incremental smelter capacity in the
U. S. over the impact analysis period of 1978-1995, it is relevant
to examine whether a new smelter might be built in the Northwest.
Such a new smelter could be based on conventional technology (such
as reverb smelting) or new technology (such as electric or flash
smelting) and could treat impure or only clean concentrates.
If such a smelter were based on impure concentrates, it would
preferably be located on tidewater to receive imported concentrates.
The New Source Performance Standards would permit the use of either
reverb smelting or electric furnace smelting using double absorption
acid plants for SO2 control on strong streams. Weak streams produced
by sources such as reverbs would not require permanent emission
control, however, NAAQS would have to be maintained. Thus, one
might argue that if Tacoma as a processor of impure concentrates were
located in an area where it were not subject to the State of
Washington/PSAPCA regulations, its current level of SO2 control is
equivalent to the NSPS requirement for the control of strong streams.
If the Northwest continues to have relatively low cost electricity
compared to the cost of fossil fuels, an electric smelter could be
considered as an alternative for treating impure concentrates.
This option has already been examined as Option 1.2B.
The other alternative is a smelter based on clean concentrates.
Under the assumption of lower relative cost of electricity, an electric
furnace smelter might be a preferred choice. Such a smelter would not
necessarily require a tidewater location, since, based on current
trends in mine production of copper, the concentrates for such a
smelter would probably come from Arizona. Thus, as a first approxi-
mation, an electric smelter in the Northwest can be compared against
a similar smelter in the Southwest by comparing assumed savings in
electricity costs versus increased transportation costs.
Electric smelting requires about 350 kWh/ton of charge, or 1400 kWh/ton
of copper. The difference in power costs between the Southwest and
the Northwest is about lc/kWh. Thus, the saving in electricity costs
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TABLE V-31
SUMMARY OF SENSITIVITY ANALYSIS RESULTS
Option
Baseline
Conditions
Discriminatory Monopo-
listic Pricing Under
Long Run Copper Price at
80
85 90
(cents/lb)a
100
Presence of
Other Regu-
Higher
Trans-
portation
latory Costs Costs0
Lower Lower
Smelter/ Variable Lower
Refinery Cost/Higher Historical Capital
Output^ Profit^ Cash Flow^ Investment^
4.IB - Minimum Control, no OSHA
4.2B - Minimum Control, with
OSHA
3.IB - Intermediate; Delay;
no OSHA
<
I
ON
VO
3.2B - Intermediate; Delay;
with OSHA
1.1B - Maximum Control, no OSHA
1.2B - Maximum Control, with OSHA
N N
N M
N N
Notes: Y =» Ye?—raicroeconomic/financial analysis indicates that a given control option is feasible and preferred over shutdown.
N =» No—microeconomic/financial analysis indicates that a given control option is not feasible.
M = Maybe—raicroeconomic/financial analysis indicates that a given control option is barely or marginally feasible.
a. Version A revenue stream (i.e., Lepanto falls out after 1980 and is replaced by other domestic suppliers of clean concentrates.
b. These reflect modifications of base conditions reported in the first column.
>
—i
r-f
rr
c
—i
U
D
n
-------
is about $14/ton of copper. The transportation costs for bulk con-
centrates would be about 4-6c/lb of contained copper, or $80-120/ton
of copper. Thus, it can be seen that the power savings are insufficient
to induce electric smelting of Arizona concentrates in the Northwest.
Furthermore, such concentrates could be smelted in Arizona at lower
energy costs by autogeneous smelting processes such as flash smelting.
2. The Issue of Fugitives
The attainment of NAAQS using permanent controls is a preferred
approach. From the viewpoint of smelter management, it is relevant
to ask whether NAAQS will be met after installing the Best Available
Control Technology or whether NAAQS or local standards would still
be exceeded because of uncontrolled fugitive emissions requiring,
in turn, additional control measures or a permanent production
curtailment. The uncertainties in this area increase the risk
associated with the use of BACT-caliber technology in urban areas
where the fugitives problem cannot be resolved by acquiring land
in the vicinity of a smelter.
I. LIMITATIONS OF ANALYSIS
In this report, we have assessed the economic impact of incremental
pollution control expenditures on Tacoma under hypothesized base
conditions. We have further performed a series of sensitivity
analyses to examine the sensitivity of these conclusions to progressive
relaxation of these base conditions. This has enabled us to explore
the impact analysis problem under a reasonably wide range of conditions
or combinations of conditions, to check whether the final conclusions
remain the same (i.e., are "robust") or become ambiguous as these
base conditions are relaxed.
While this sensitivity analysis helps define a "feasibility space"
over which certain options are either feasible or not feasible,
certain limitations remain. These limitations generally fall into
five broad categories which are not necessarily mutually exclusive:
(1) variables or factors omitted from consideration, (2) the reliability
of the data used and the correctness of their extrapolation over the
impact period of 1978-1995, (3) validity of the methodological
approach, (4) reasonableness of the future "state(s) of the world"
hypothesized for analysis, and (5) correctness for the postulated
decision-making behavior on the part of Asarco.
There exist major uncertainties in the future with respect to other
potential environmental regulations and associated compliance costs
at Tacoma. These relate not only to costs for incremental SO2
control and for OSHA-inorganic arsenic standards which are treated
explicitly in this report, but also to other potential costs (for
ambient lead, arsenic, in-plant SO2 and other standards) which could
also be incurred over the impact analysis period.
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This factor increases the uncertainties at Tacoma. Our impact
results are understated to the extent that these costs are not
explicitly considered. (A possible way to take this factor into
consideration would have been to increase the discount rate to
20% or even higher. This would not have affected the conclusions).
A related point in this connection is the possibility that the costs
of compliance associated with all control options considered in our
analysis are understated in the following sense. The pollution
control costs for existing sulfuric acid and liquid S02 production
are a part of the baseline costs and the revenues from the sale
of these byproducts are a part of the baseline revenue stream.
All incremental SO2 control options require liquid SO2 for enrich-
ment and assume that liquid SO2 is available at zero cost. If liquid
S02 were unavailable, the operating costs for all the options
considered would have been significantly higher—reflecting mainly
increased energy consumption.
Our analysis over the period 1978-1995 relies on numerous estimates
and projections prepared (by us or by others) on the basis of
professional judgment using available information as a guide. These
data and projections are in the following areas:
• Incremental SO2 control costs
® Incremental OSHA costs
® Future baseline raw materials supply to Tacoma
• Potential reduction in future baseline capacity of Tacoma
if electric smelting is adopted
e Future production costs
o Future transportation costs
e Future revenues at Tacoma
e Future charges for smelting and refining in Japan, the
Philippines and the Southwest
• Future concentrate production costs for Lepanto, Northern Peru,
and Duval
• Shutdown costs for Tacoma
Generally speaking, our analysis leads us to believe that the conclusions
reported are fairly "robust" (i.e., strong, invariant, not very sensi-
tive) over a wide margin for the magnitude of these projections.
Thus, our conclusions will not be altered significantly if somewhat
different numbers are used. A different set of such numbers could be
derived by other analysts by using more precise historical data and/or
by using their professional judgment. We believe that it is unlikely
for such numbers to fall outside the range used in the sensitivity
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analysis; and, if so, be in a direction such that the basic conclusions
are altered. For these reasons, we believe that additional historical
data is not likely to have a significant effect on the conclusions.
For example, even if our estimate of net present value of shutdown is
in error by several million dollars, it is not likely to alter our basic
conclusions under baseline analysis. The conclusions pertaining to
Options 4.2B and 3.IB, under hypothesized discriminatory monopolistic
pricing on the part of Tacoma, might be altered, but this depends on
the size of the difference from the estimates given here, and the
extent to which high copper prices would be obtained (especially in
the early years), in order to permit such a strategy.
The methodological approach used in our analysis, relying on integrated
microeconomic and financial analysis principles and practice, is
predicated upon rational economic behavior. This may involve at least
two types of shortcomings. In the first instance, actions or reactions
in real life may be more discontinuous than would be implied by theory.
Moreover, certain "intangible" factors may be completely ignored
in a theoretical analysis. For example, before embarking on a course
of discriminatory monopolistic pricing, Asarco may have to weigh
such intangibles as possible loss of "goodwill." While "goodwill"
is intangible in the sense that it is difficult to quantify, it
might be an important issue to Asarco given the fact that a majority
of new projects in the mineral industry are joint ventures and goodwill
is important for the continuation of this practice. Similarly,
Asarco may not want to antagonize the Government of Peru about Northern
Peru, since Asarco has a much larger equity investment in the Southern
Peru Corporation of approximately $160 million.
It is not possible to define the future "state(s) of the world"
(1978-1995) in a precise manner. A single unique set of future
conditions, including copper prices, can neither be defined nor,
of course, guaranteed for such impact analysis. There are many
participants in the present analysis, each having a possibly
different set of future expectations (e.g., on copper prices),
different set of alternatives open to them and different perceptions
of risk than may be imputed to them in the analysis here. The
participants are assumed to behave in certain ways, based on
theory, which may not, in reality, occur, not because of any
deficiency in theory but because real life is typically more
uncertain and therefore too complicated to be fully predicted through
microeconomic or financial analysis. We have already pointed out how
some "intangible" factors may impinge upon the analysis and the
result. Legal risks that might be taken by Asarco-Tacoma in pursuing
a discriminatory monopolistic pricing strategy have also been ignored.
Other factors have also been omitted from consideration, to keep the
analysis under manageable proportions. For example, Lepanto, rather
than paying high toll charges over the period 1978-1980, as Tacoma's
monopolistic pricing behavior would require, might instead produce
and stockpile its concentrates until the new Philippines smelter
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opens. These points, taken together, cumulatively indicate that
the revenue streams estimated for Tacoma over the period 1978-1995
under Tacoma's hypothesized discriminatory monopolistic pricing
behavior represent upper-bounds under each assumed long-run copper
price level. However, if under these "extreme" conditions a control
option fails to be considered viable, then, it would seem to us that
there is little likelihood for that option to be in fact viable
(i.e., we can reject the hypothesis that a given option is viable
with a high degree of confidence).
Finally, it should be noted that any analysis by a third party
cannot capture in detail Asarco's full-range of decision options,
their perceptions of risk and uncertainty and even their analytical
approach in examining the Tacoma smelter/refinery situation. However,
while the details of Asarco's thinking may not have been fully
captured, we believe our analytical approach represents a reasonable
approximation of the central logic of Asarco's decision-making in the
area considered in this report.
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APPENDICES
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APPENDIX A
TYPICAL SMELTING AND REFINING SCHEDULE FOR COPPER CONCENTRATES
A. INTRODUCTION*
The actual price paid by a smelter and refinery for a particular concen-
trate is a function of the composition of that particular concentrate, the
overall composition of the entire smelter and refinery charge, and the
effect the concentrate exerts on their operations. Smelters with varied
sources of ores and concentrates generally have lower recoveries and
might offer less attractive terms. Similarly, a concentrate considered
undesirable by one smelter might be considered desirable by another
because of the composition of other concentrates and be offered a
"friendly" contract. The typical contract shown below has the structural
features of actual smelting and refining contracts in the U. S. and abroad.
The following features of these contracts are important:
1. The concentrate value (and mine profits) vary with the
price of the refined metal. The charge for smelting
and refining does not vary with the price of the
refined metal.
2. The smelting and refining charges increase in accor-
dance with specified formulae with increases in energy
and labor costs.
3. Contracts fall Into two categories: A "custom" contract
involves the outright purchase of the concentrate by the
smelter and refinery. Under a "toll" contract, the
smelter will smelt and refine the concentrate for a fee
and return the recovered metals. In either case, the
formulae for calculating smelting and refining charges
are the same.
B. DEFINITIONS AND TERMS
Ton: Dry short tons of 2000 lb; unless otherwise stated,
all tons refer to dry tons of concentrates.
OZ: Troy ounce (31.1035 g)
Unit: One hundredth of a ton; 20 lb.
See also: C. F. Page, Engineering and Mining Journal, June 1965, for old
smelter schedules, pp. 199-205.
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Delivery: FOB smelter. Freight and insurance to be paid and
guaranteed by the seller. An extra unloading and sampling
charge is assessed for small shipments. The date of delivery
is the date on which unloading at the smelter is commenced.
Title: For toll contracts, the title to all accountable metals
(metals to be returned) remains with the shipper (mine) at all
times. For custom contracts, title shall pass to the buyer
(smelter) after delivery, as defined above.
Weighing, Sampling, Assaying: Smelter weights and samples
govern settlement. The shipper, at his own expense, is
entitled to be represented at the smelter for sampling and
weighing. The final sample is split into four portions:
shipper, smelter, umpire and reserve. If shipper and smelter
agree within splitting limits, the average of the two is used
as settlement assay. If they differ by more than the split-
ting limit, the umpire sample is analyzed by an umpire
agreeable to both parties and the middle of the three assays
is used for settlement.
C. ACCOUNTING FOR METALS (Metals Paid for or Returned)
Copper: From copper assay, deduct one unit and pay for
(or return) 97-100% of the remaining copper.
Gold: If gold content is at or over 0.03 oz/ton, pay for
(or return) 98% of gold content. No accounting shall be
made for gold content if less than 0.03 oz/ton.
Silver: If silver content is 1 oz/ton or over, pay for
(or return) 95% of silver content. No accounting shall
be made for silver content, if less than 1 oz/ton.
D. PRICES
Copper: Metals Week, U. S. Producer refinery quotation,
or average of 4 LME quotations (prompt, 3 months, bid,
asked) averaged for the calendar month, 90 days after
the date of delivery. For toll contracts, return metal
after 90 days.
Silver: Monthly average of Handy & Harmon, New York,
price adjusted to the applicable basis or average of
LME silver settlement for the same time period used
for copper settlement.
Gold: Monthly average of London gold settlement.
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E. CHARGES, DEDUCTIONS AND PENALTIES, ESCALATIONS
Base Smelting Charge: $30-60/net dry ton of concentrates.
Base Refining Charge: 4-8
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APPENDIX B
SULFURIC ACID AUD SULFUR DIOXIDE
A. MARKET OUTLOOK FOR SULFUR DIOXIDE AND SULFURIC ACID IN THE NORTHWEST
1. North American Sulfur, Sulfur Dioxide arid Sulfuric Acid
a. Sulfur
North America accounts for more than 25% of total world sulfur consumption.
The U. S., in turn, accounts for approximately 85% of North American con-
sumption. Imported sulfur supplies about 10% of total U. S. consumption,
but imports of sulfuric acid represent only about 1% of U. S. consumption.
This is because, while sulfur is a commodity chemical which enters signi-
ficantly into international trade, the marketing of sulfuric acid, and to
some extent sulfur dioxide, is limited by the hazard associated with
handling and the expense associated with their shipment to distant markets.
Sulfuric acid and sulfur dioxide weigh three times and twice as much,
respectively, as the equivalent weight of sulfur. Both are shipped in
tank cars, while sulfur can be shipped molten in tank cars or in solid
form. The storage of elemental sulfur in solid or molten form is cheaper
and less hazardous. Finally, the production of sulfuric acid or SO2 gen-
erates waste heat which is recovered as byproduct steam. For all of these
reasons, a large percentage of sulfuric acid and SO2 production is captive
and much of the production is consumed within 200 miles of the producing
point.
Approximately 85% of U. S. sulfur is converted to sulfuric acid, mainly
for use in production of fertilizers. In addition to sulfuric acid, other
uses for sulfur include the manufacture of carbon disulfide, phosphorus
pentasulfide, pulp and paper products and vulcanized rubber. Although a
considerable amount of research has been done on possible new applications
for sulfur (e.g., as a partial replacement for bitumen in asphalt), none
of these new uses has achieved commercial success to date.
North American sulfur demand has historically experienced growth at a rate
of approximately 4% per annum. Supplies of sulfur have grown rapidly since
the 1950's when new sources of sulfur appeared in the form of non-discre-
tionary, byproduct sulfur derived from fossil fuels, and byproduct sulfuric
acid produced during the processing of nonferrous metal ores. This byprod-
uct sulfur is subject to completely different costs of production than is
discretionary Frasch sulfur, which, until the 1950's, represented the major
portion of North American production. Currently, however, discretionary
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and nori-discretionary sulfur production are of nearly equal Importance in
North America.
Canada has historically accounted for the majority of recovered non-dis-
cretionary sulfur in North America. This sulfur is a byproduct of gas
and crude oil refining operations in Alberta. Much of this sulfur is
being stockpiled in Canada because of logistics and regulatory problems
associated with its shipment to potential markets. Nevertheless, this
stockpile, the size of which now exceeds the current annual U. S. con-
sumption of sulfur, must be viewed as a potential future supplement to
other recovered sulfur values in the Northwest.
Non-discretionary elemental sulfur from sour gas or crude refining is
usually lower in impurities than natural Frasch sulfur. Both can be
stockpiled easily and compete directly against each other. Non-discretionary
sulfuric acid and liquid SO2 compete against elemental sulfur, but suffer
from the following handicaps: Their storage and handling is more hazardous
and more expensive; their transportation costs are higher and their use
does not provide byproduct steam obtainable when elemental sulfur is
burned. Thus, sellers of byproduct SO2 or sulfuric acid have to adopt a
strategy of selling their product in the nearest market (to minimize
transportation costs) at a discount below the equivalent product derived
from elemental sulfur. The discount compensates for the absence of by-
product steam credits, usually higher impurity (heavy metals, etc.), off-
color, and lower reliability of supply compared to a captive plant.
In general, the production of sulfur and its derivatives is expected to
increase more rapidly than demand for these products. This is particularly
true in the West where demand for sulfur is relatively limited but where
production of recovered sulfur from fossil fuels refining is extensive.
Particularly important are the production of sulfur from refining Canadian
sour gas in Alberta and the refining of Middle Eastern crude oils in
California refineries. The refinery production of sulfur in California
will decline if and when the lower-sulfur Alaskan crudes displace the
Middle Eastern crude oils. In addition, air pollution control regulation
require a reduction in the emissions of sulfur dioxide from smelters, re-
fineries, power plants and other facilities. This will lead to an increase
in the production of byproduct sulfur values in the Northwest, as in the
U. S. as a whole.
b. Sulfur Dioxide
Sulfur dioxide is produced by burning elemental sulfur. The single largest
use for sulfur dioxide is in the production of sodium hydrosulfite which
in turn is used as a bleaching agent in the production of textiles, paper,
and clay. The use of SO2 in pulp and paper manufacture is dwindling be-
cause sulfite-based pulping is now technically obsolete. Other uses for
sulfur dioxide, including refining and food processing, are expected to
offset the lower demand in pulp and paper. The result will be that SO2
demand is expected to increase at an annual rate of approximately 4-5%
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during the next five years. Current North American sulfur dioxide (SO2)
capacity is approximately 251,000 tons/year, as indicated in Table B-l.
A complete usage breakdown for sulfur dioxide is presented in Table B-2.
The Northwest accounts for a relatively large portion of U. S. sulfur
dioxide capacity. In fact, Asarco's Tacoma capacity of 70,000 tons/year
(production has been about 50% of capacity) is equivalent to one-third
of total U. S. consumption. Scott Paper Company, which until recently
produced sulfur dioxide in Washington, is believed to have put its plants
on a standby basis and is purchasing Asarco's Tacoma production for all
its needs. Another Western sulfur dioxide plant, which has been removed
from current capacity lists, but which is reportedly still in operation,
is a small plant operated by Virginia Chemicals in Selby, California.
This plant, with a capacity of approximately 14,000 tons/year, is expected
to be shut down soon, as sulfur dioxide from Tacoma takes over those markets
currently served from this location. Marketing of the sulfur dioxide from
the Tacoma smelter is currently handled under a ten-year contract by
Virginia Chemicals. Finally, Cominco operates a 60,000 tons/year sulfide
dioxide plant at Trail, British Columbia which, reportedly, supplies some
of the sulfur dioxide requirements for the Northwest.
As was indicated in Table B-l, approximately 70% of sulfur dioxide pro-
duction is used in the production of bleaches or related chemicals. The
largest single bleaching application is in the pulp and paper industry.
Another important use of Northwestern sulfur dioxide is for the production
of wine and other food products in California. The total western U. S.
market for sulfur dioxide is estimated to be approximately 30,000 tons/
year. Any additional production not consumed in the West is shipped to
the Eastern markets with a shipping cost of about $45/ton. When valued
at $130/ton (a published list price in Chemical Marketing Reporter),
sulfur dioxide can be shipped longer distances than sulfuric acid. This
is because of its lower weight and higher value on a sulfur equivalent
basis.
In the Northwest, however, most of the SO2 is sold only by displacing
elemental sulfur, which as described earlier, is abundant in this region.
About a third of Tacoma's production, which is sold in the Northwest,
displaces elemental sulfur and realizes a price which is tied to the
sulfur price and is a small fraction of the published list price. Another
third of Asarco's SO2 output is sold in California and the West at a price
which reflects its form value but which is well below the list price. The
remainder which is shipped East, displaces elemental sulfur from this mar-
ket. It appears that Asarco does not realize netbacks to Tacoma suffi-
cient to cover the out-of-pocket costs of making SO2 in any of its signifi-
cant markets. We believe it is unlikely that Asarco will be able to break
even on SO2 sales in the near future.
c. Sulfuric Acid
Sulfuric acid is by far the most important U. S. industrial chemical in
terms of annual production volume. Although 1975 production exceeded
30 million tons, this represented a drop of more than 7% from the record
level of 33 million tons produced in 1974. As a mature chemical commodity,
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TABLE B-l
NORTH AMERICAN SULFUR DIOXIDE CAPACITY
Producer
A. Western U.S. & Canadian
Asarco, Inc.
Cominco
Scott Paper Co.
Virginia Chemicals
Location
Tacoma, Washington
Trail, British Columbia
Anacortes, Washington*
Everett, Washington*
**
California
Subtotal
Annual Capacity
(thousand tons)
70
60
***
14
144
B. Eastern U.S. Capacity
Subtotal
Total
107
251
Plants not in operation.
**
Plant scheduled to shut down.
***
70,000 tons is design rate; production has been about 35,000 tons/year.
Source; Chemical Marketing Reporter and private communication with industry.
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TABLE B-2
SULFUR DIOXIDE END USE
End Use Percent of Total
Hydrosulfites, other chemicals
45
Pulp and paper
25
Metal and ore refining
11
Soybean protein
8
Oil refining
6
Miscellaneous
_5
Total
100
Source: Chemical Marketing Reporter and Arthur D. Little, Inc., estimates
based on private communication with industry.
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the long-term growth for sulfuric acid has historically been about 3% per
annum. Between 1965 and 1975, the growth rate was depressed to an average
of only 2% per annum due to the low level of 1975 production. As indicated
earlier, foreign trade is relatively unimportant, with imports equal to
1% of production in 1975 and exports at approximately half this level.
In 1975, Canada and Mexico, together, received 80% of U. S. sulfuric
acid exports. In the same year, 93% of U. S. imports came from Canada.
As indicated in Table B-3, U. S. sulfuric acid capacity in 1975 was
approximately 46 million tons. The vast majority of this capacity (84%)
is in the Gulf Coast and eastern U. S. The Northwest, the Pacific Coast
and the Southwest, together, account for only 16% of U. S. sulfuric acid
capacity.
By far the most important use for sulfuric acid is in the production of
phosphate fertilizers, which account for approximately 55% of U. S. sul-
furic acid demand. Other uses accounting for more than 3% of total demand
are the alkylation of hydrocarbons (5%) and the production of titanium
dioxide, ammonium sulfate and alcohols (approximately 4% each). A more
complete description of current sulfuric acid use is given in Table B-4.
2. Sulfur, Sulfur Dioxide and Sulfuric Acid in the U. S. Northwest
a. General Outlook for Sulfur Balance in the Northwest
As indicated in Table B-3, Western U. S. producers of sulfuric acid
account for approximately 7.6 million tons or 16% of total U. S. capacity.
Sulfuric acid producers in the Northwest including Washington, Montana,
Idaho, and Wyoming account for approximately 2 million tons or 5% of
total U. S. capacity. Finally, the three sulfuric acid producers in
Washington State, with a combined capacity of 167,000 tons, account for
less than 0.4% of U. S. capacity. If 90% of the SO2 emissions are con-
trolled at Tacoma, the incremental sulfuric acid production would be
approximately 132,000 tons/year. This would increase sulfuric acid
capacity in Washington to approximately 300,000 tons/year.
Potential new Western sulfuric acid capacity through 1979 as indicated
in Table B-5, is approximately 1.8 million tons annually. The incre-
mental acid capacity at Tacoma (if the plant achieves 90% sulfur control)
would represent approximately 7% of this total. For the West as a whole,
an increase from 7.6 million tons of annual capacity in 1975, to 9.4
million tons in 1979, represents nearly a 25% gain in regional capacity.
This is equivalent to an average annual growth in capacity of approximately
5%. This rate is at the high end of the range of likely future U. S.
sulfuric acid demand growth of 3-5% per annum. It is also significantly
more rapid than likely increases in demand in the West. For example, a
U. S. Bureau of Mines forecast of Western phosphate rock growth indicates
that growth will be at a rate of about 3-5% per annum between 1970 and
1990.
"Development of Phosphate Resources in Southeastern Idaho," Volume I,
Draft Environmental Impact Statement, Dept. of Interior, 1976.
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TABLE B-3
U. S. SULFURIC ACID CAPACITY - 1975
Producer Location Annual Capacity
(thousand tons)
A. Washington State
Allied Chemical Anacortes, Washington 92
Asarco, Inc., Tacoma, Washington 53
Georgia-Pacific Bellingham, Washington 22
Subtotal 167
B. Other Northwest
Anaconda Co. Anaconda, Montana 231
Beker Industries Conda, Idaho 600
Gulf Resources Kellogg, Idaho 250
Phelps Dodge Jeffrey City, Wyoming 35
Phelps Dodge Riverton, Wyoming 75
J.R. Simplot Pocatello, Idaho 800
Subtotal 1,991
C. California 1,702
D. Southwest 3,787
E« Western U.S. 7,647
F. Other U.S. 38,748
Total 46,395
Source: Directory of Chemical Producers and Arthur D. Little, Inc., estimates
based on private communication with industry.
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TABLE B-4
SULFURIC ACID END USE
Fnd Use Percent of Total
Fertilizer
56
Alkylation
5
Titanium Dioxide
A
Ammonium Sulfate
A
Alcohols
A
Copper Leaching
3
Hydrofluoric Acid
3
Aluminum Sulfate
2
Cellulosics
2
Steel Pickling
1
Surface-Ac Live Agents
1
Uranium Ore Processing
1
Miscellaneous
14
Total
100
Source: Arthur D. Little, Inc., estimates based on published industry
statistics.
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TABLE B-5
POTENTIAL NEW WESTERN U. S. SULFURIC ACID CAPACITY
(thousand tons/year)
Producer
Allied Chemical
Anaconda**
Asarco, Inc.**
Asarco, Inc.**
Kennecott**
Occidental
Phelps Dodge**
Bunker Hill
Valley Nitrogen
Location
Richmond, Calif.
Anaconda, Mont.
East Helena, Mont.
Tacoma, Washington
Garfield, Utah
Lathrop, Calif.
Hidalgo, New Mexico
Kellogg, Idaho
Helm, Calif.
Annual Total
Total Potential
Increment
Incremental Capacity
1977 1978 1979+
140
120
140
420
250
355
865
130
200
150
420 620
1,285 1,905*
A*
A 23% increase over 1975 regional capacity, of which over half is
non-discretionary; equivalent to 780K tons of phosphoric acid (P2O5)
k
Non-discretionary capacity.
Source: Arthur D. Little, Inc., estimates, EPA/Region X.
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3. The Outlook for Incremental Sulfuric Acid Produced at Tacoma
a. Marketing
Many large consumers of sulfuric acid choose to purchase sulfur and
produce sulfuric acid on-site in order to achieve low price, high quality
and dependability. In addition to these benefits, the producer of this
captive sulfuric acid can use excess steam generated during sulfur com-
bustion, for example, to concentrate his phosphoric acid product. At
$1.25 per million Btu's this byproduct steam represents an energy credit
of approximately $5.00/ton of sulfuric acid produced. For byproduct
smelter acid to displace this acid it must not only be sold at less than
the integrated acid producer's variable cost, but it must also compete
with this energy credit on a delivered cost basis.
The producers of non-discretionary byproduct sulfuric acid (or SO2) have
to sell their product in competition with the same products often produced
in captive plants by the user. The general strategy that has to be fol-
lowed by these producers is to displace discretionary acid derived from
elemental sulfur in the nearest market in order to minimize transporta-
tion costs. This displacement is achieved by selling non-discretionary
acid at a discount. This discount has to compensate for the absence of
byproduct steam credit, higher impurity content, and lower reliability
of supply (actual or perceived) compared to a captive plant. While the
quality of smelter acid has been improved recently, some specialized
markets such as alkylation are simply not available to smelter acids.
In addition, marketing sulfuric acid in the West is generally more
complex than, for example, on the U. S. Gulf Coast. One reason is be-
cause of the general lack of large single customers to purchase available
supplies. One industry source estimates that sulfuric acid fromAsarco's
Tacoma smelter is now sold to as many as 30 different consumers in
Washington and other Western states. Asarco's acid is currently marketed
by Stauffer Corporation which arranges for the sale and delivery of the
acid.
Because of high shipping costs relative to the price of sulfuric acid,
most sulfuric acid has been consumed within several hundred miles of the
producing point. Only with the recent advent of regional imbalance in
sulfuric acid supply and demand has more distant rail shipment and, to
some extent, ocean transport, become more important. Estimated costs
for rail shipment of sulfuric acid from Tacoma to selected markets are
presented in Table B-6. As will be discussed below, the shipping cost
alone for moving sulfuric acid from Tacoma to Houston, is equal to
nearly 70% of the current selling price for sulfuric acid in Houston.
The only alternative to displacing acid derived from discretionary sources
is neutralization. Order-of-magnitude costs estimated in Section III
suggest that under most conditions the shipment of smelter acid to dis-
tant markets (1000-3000 miles away) is a lower cost strategy than
neutralization. The long-term storage of acid is not a viable option
because of the hazard associated with this approach.
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TABLE B-6
ESTIMATED RAIL COSTS FROM TACOMA TO SELECTED MARKETS
(dollars/tori)
Market Destination
San Francisco, Calif.
Los Angeles, Calif.
Pocatello, Idaho
Garfield, Utah
Houston, Texas
Chicago, Illinois
Approximate Rail
Mileage
885
1,350
870
1,040
2,590
2,350
Rate c/ton
Mile
1.8
1.6
1.8
1.6
1.3
1.4
Approximate
Rail Cost
16
22
16
17
34
33
Source: Arthur D. Little, Inc., estimates.
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b. Demand
As previously indicated, more than 50% of U. S. sulfuric acid production
is consumed in the manufacture of phosphate fertilizers. Therefore,
demand for sulfuric acid is very sensitive to fertilizer demand. This
is even more true in the Northwest where the fraction of sulfuric acid
going to phosphate production is expected to increase substantially as
the Western phosphate fields are developed.
An estimate of 1975 and projected 1985 capacity for Western U. S. phos-
phoric acid capacity is presented in Table B-7. The current capacity
level of 837,000 tons of P2O5 is expected to increase to approximately
1.2 million tons by 1985. This is equivalent to an average annual
growth rate of 3.7%. In comparing the expected incremental phosphoric
acid capacity of 363,000 tons with the amount of sulfuric acid which
would be required to satisfy the requirements for this capacity, it is
interesting to note that only about 815,000 tons of sulfuric acid would
be required. This is less than half of the incremental sulfuric acid
which may be available as early as 1979 — 6 years before Western phos-
phoric acid capacity is expected to reach the 1.2 million ton level.
This also assumes that all of the incremental sulfuric acid is used in
phosphoric acid production and that phosphoric acid producers choose
not to purchase sulfur from Canada or California for on-site production
of sulfuric acid.
Although there are many other important uses for sulfuric acid, very few
of these end uses have attractive growth prospects. The use of sulfuric
acid in refineries for alkylation is expected to be level or decrease
gradually. Also, because of pollution problems associated with the sul-
fate process for the manufacture of titanium dioxide, this segment
represents a no-growth market for sulfuric acid. In any case, there
are no sulfate process plants in the Western U. S.
Alum, or aluminum sulfate is an important sulfuric acid derivative in
the Northwest. However, this is a relatively mature inorganic chemical
with growth generally limited to a rate of about 2% per annum. Because
aluminum sulfate is an important chemical for the manufacture of pulp
and paper and also because alum production consumes sulfuric acid, new
alum plants have been located near paper mills and sources of byproduct
sulfuric acid. The demand outlook for alum is limited and current
capacity is adequate for present and projected demand.
Several other relatively important products derived from sulfuric acid
also have limited growth prospects. For example, the production of
hydrofluoric acid requires sulfuric acid but the two most important
applications for hydrofluoric acid, fluorocarbons and aluminum fluoride,
have limited or negative growth potential because of efforts to control
fluorine emissions to the environment. Sulfuric acid is also used in
the production of cellulosic fibers and films, however, this market
faces long-term decline.
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TABLE B-7
FORECAST OF WESTERN U. S. PHOSPHORIC ACID CAPACITY
(thousand tons P2O5)
Capacity
Growth Rate
Producer Location 1975 1985 (p.a.a.)
Becker
Conda, Idaho
250
Collier Carbon
Nichols, California
8
Duval
Hanford, California
20
Gulf Resources
Kellogg, Idaho
32
Occidental
Lathrop, California
40
J.R. Simplot
Pocatello, Idaho
280
Stauffer
Garfield, Utah
100
Valley Nitrogen
Helm, California
100
Valley Nitrogen
Bena, California
7
Total 837 1200 3.7%
Source: Directory of Chemical Producers and Arthur D. Little, Inc., estimates,
based on private communication with industry.
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Uranium ore processing and copper leaching represent two relative bright
areas in the sulfuric acid end use scheme. Unfortunately, these two
applications, combined, account for only about 4% of sulfuric acid demand.
Copper leaching has recently become more attractive, partially because
of the ready availability of byproduct sulfuric acid from smelter gases
and partially because of hydrometallurgical process developments for
metal recovery from ore tailings. Uranium ore processing while promising,
faces many uncertainties as the U. S. gradually increases its dependence
on nuclear power. One nonferrous metal company representative places
potential sulfuric acid demand for this application at about 15,000
tons/year in the Northwest.
In summary, the expected growth in sulfuric acid demand in the Northwest
is much lower than the expected growth in capacity during the next ten
years. With the incremental supply likely to be larger than incremental
demand, any additional sulfuric acid from Tacoma must displace current
demand in the Northwest, thus disrupting this market, or move into
more distant, possibly export, markets.
c. Prices and Netbacks
In this section, we calculate the maximum netbacks Tacoma can obtain if
it sells incremental sulfuric acid in the regional demand centers by
displacing acid generated by burning elemental sulfur. The netbacks to
Tacoma are calculated by subtracting transportation costs from estimated
average acid prices.
A summary of current and historic sulfuric acid prices is presented in
Table B-8. These prices generally represent average U. S. prices with
current prices in the Northeast and Mid-West closer to $55/ton. Smelter
acid is generally available in the Southwest at approximately $15/ton
f.o.b. smelter. Because of relatively low rail rates in the Southwest,
smelter acid from southern Arizona or New Mexico can be shipped either
to Los Angeles or to Houston for approximately $12/ton, resulting in a
delivered price of approximately $27/ton. Acid from Tacoma could com-
pete in Los Angeles with this acid from the Southwest only by accepting
a netback of $5/ton ($27 less $22 rail cost from Tacoma to Los Angeles).
Based on the estimated rail costs in Table B-7, sulfuric acid from Tacoma
could compete with smelter acid from the Southwest in the Houston market
only by subsidizing the $34 rail cost — resulting in a negative netback
of -$7. If demand exists, it would appear to be more attractive to
ship Tacoma acid to Chicago where it could compete with acid from the
Southwest and achieve a netback of perhaps $10 to $15 per ton.
The potential for inducing a phosphate fertilizer manufacturer in, for
example, Idaho to shut his acid plant and purchase smelter acid from
Tacoma does not appear great since the estimated freight rate of $16/ton
is roughly equivalent to the estimated cost of producing sulfuric acid
in Pocatello, based on a delivered sulfur cost of approximately $50/ton.
Since this does not include the estimated $5/ton steam credit, a subsidy
for the rail shipment of acid from Tacoma to Pocatello would appear to
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Arthur D Little Inc
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TABLE B-8
PRICE HISTORY FOR SULFURIC ACID
(dollars/ton)
Year
Sulfuric
1960
24
1964
24
1968
34
1972
36
1976
48
0
Average list price, 100% basis, FOB works, tanks.
Source: Chemical Marketing Reporter.
B-15
Arthur D Little, Inc
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be necessary, again resulting in a negative netback. Similar logic would
hold for most Western phosphoric acid producers having captive sulfuric
acid plants. These estimated netbacks for Tacoma are summarized in
Table B-9.
4, Conclusions
Because of the relatively rapid increase in potential sulfuric acid supplies
in the West relative to expected demand, incremental sulfuric acid from
Tacoma would be forced to compete for demand in more distant, perhaps ex-
port, markets. However, most foreign and domestic markets for sulfuric
acid will be facing the same imbalance that is expected to develop in the
U. S. Northwest. For example, Japan which has historically imported
large quantities of sulfuric acid, began exporting sulfuric acid in sig-
nificant quantities in 1975.
An analysis of sulfuric acid prices and rail costs to various domestic
markets indicates that netbacks to Tacoma vary from $-7 to +15 per ton
of acid. The highest netback is based on a distant market (Chicago) and
this netback would only be available if byproduct sulfuric acid from
another source cannot be delivered at a more competitive price. In view
of this analysis, the average netback on incremental sulfuric acid pro-
duction at Asarco's Tacoma Smelter is likely to be $0 to $5, i.e., the
acid can be sold in a number of potential markets for the cost of delivery
plus $0 to $5.
In view of the cost for neutralization of byproduct sulfuric acid estimated
in a subsequent section (Section C), at about $20-25/ton, it appears that
the smelters would choose to sell acid at a $0 to $5 netback and utilize
the neutralization facility as a standby to be used in periods of high
copper demand and low acid demand.
B. CURRENT COSTS OF EMISSION CONTROL AT TACOMA
1. Acid Plant
Table B-10 summarizes the costs of making acid at Tacoma. Table B-ll
presents a list of new equipment installed at the acid plant.
2. Liquid SO2 Plant
Table B-12 summarizes the costs for liquid S02 production at Tacoma. In
Tables B-10 and B-12, it should be noted that "tools, repairs and miscel-
laneous supplies" amount to less than 4% of capital investment. When
engineering estimation techniques are used, such costs are usually esti-
mated at 4-5% of capital investment.
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Arthur D Little, Inc
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TABLE B-9
ESTIMATED NETBACKS TO TACOMA
($/ton acid)
Destination
Value at
Destination
Less
Rail Cost
Netback
to Tacoma
Los Angeles
27
22
5
Houston
27
34
-7
Chicago
43-48
33
10-15
Pocatello
11
16
-5
Average
0-15
Source: Arthur D. Little, Inc. estimates.
B-l 7
Arthur D Little, Inc
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TABLE B-10
COSTS OF ACID PRODUCTION AT TACOMA
Operating Costs (1975$) $/Ton H^SO^
Raw Material: Vaporize Liquid SO„ 1.98
SO2 from Converters
Operating Labor and Supervision
(including fringe benefits) 4.67
Utilities: Power 0.85
Fuel Oil 0.66
Gas 0.41
Tools, Repairs & Miscellaneous
Supplies 2.22
Total Direct Costs 10.79
Indirects 3.05
Depreciation 2.31
G&A 0.59
Overhead 2.90
Total Unit Operating Costs 19.64
Source: Asarco, Inc.
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TABLE B-ll
NEW EQUIPMENT INSTALLED AT THE ACID PLANT
(1951-1976)
Item Year
40-ton oleum tank 1949
Additional storage 1951-1952
Battery acid facilities 1953
Repair and replace blower impeller 1963
Replace spray chamber 1965
Replace preheater 1965
Add electrical control on Cottrell system; increase blower HP 1967
Replace preheaters; remove SO3 cooler 1970
New absorption tower; new tail gas flues 1973
Hot heat exchanger; new SO3 vaporizer; remove Labbd coolers 1973
Voltage controller or Cottrell 1974
Replace cast iron piping with acid coolers 1974
Bypass flues 1975
New drying tower 1976
Source: Asarco, Inc., EPA/Region X
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Arthur D Little, Inc
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TABLE B-12
COST OF LIQUID SO? PRODUCTION AT TACOMA
Operating Costs (1975$) $/Ton SOp
Raw Materials: Acid 0.07
DMA 5.89
Operating Labor and Supervision
(including fringe benefits) 6.47
Utilities: Steam A.79
Power 3.53
Tools, Repairs & Miscellaneous
Supplies 15.12
Total Direct Costs 35.87
Indirects 11.72
Depreciation 7.95
G&A 1.97
Total Operating Costs 57.51
Source: Asarco, Inc.
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Arthur D Little, I nc
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C. ACID NEUTRALIZATION COSTS
In this Section, we estimate "ball park" acid neutralization costs for a
plant with a capacity up to 800 tons/day of acid. Such a plant would
probably not be used on a continuous basis, but only during those periods
when acid cannot be disposed in any other way. We feel that an acid neu-
tralization plant would be located away from the smelter, e.g., in eastern
Washington, so that the sludge from neutralization can be stored indefi-
nitely at site in a lined pond. The use of lined ponds for such storage
is consistent with current trends in effluent limitation guidelines.
The M&S index was used to escalate plant costs to 1978. Pond costs usually
vary from $4,000-35,000 an acre, depending on the terrain and whether they
are lined or not. We have used average costs of $25,000 an acre for a
lined pond. Some of the operating unit costs were: limestone at $8 a ton
delivered, operating labor at $10.65 an hour and supervisory personnel at
$20,000 a year. (If such a facility were actually built, it would probably
be run with Tacoma smelter employees on overtime.)
The capital and operating costs are summarized in Table B-13. Disposal
costs are of the order of $21.00 a ton of acid at the disposal site. The
shipping of acid to this site would entail an additional transportation
charge of $4.00/ton of acid resulting in total acid disposal costs of the
order of $25/ton acid.
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Arthur D Little, Inc
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TABLE B-13
ORDER-OF-MAGNITUDE COSTS OF ACID NEUTRALIZATION FOR A 800 TPD PLANT
(1978$)
CAPITAL COSTS
Purchased Equipment Costs (PEC)
Installed Plant Cost (3 x PEC)
300 Acre Pond @ $25,000 an acre
Total Capital Costs
VARIABLE COSTS
Utilities
Cooling Water
Power
Chemicals
Operating Labor
Labor
Supervision
Total Direct Labor
Payroll Overhead
Maintenance and
Supplies
Plant Overhead
Total Variable Costs
FIXED COSTS
11 MGal @ $0.025/MGal
4300 kw, 24 hr <3 $0.006/kwh
890 tons @ $8.00/ton
2 men, $10.65/hr, 24 hr
15% direct labor
20% direct labor costs
5% of capital cost
50% operating labor plus
maintenance and supplies
Depreciation, Interest,
Taxes and Insurance 21.5% of capital costs
Total Disposal Costs
Source: Arthur D. Little, Inc. estimates.
B—22
$ 814,350
2,443,050
7,500,000
$9,943,050
$/Day
$
0.30
619.20
$ 619.50
$ 7,120.00
$
$
511.20
76.70
587.90
117.60
$ 705.50
1,484.00
1,093.00
$11,022.00
$ 6,381.40
$17,403.40
$21.75/Ton Acid
Arthur D Little, Inc
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APPENDIX C
ARSENIC TRIOXIDE (As?0Q
A. INTRODUCTION
Arsenic trioxide (A62O3) is produced as a byproduct from the flue dusts
obtained during pyrometallurgical extraction of copper, lead, gold or
silver ores. Asarco's Tacoma smelter is one of the few processors
of high arsenic-containing raw materials in the world and is the only
producer of byproduct AS2O3 in the United States.
B. BYPRODUCT As^Os PRODUCTION
Arsenic is available commercially primarily as arsenic trioxide (AS2O3)
and is known as white arsenic. Usually, this commodity designation
is reserved for arsenic trioxide which is at least 99% pure. Crude
arsenic (sometimes referred to as black or gray arsenic) usually ranges
in purity from 95-98% AS2O3. In the range 98-99%, the differentiation
between crude and refined arsenic (or between black and white arsenic)
can depend upon color or other physical characteristics, rather than
arsenic trioxide purity.
At Tacoma, flue dusts from roasters and reverb containing arsenic are
fed to the Godfrey roasters. The arsenic trioxide volatizes and is
passed through arsenic settling kitchens (of which there are three),
where the arsenic trioxide is condensed. A very small fraction of
AS2O3 is further processed in a reduction plant and shipped as arsenic
metal. Tacoma's production of arsenic trioxide has averaged about
11,000 short tons/year, of which about 7,000 short tons has been in
the form of crude arsenic trioxide and 4,000 short tons has been in
the form of refined arsenic trioxide. Production of metallic arsenic
has averaged only about 200 short tons/year.
C. MAJOR PRODUCERS OF AspOq
In addition to the United States (i.e., Tacoma), the major current
producers of byproduct AS2O3 are Sweden, France, Southwest Africa,
the U.S.S.R., Mexico and Peru.
Sweden: Sweden is the largest supplier of arsenic trioxide worldwide
(18,200 short tons in 1973) and is the largest foreign U. S. supplier.
The Swedish arsenic is produced at the Ronnskar Works of Boliden AB,
as a byproduct of smelting of copper concentrates and from arsenical
dusts stockpiled from past operations (smelting arsenical gold
concentrates from the Boliden mine).
France: In France, much of the output of over 10,000 short tons in 1973
was produced by two producers.
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Southwest Africa: According to the U. S. Bureau of Mines, output of
AS2O3 in Southwest Africa reached 8,981 short tons in 1973, produced
by the Tsumeb Mine and Smelter. In 1968-1969, the production of
arsenic trioxide from Tsumeb was about 2,500 tons per year. From
1970 through 1972, it increased to about 4,000 tons per year. It
therefore appears that byproduct arsenic production at Tsumeb has
increased significantly.
U.S.S.R.: The U. S. Bureau of Mines has estimated that in 1973 the
U.S.S.R. produced 7,990 tons of arsenic trioxide. This is believed to
have been produced as a byproduct of the smelting of metallic ores,
including the arsenic-cobalt ores of the Khovu-Aksink deposit.
Mexico: The U. S. Bureau of Mines reports that the production of
arsenic trioxide in Mexico totaled 4,830 tons in 1973, representing
a significant decline in output since 1971. Production over the
period 1967-1971 ranged from 7,000 to 13,000 short tons per year.
Peru: The U. S. Bureau of Mines estimates that 1,200 tons of arsenic
trioxide equivalent were produced from Peruvian mines in 1973.
Presumably this does not include 1,700 tons of As203 equivalent
shipped to the Tacoma plant in the form of Northern Peru concentrates.
We understand that a large quantity of arsenic trioxide is handled at
the Oroya smelter of Impresa Minera del Centro del Peru (which was
the Cerro de Pasco operation prior to its nationalization in 1973).
Oroya has always handled significant amounts of arsenic-containing
materials. Even in the mid-501 s, arsenical dusts were treated to
recover contained arsenic values. Some calcium arsenate and arsenic
trioxide was produced for local sales. The remaining dust was and
is still being stockpiled.
The supply of arsenic-containing dusts has been in excess of the
demand for refined AS2O3 and surplus dust has been stockpiled or
buried1. The producers of refined AS2O3 have usually maintained
low prices and have also maintained stockpiles of flue dust or refined
AS2O3. In general, the absolute value of the AS2O3 price has been
dictated primarily by the size of the inventory of refined AS2O3.
Typically, prices have decreased when major producer inventory became
very high. In the last three years, inventories have decreased very
significantly because of strong demand in spite of large price increases.
D. CONSUMPTION TRENDS IN THE UNITED STATES AND IMPORTS FROM ABROAD
As shown in Table C-l, annual consumption of AS2O3 in the United States
during the 1960's and early 1970's ranged from a low of 20,533 tons in
1963 to a high of 34,585 tons in 1967. Prices during that period did
*We understand that such stockpiling also occurs in eastern and western
Canada.
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Arthur D Little, Inc
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TABLE C-l
u. s.
CONSUMPTION OF As?0^,
1960-1974
Years
Apparent
Consumption
(short tons)
Average Price'
($/short ton)
1960
24,338
77.3
1961
28,328
76.5
1962
25,700
73.4
1963
20,533
75.6
1964
30,663
80.9
1965
31,839
88.1
1966
30,832
86.9
1967
34,585
96.7
1968
31,639
108.1
1969
27,421
116.9
1970
25,863
127.0
1971
23,906
130.1
1972
23,613
135.6
1973
30,496
133.5
1974
32,000
172.lb
Notes: a. Average price is based on the weighted average
of the domestic price (f.o.b. Tacoma) and the
price of imported AS2O3 (c.i.f.).
b. Estimated.
Source: Asarco, Incorporated, U. S. Bureau of Mines,
Minerals Yearbook, various issues, U. S. Foreign
Trade, Imports, Commodity by Country.
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Arthur D Little, Inc
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not fluctuate nearly as much as consumption, but rose steadily from
$77.3/ton in 1960 to $172.10 in 1974.
Arsenic (i.e., arsenic trioxide, or, in abbreviated form, As) has a
wide range of industrial uses in the United States, including the
manufacture of pesticides, herbicides, desiccants, glass products,
wood preservatives, pharmaceutical preparations, inorganic chemical
reagents and nonferrous alloys. Table C-2 shows how the consumption
of As has been distributed among these industries since 1968.
Arsenic is primarily consumed by the agricultural chemicals industries
for the preparation of arsenical compounds used in herbicides and
pesticides. In 1974, the agricultural chemical industry accounted
for approximately 67% of the U. S.-consumed As. Arsenic acid (l^AsOij)
is the most widely-used compound for defoliation of cotton plants.
Arsenicals are also used heavily by the cotton industry for weed
killing and as a desiccant. Of the agricultural sector, the cotton
industry is perhaps the most dependent on arsenicals since no proven
substitutes exist.
The glass industry's share of U. S. consumption of As has declined to
half what it was in 1968, as reflected in Table C-2. This appears to
have been the result of a switch in technology away from using AS2O3
as a refining agent. The glass industry is continuing to substitute
arsenic with cerium oxide in conjunction with selenium for the
decolorization of the glass.
The wood preserving industry, according to the U. S. Forest Products
Laboratory and the American Wood Preservers Association, have not
been able to find an acceptable (primarily odorless) substitute for
water-soluble arsenic-based preservatives.
The pharmaceutical industry uses a small portion of As in its formu-
lations.
Arsenic is added to both lead and copper alloys to improve their
properties. This market appears to be growing in its relative
share of As consumed in the United States. The lead storage battery
industry is the primary consumer of As metal. However, development
work on a substitute for As in the battery industry has resulted in
a calcium alloy substitute. It is still too early to define the
extent to which this will displace arsenic.
In conclusion, based on the limited information available, it appears
that some U. S. As consumers have been striving toward acceptable
substitutes for As-based end-use products. The agricultural chemicals
and wood preserving industries, however, have not been very successful
in finding acceptable substitutes for their As-based products (i.e.,
their demand for arsenic is fairly inelastic). The largest of these
markets (agricultural chemicals) could disappear if regulations
governing the use of arsenic change.
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Arthur D Little, Inc
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TABLE C-2
CONSUMPTION OF As203 IN THE UNITED STATES
BY MAJOR END-USE INDUSTRIES
(percent of total consumption)
1968 1971 1974
Agricultural Chemicals
(SIC 2879) (Pesticides) 77 70 67
Glass and Glassware
(SIC 322) 18 20 9
Industrial Inorganic Chemicals
(SIC 2819) (Catalysts-
reagents) { 16
Nonferrous Alloys
(SIC 333) (Copper-lead)
I
\
10
Medicinal Chemicals
(SIC 2833) (Agricultural) 1 2
TOTAL (Percent) 100 100 100
Source: Asarco, Incorporated (1974); 1968, and 1971 are estimates.
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Table C-3 shows trends in apparent U. S. consumption of arsenic and
sources of supply over the period 1960-1973. It can be seen from
this table that, during this period, the major share of supplies of
AS2O3 has historically come from abroad. Sweden, the world's largest
producer of As is also the largest U. S. foreign supplier at present.
Mexico has also been a major U. S. supplier in the past. More
recently, domestic sources of AS2O3 have been supplying a larger
share of the U. S. market. In 1962, approximately 61% of the AS2O3
consumed in the United States was imported; by 1974, only 44% was
imported. Some of the increase in the relative share of domestically-
produced AS2O3 can be explained by changes in the domestic price of
AS2O3 relative to the imported price. As the domestic price of AS2O3
decreased relative to the imported price, U. S. consumers appear to
have moved away from foreign-produced toward domestically-produced
As203.
E. ELASTICITY OF DEMAND FOR ARSENIC IN THE UNITED STATES WITH RESPECT
TO DOMESTIC AND FOREIGN PRICES
Available analytical evidence suggests the following demand characteristics
for arsenic:
o Total arsenic demand is relatively insensitive to price (i.e., in-
elastic) indicating that U. S. consumers of arsenic have few
nonarsenic substitutes available.
o The demand for domestically-produced arsenic is price elastic
(i.e., sensitive to both the domestic and import prices of arsenic).
Therefore, if domestic prices should rise relative to foreign
prices, arsenic users would substitute foreign sources of arsenic
for domestically-produced arsenic.
e The demand for arsenic has been more sensitive to domestic and
foreign prices in the past in situations when there was excess
supply.
Table C-4 shows the shift in the source of As consumed in the United
States and the changes in relative prices of domestic versus imported
arsenic. In looking at these trends over time (1962-1974), we can
see a very definite relationship between the source mix (i.e.,
domestic vs. imported) and the relative prices. Expressing this
relationship in mathematical form and performing the necessary
calculations, using historical data, we find that:
Domestic share = 40.8 - 43.1 In (Relative Domestic Price)
where
Domestic share is the percent of total U. S. As consumption that
is domestically supplied; and
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Arthur D Little, Inc
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TABLE C-3
APPARENT
U. S. CONSUMPTION OF AsoO
q AND SOURCES OF
SUPPLY, 1960-
-1974
(in short
tons, unless
otherwise indicated)
Sales
; of
Apparent
Domestic
Domest ically
Imported
Prices
($/ton)3
Years
Consumption
Production
Stocks
Produced As
As
Domestic
Imports
1960
24,338
N. A.
3,227
11,913
12,825
72
82
1961
28,328
12,366
6,748
8,845
19,483
82
73
1962
25,700
9,528
3,156
9,942
15,758
82
68
1963
20,533
8,819
6,000
5,974
14,559
82
73
1964
30,663
8,478
2,000
12,478
18,185
88
76
1965
31,839
15,814
1,500
16,314
15,525
94
82
1966
30,832
12,157
1,500
12.157
18,675
99
79
1967
34,585
6,510
500
7,510
27,075
114
92
1968
31,639
8,944
3,000
6,444
25,195
124
104
1969
27,421
13,335
8,400
8,000
19,421
124
114
1970
25,863
14,131
15,500
7,100
18,763
124
111
1971
23,906
9.797
17,700
7,500
16,406
124
133
1972
23,613
13,319
21,000
10,000
13,613
124
144
1973
30,496
13,118
15,000
19,000
11,496
124
149
1974
32,000
9,694
2,500b
18,000
14,000
155b
194b
Notes: a. Average price of As imports both refined and crude; average price of domestically refined AS2O3.
b. Estimates.
—t
^ Sources: Asarco, Incorporated^ U. S. Bureau of Mines, Minerals Yearbook, various issues..
r—*-
w
5"
n
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TABLE C-4
TACOMA'S SHARE OF THE DOMESTIC MARKET AND
RELATIVE PRICES OF As203, 1960-1974
Years
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
Tacoma's share
of the
c
Domestic Market
(%)
47.3
31.2
38.7
29.1
40.7
51.2
39.4
21.7
20.4
29.2
27.4
31.4
42.3
62.3
Domestic Price
Relative to
Foreign Price
.87 3
1.12a
1.21
1.12
1.16
1.15
1.25
1.57
1.19
1.09
1.12
.93
.86
.83
Notes: a. Possible noise in the series.
b. Estimated.
c. Domestic share is the percent of total U. S.
As consumed that is domestically supplied.
d. Domestic relative price is the domestic price
of refined AS2O3 f.o.b. Tacoma divided by the
average imported price of As c.i.f. imported.
Most of the imported As is refined As203.
Source: Asarco, Incorporated, U. S. Bureau of Mines,
Minerals Yearbook, various issues.
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Arthur D Little, Inc
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Relative domestic price is price of domestic refined arsenic f.o.b.
Tacoma divided by average c.i.f. imported price.
This equation indicates that, provided world supplies of As are available
(i.e., no shortages), U. S. consumers are responsive to relative prices
for As. Therefore, a domestic producer of As could expect to lose some
of his market share if domestically-produced As prices become much
higher relative to the imported prices.1
F. CONCLUSIONS
The world arsenic market is highly concentrated on the sellers' side
and the demand for arsenic in most uses appears fairly price inelastic2,
at least in the short run. It might be inferred from this that Tacoma,
enjoying substantial market power, could increase domestic arsenic
prices substantially to alleviate, in part, the burden of pollution
control costs associated with any of the options being considered. Our
analysis shows, however, that Tacoma will have little to gain by
increasing the price of arsenic, if this leads to a rise in relative
prices (i.e., domestic price versus foreign prices), particularly in
the fact of the present and foreseen world arsenic supply-abundance in
the form of stockpiled flue dusts.
*We believe such a conclusion is strongly indicated even though we
realize certain limitations inherent in such an analysis (e.g.,
relatively small sample; possible errors in the price and quantity
data used; the identification problem, that is, the supply schedule
and the demand schedule for arsenic interact simultaneously to determine
the quantity of domestic arsenic sold and its price).
2This is true especially in the case of agricultural chemicals, the
most important user of arsenic trioxide. Should the use of arsenic
in herbicides, pesticides, etc., be banned or severely curtailed
in the future, such a statement about demand elasticity would have
much less validity.
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Arthur D Little, Inc
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APPENDIX D
LEPANTO CONSOLIDATED MINING COMPANY
A. INTRODUCTION
We have made an estimate of Lepanto's copper production cost based on
information in their 1975 Annual Report. We attempted to perform the
same kind of analysis as was used for Duval (see Appendix G). However,
we did not have as much information available. The estimates developed
are subject to change if and when more data become available.
B. BACKGROUND
Lepanto produced 43,844 dry metric tons (DMT) of concentrate in 1975,
containing 13.3 million kg of copper (about 14,600 short tons). In
1975, 46,448 DMT of concentrate were loaded in four ships: 38,037
tons were sent to Asarco's Tacoma smelter and 8,411 tons to Anaconda
in Montana. The concentrate sent to Tacoma contained 1,288 kg of gold
and 6,429 kg of silver. That sent to Anaconda contained 171 kg gold
and 1,345 kg silver.1
Copper production in 1975 declined 11.7% from 1974. Production cutbacks
were continued to avoid further inventory accumulation (stocks left
on hand at year-end were nearly equal to the amount produced during
the year), and were also related to the situation at Asarco, as
Lepanto's president stated in the Letter to Stockholders. Indeed, we
believe his remarks provide extremely valuable perspective on the
situation at Tacoma as far as Lepanto is concerned, and thus reproduce
them below:
"TO OUR STOCKHOLDERS: For the first time since our company
resumed mining operations after World War II, a consolidated
loss of P 1,746,119 was incurred in 1975 compared to a net
income of P 91,734,095 in 1974. Although the Lepanto Mines
Division actually lost P 5,517,789, this was partially
offset by our subsidiaries which collectively earned a total
of P 9,548,069 before income tax. After income taxes and
after deducting the shares of minority stockholders in these
subsidiaries, they still made a net contribution of
P 3,771,670 to the Company, thus bringing our net loss to
only P 1.75 million.
D-l
Arthur D Little. Inc
-------
The very disappointing loss in our principal division,
the Lepanto mines, was brought about by a combination of
factors: the low price of copper, averaging US$1,176 per
kilogram during the year (US$1,673 in 1974), and the
continued decline in gold prices, which averaged US$5,046
per gram during 1975 (US$5,374 in 1974). Accompanying
these low prices were steadily increasing operating costs
that saw the cost of supplies, tires, fuel, and spare
parts rise to record new heights. Likewise, manpower
costs and overhead continued to increase.
Moreover, production during the year declined principally
because of the lower grade ore that were mined. In
spite of our reduced volume of concentrate production
(43,844 DMT for 1975 versus 49,630 DMT for 1974), we
were not able to reduce our inventory of concentrates to
any large extent. We ended the year with 58,023 DMT of
concentrate inventory compared to 58,339 DMT the year
before.
As reported last year, many of our problems were associated
with Asarco's own problems in its Tacoma smelter. Due to
pollution regulations in the U. S., Asarco stopped smelting
for us during the last three months of 1975 in order to use
up their own priced inventory prior to the expiration of
their variance permit on January 31, 1976. However, they
resumed smelting for us in January and, at the time of this
writing, they continue to do so.
In view of the mounting stockpile of concentrates on hand
together with the uncertainty at the time of Asarco's con-
tinued operation after January 31, 1976 (when Asarco's
permit to operate was scheduled to expire) the Company
decided late last year to suspend mining operations at the
Lepanto Mines Division. We therefore implemented a special
leave period under which employees at the mine site were
sent on vacation leave with pay from December 10, 1975 to
January 15, 1976. During this standstill period, studies
were made which prompted the Company to continue indefinitely
the suspension of mining operations starting January 16, 1976
As a result, 1,500 employees have been laid off out of a
total of 2,200. The suspension of mining operations and
the laying off of employees were cleared with the government
agencies concerned. The laid off employees were paid their
termination pay and all their unused vacation and sick
leaves, and were given financial assistance for an extra
period of 60 days from January 16, 1976. They were also
given free transportation services, plus a cash relocation
allowance. The Company has also committed, on the resumption
of mining operations, to give to the laid off employees first
D-2
-------
preference for reemployment; provided, of course, that the
laid off employees meet the requirements of the jobs in
question.
The remaining 700 employees have been retained to do
essential mine development and rehabilitation, security,
care, and maintenance work. This would place the mine in
a position to operate more efficiently when we resume
operations. Should the prices of copper and gold rise to
a point where we would be able to operate profitably, we
shall immediately resume production at the Lepanto mines.
In the meantime, we intend to continue shipping our con-
centrates to Asarco's Tacoma smelter until our inventory
on hand is used up.
The Puget Sound Air Pollution Control Agency recently held
hearings on whether or not to allow Asarco's Tacoma smelter
to continue operating under certain conditions. We have
been advised by Asarco that the Puget Sound Air Pollution
Control Agency has granted its request for a five-year
variance to operate its Tacoma smelter.
As we have stated often in the past, we believe that the
long term solution to this problem is for the Philippines
to have a smelter that is designed to smelt Lepanto's
material together with other Philippine copper concentrates.
We are pleased to report progress on this project during the
past year. With three other mining companies, Lepanto has
brought this project to a decisive stage whereby the basic
engineering activities have been accomplished and contract
proposals with firm prices of equipment have been received.
In view of the necessity of state assistance, we have turned
over to the President's Copper Smelter Advisory Committee
headed by Secretary Vicente T. Paterno, the leadership in
pursuing this project to a successful conclusion. We are
confident that decisive action will be taken soon by our
Government so that we can get this long delayed project
onstream. ...
... Since the price of copper is such an important factor
in our decision on whether or not to reopen our mine, we
hesitate to forecast how we will fare in 1976. At present
it appears to us that, although there are signs of an
economic upturn in the U.S., such signs are still not an
assurance of a sustained increase in the price of copper.
The continuing imbalance in the supply and demand
situation, which is highlighted by the large copper
inventories in the London Metal Exchange warehouses and
in Japan pose a bearish influence on the price. It is
our intention to review the situation periodically.
D-3
Arthur!) Little, I nc
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Anticipating all these, Management has taken steps to
drastically cut down all overhead expenses and conserve
as much as possible our cash resources in order to meet
our financial commitments to the Roaster and Smelter
Projects. Our financial consultants, together with
Management, are studying the critical problem of raising
funds for these priority projects. We can only assure
you that all efforts will be devoted to these, so that our
Company's long term future can be assured. We have a good
and rich mine that, although plagued by arsenic and other
impurities, is still a very viable one under normal
conditions. ..."
Exhibit D-l presents a 10-year picture of the mining operations. Note
the departure in 1974-1975 in the ore grade, mined down to 1.78% copper,
compared to the consistently higher grade of the prior years. We believe
this was a logical consequence of the sharp increase in copper and gold
prices in 1974. The January 1, 1976 ore reserves reported by Lepanto
had an average grade of 2.6%, which is similar to the average grade of
ore mined over the period 1966-1973. Estimated remaining economic ore
reserves amounted to 7.56 million tons containing about 218,000 tons
of copper and 29,000 kg gold.
C. PHILIPPINES COPPER SMELTER PROJECT2
According to the 1975 Annual Report, in 1975 Lepanto Consolidated
Mining Company and three other copper mining companies in the
Philippines organized the Copper Smelter Corporation of the Philippines
(CSCP) to set up a copper smelting and refinery project. Several
officers of Lepanto are among the key officers of the CSCP.
"The project involves the setting up of a smelter and refinery in
Negros Occidental capable of producing 84,000 metric tons per year
of cathode copper for the local and export markets. The well known
and proven flash smelting process developed by Outokumpu Oy of Finland
shall be employed in treating concentrates from the different Philippine
copper mines.
The refinery shall be designed to turn out cathode copper which meets
international standards and special high purity consumer standards.
CSCP is currently making arrangements with Philipp Brothers Oceanic
of the U.S. and Marubeni Corporation of Japan for the marketing of
the smelter's products abroad. In a memorandum of agreement executed
with CSCP, Planters Products, Inc. has agreed in principle to purchase
the smelter's byproducts of sulphuric acid for the production of
fertilizer in its plant to be built next to the copper smelter. Gold
and silver separated from copper will be refined in a precious metals
plant within the smelter complex capable of treating additional gold
and silver from other Philippine producers. Selenium and bismuth
recovered from the smelter will be sold to specialist refiners abroad.
D-4
Arthur D Little, Inc
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TABLE G-2
DUVAL COPPER MINING AND MILLING
Property and Year
Esperanza^
19 71
1972
1973
1974
1975
1976
Ore
Milled
(Thousands
of Tons)
6,006
6,628
5,341
5,409
Mineral Content
Copper Molybdenum
Gross
Revenues
Per Ton
Sold2
Suspended Operations
0.34%
0.31
0.26
0.29
0.039%
0.039
0.041
0.037
$4.47
5.89
4.33
7.39
Costs
Per Ton
Sold3'1*
$3.32
3.46
4.51
4.02
6.48
Mineral Park
1971
1972
1973
1974
1975
1976
Battle Mountain
1971
1972
1973
1974
1975
1976
Sierrita1
1971
1972
1973
1974
1975
1976
6,976
6,648
6,247
5,620
4,743
1,625
1,781
1,730
1,690
1,716
28,304
29,885
30,885
31,387
32,968
0.41
0.38
0. 36
0.30
0.28
0.84
0.63
0.55
0.66
0.71
0.29
0.28
0.29
0.33
0.35
0.036
0.042
0.040
0.043
0.048
0.029
0.031
0.026
0.030
0.035
3.88
5.46
5.29
4.28
4.57
6.72
5.67
7.72
9.36
13.20
3.01
3.94
4.66
3.84
6.75
3.65
2.81
3.66
3.81
4. ] 3
5.01
5.50
5.66
5.38
7.67
8.72
11.63
2.67
2.65
3.01
3.81
3.97
5.14
Design milling capacities at Esperanza, Mineral Park and Battle Mountain
(near the Copper Canyon mine) are 15,000, 19,000 and 4,000 tons of ore
per day, respectively. From the commencement of mining operations at the
Battle Mountain mines through December, 1976, the Copper Canyon mine has
accounted for approximately 82% of the tonnage milled at Battle Mountain,
Design throughput at Sierrita is 82,500 tons of ore per day.
2
Excludes revenues from leach-precipitation operations.
3
Includes the cost of mining leach material (except for Battle Mountain and
Sierrita) and all mining, milling, smelting, refining and indirect operating
costs, but excludes depreciation, depletion and interest. The average per
ton depreciation and depletion for mill and leach copper allocable to tons
milled and sold was as follows:
Property
1972
1973
19 74
1975
1976
Esperanza
$ -
$ .18
$ .19
$ .16
$ .13
Mineral Park
.29
.31
.20
.19
.13
Battle Mountain
.68
.64
.68
1.19
1.83
Sierri ta
.28
.31
.33
.34
.38
''The weighted average rate of escalation in unit mining costs was 13.3%/year.
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Arthur D Little, Inc
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Complete process and design engineering studies for the project have
been completed and contract proposals received. The project, which
involves an investment of approximately US$250 million, is expected
to be operational in late 1978 or early 1979.
The establishment of the copper smelter and refinery will minimize
the current dependence of Lepanto and other mining companies on
foreign smelters and encourage the local and regional development of
related industries like the wire and cable and copper fabrication
industries. The sales of precious meatls, savings of mining companies
from the nonincurrence of shipping costs to and smelting charges of
foreign smelters, and the reduction of sulphuric acid importations
are expected to result in net foreign exchange earnings and savings
of approximately US$25.1 million annually."
D. ROASTER PROJECT
The Lepanto Roaster Project involves the setting up of a roasting plant
to remove the arsenic and antimony from Lepanto's concentrates prior
to smelting. The plant, which is designed to be integrated with
CSCP's smelter, will be built adjacent to the smelter complex. The
establishment of the roaster plant will commence as soon as decisions
on the copper smelter are finalized.
E. CURRENT COPPER COST STRUCTURE
Because Lepanto showed a loss on copper sales in 1975, we can estimate
and reconstruct the sales which would show a break-even on a Lepanto
accounting basis. In the following calculations, we translated at
the average rate of $0.1343 per peso, as implied in the Lepanto Annual
Report.
Let AVC = out of pocket Lepanto costs excluding interest charges.
Then,
AVC' = [(Loss) + Sales Revenues] - Depreciation - Interest 1975
Sales of 27.6 million pounds of copper were $14.8 million; sales of
gold and silver $8.5 million (equal to $0.31 per pound of copper
sold). Break-even revenue was the sum of the loss or $0.75 million
and total 1975 sales of Lepanto Mines Division of $23.3 million.
Based on the 1975 Annual Report, we estimated related depreciation
and depletion charges of about $6.4 million; and interest of about
$0.6 million. This gave an AVC' of $0.62/lb, including smelting,
refining, and transportation charges (SR&T).
D-6
Arthur D Little, Inc
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Check: Break-even sales
Less: Cost of Goods Sold
$24.1 MM
($0.62 x 27.6 MMlbs)
lb
-17.1
Depreciation and Interest
7.0
Net profit
0.0
Subtracting an estimated 22
-------
To estimate in terms of 1978 dollars, one has to assume the effects of
Philippine inflation as well as the possible change in the value of
the peso vis-^-vis the U. S. dollar. To a first approximation, we
assume these are offsetting, so that:
AVC1975 " aVC1978
ATC1975 ^ ATC1978
In terms of copper prices, one must add in the 1978 Tacoma base case
SR&T charges re Lepanto, i.e., approximately 23
-------
REFERENCES
1) 1975 Annual Report to Lepanto Consolidated Mining Company.
2) This description from Lepanto's 1975 Annual Report is dated. See
Appendix E for details on the recent development.
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Arthur D Little, Inc
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APPENDIX E
THE PHILIPPINE SMELTER
The government of the Republic of the Philippines has been interested in
a local smelter for many years in order to create additional employment,
foster the development of satellite manufacturing industry and reduce the
dependence on the Japanese smelters.
The early feasibility studies were done in the late 1960's.1 Several
groups have prepared feasibility studies based on various processes such
as flash smelting, pre-roasting, etc. At one time, even the Mitsubishi
process was suggested. Several locations have been considered, e.g.,
Poro (most convenient to the Northern Luzon mines), Negros Occidental
(convenient to Marinduque), Cebu (Atlas), Bataan Industrial Park (away
from mines but near a power source), and Quezon or Batangas (a location
not near any major mine but near Manila). Smelter sizes considered most
often have been in the range of 80,000 to 120,000 tons/year. The recent
developments are discussed below.
In 1975-early 1976, there were two groups considering smelter projects.
The First Smelter Corporation (mainly Lepanto and Marinduque) was considering
a $250 million smelter on Negros Occidental.2 Atlas was considering one
initially on Cebu near the mines and then on Bataan, near a source of
power. Atlas' proposal was turned down by the Philippine Economic and
Development Authority3 and the plans were subsequently shelved.1*
In mid-1976, a new company, Philippine Associated Smelting and Refining
Corporation, was formed which superceded the First Smelter Corporation.5'6
The participants were: Atlas Consolidated, Marcopper, Philex, Marinduque,
Lepanto, Western Minoloco, Black Mountain, Consolidated Mines, Benguet
Consolidated, Acoje Mining and CDCP Mining. The equity participation was
in proportion to concentrate production, i.e., the ability to supply the
smelter.
The latest information (late 1976-early 1977)1'7 indicates that Arthur G.
McKee will build a smelter and refinery with rod casting facilities in
either Batangas or Quezon, near Manila. This facility will produce 84,000
tons/year of copper and is expected to be in operation in 1979-80. The
eleven companies will contribute 36% of the equity; the Government, 34%;
and foreign interests, 30%. Since Philippine imports of refined copper
are about 15,000 tons/year1, much of the copper output will be exported.7'8
E-l
Arthur D Little, I nc
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REFERENCES
1) Far Eastern Economic Review, November 12, 1976, pp. 68-72
2) a. Metals Week, July 5, 1976
b. Metals Week, November 2, 1976
3) Metals Week, January 26, 1976
4) Metals Week, April 19, 1976
5) Metals Week, August 30, 1976
6) Engineering and Mining Journal, October 1976
7) a. Metals Week, October 25, 1976
b. Engineering and Mining Journal, February 1977
c. Engineering and Mining Journal, December 1976
8) Metals Week, December 20, 1976
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Arthur D Little, Inc
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APPENDIX F
ASARCO'S NORTHERN PERU MINING CORPORATION
Northern Peru Mining Corporation (NPMC), an Asarco subsidiary, operates
the Quiruvilca mine and mill, 450 miles north of Lima, Peru. The ore
body is complex and produces silver-rich copper and lead-zinc
concentrates. During the period 1971-1975, ore milled was over
300 thousand tons/year with copper content about 2%. Copper production
amounted to an average of 7,600 tons/year. In 1976, production shifted
to favor lead-zinc-silver production at the expense of copper, which
dropped to 3,800 tons.
Peruvian General Mining Law and Regulations provide for the participation
by employees of mining companies operating in Peru, through Mining
Communities, in the ownership and management of the Peruvian assets of
such companies.1 The law contemplates that employee participations
will evenutally amount to 50%. Under the law and regulations (which
became effective in the second half of 1971), 10% of earnings, before
taxes and depletion, is to be paid over for the eventual benefit of
employees of the Peruvian mining industry, with an additional 1% of
such earnings to be paid to Peru's Mining, Scientific & Technological
Institute. Sixty percent of the payments to be made for the benefit
of employees is to be made through the issuance of certificates of
participation in net assets which are located in Peru, and forty
percent of such payments is to be made in cash.
In addition, the General Mining Law requires that each foreign mining
company operating in Peru establish a governing body ("Organo Director")
to govern its local activities. The Mining Community must be repre-
sented by at least one member on the Organo Director and voting power
is allocated between the Mining Community and the mining company in
proportion to the participation certificates held by each.
We understand that NPMC has not been a profitable operation. In 1975,
Asarco proposed the transfer of its interest in the Quiruvilca mining
unit to an appropriate agency of the government at no cost to the
Government.2 (This was at the time when the Peruvian Government had
just nationalized the assets of Marcona Mining Corporation, owned by
Cyprus Mines and Utah International of the U. S.)
The Peruvian Government did not take over this operation but negotiations
with the government and labor officials led to an agreement on reducing
the work force by one-third plus other adjustments intended to make the
operation profitable.3
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Arthur D Little, Inc
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Our understanding is that the Peruvian Government's marketing entity
for mineral products, Minero Peru Commercial (Min Peco) controls all
transactions involving Peruvian mineral products including the Northern
Peru concentrates. Min Peco negotiates the processing of Quiruvilca's
output usually with International Metals, a wholly-owned Asarco
subsidiary, and may have it tolled through Tacoma, or sold to Asarco
on the basis of a custom smelter contract through Tacoma.
We do not have in our possession either the mining and milling costs
at Quiruvilca or the smelting and refining contract governing trans-
actions at Tacoma regarding the mine. Based on the information
presented above, we have assumed that Quiruvilca has been and will
continue being a marginal operation.
For analytical purposes, Quiruvilca and Lepanto are treated together
since they share the following characteristics: high impurity
concentrates, marginal mines, and no alternative smelter outlets
at this time. It may be assumed that the costs of production at
Lepanto and Quiruvilca are similar since Quiruvilca was showing a
loss in 1975, and Lepanto shut down in late 1975 and showed a loss
that year (during which there was a sharp drop in copper prices.)1*
Northern Peru Mining Corporation (NPMC) and Southern Peru Copper
Corporation (SPCC) are the two largest mining operations not owned
by the Peruvian Government.5 In deciding not to nationalize Northern
Peru and in allowing a reduction in the work force, we assume that
the Peruvian government resolved to their satisfaction the nature of
the transfer costs between NPMC, Tacoma, and Asarco-New York, and pre-
sumably decided that high labor costs were the reason for the unprofitable
operation of the mine.
In comparison with the much larger SPCC operation, it should be noted
that the net assets in Peru of Asarco's wholly-owned subsidiary NPMC
amounted to $5.6 million at December 31, 1976, whereas its equity
investment in SPCC amounted to $154.6 million.6
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Arthur D Little, Inc
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REFERENCES
1) Pages A-35, A-74 of July 1976 Official Statement issued in
connection with Asarco environmental improvement revenue bond
financing; also, page C-ll and page C-12 of the 1974 and 1976
Form 10-K reports of Asarco.
2) a. Engineering and Mining Journal, September 1975, page 212.
b. Simon D. Strauss, Executive Vice President, Asarco, Inc.
Testimony before U. S. Department of Labor, OHSA, re:
Proposed Standard for Occupational Exposure to Inorganic
Arsenic, September 9, 1976, page 464.
3) Metals Week, December 15, 1975.
4) Lepanto Consolidated Mining Company Annual Report, 1975.
5) Simon D. Strauss, loc. cit., page 464.
6) Page 27 of the 1975 Annual Report of Asarco.
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Arthur D Little, Inc
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APPENDIX G
DUVAL CORPORATION
Duval is a wholly-owned subsidiary of Pennzoil Company. Pennzoil is a
large natural resources company engaged in oil and gas exploration, pro-
duction, refining, and marketing; and the mining and processing of ores
and minerals, principally copper, molybdenum, sulfur, and potash.
Pennzoil's total revenues in 1976 were $1.02 billion, with net income of
$167.6 million. Total employment was approximately 9,500 as of December
31, 1976. Duval accounted for about one-third of Pennzoil's revenues and
somewhat more than one-half of its gross operating income. Details on
Duval are presented below.1
A. COMPONENTS OF REVENUES AND INCOME
The data in Table G-l indicate the components of Duval's mining business
and sources of gross income (before total interest charges, Federal in-
come tax, and unallocated general corporate overhead expense).
B. METALS
Duval owns and operates three open-pit copper-molybdenum mines in Arizona
and two open-pit copper mines in Nevada. Silver is recovered as a by-
product from all the ore bodies, and gold is recovered as a byproduct from
the Nevada ore bodies. Duval's largest mine, the Sierrita Property
located near Tucson, Arizona, is owned by Duval Sierrita Corporation (Duval
Sierrita), a wholly-owned subsidiary of Duval. Operations at the Sierrita
Property began in 1971. Duval's Esperanza Property, which is adjacent to
Sierrita, has been in production since 1959, while Duval's Mineral Park
Property, located near Kingman, Arizona, has been in production since 1964.
The Nevada mines, Copper Canyon and Copper Basin, are located near Battle
Mountain, Nevada and have been in production since 1967.
Duval owns and operates a total of four concentrating mills located at or
near each of its mines for the conversion of ore into copper or molybdenum
concentrates. Average concentrator recovery has been 84.80% of the copper
assay content of all ore milled. Copper is also produced from supplemental
leach-precipitation operations at the mines (except Sierrita). Such opera-
tions entail the leaching of waste rock with an acidic solution and the
treatment of the resulting copper-bearing solution in a precipitation plant
to produce copper precipitates.
Duval's copper concentrates and precipitates are currently sold as such or
are toll smelted and refined by others for redelivery to and marketing by
Duval. Duval has recently completed the physical construction of and is
G-l
Arthur D Little, Inc
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TABLE G-l
DUVAL LINES OF BUSINESS
1974
1975
1976
Production (Thous. Tons)
Metals
Copper
133
138
145
Molybdenum
9
10
12
Sulfur (long tons)
2,352
2,174
1,771
Potash
U. S.
520
504
441
Canadian*
962
778
612
Sales (Thous. Tons)
Metals
Copper
122
157
101
Molybdenum
10
8
11
Sulfur
1,993
1,787
1,925
Revenues ($ Millions)
Metals
185
159
187
Other
96
125
142
Total
281
284
329
Gross Operating Income ($ Millions)
Metals
Other
Total
33
37
70
(13)
50
37
32.6
63.A
96.0
Disposed of in October 1976.
G-2
Arthur D Little Inc
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now in the process of starting up the operation of a CLEAR-process hydro-
metallurgical plant near the Sierrita Property for the electrolytic pro-
duction of copper crystals (equivalent to a high-grade blister copper)
from concentrates produced at the Esperanza and Sierrita Properties and
precipitates produced at the Esperanza and Mineral Park Properties. The
patented CLEAR process is designed to create no solid, liquid or gaseous
pollution. The plant is designed to produce 40,000 tons of copper crystals
per year. It is currently estimated that the plant will cost a total of
$51,000,000, including capitalized interest and start-up and test costs.
The copper crystals will be sold as such to conventional electrolytic
copper refiners and (to a limited extent) to fabricators or will be toll-
refined by others for marketing by Duval.
Most of Duval's molybdenum concentrates are currently treated by Duval
for marketing as molybdenum sulfide or for roasting in Duval's roasters.
The roasted product, molybdenum trioxide, is packaged and marketed by
Duval as technical molybdic oxide. The balance of the molybdenum concen-
trates is converted into ferro-molybdenum, one of a broad line of products
offered to the steel and foundry industries. In 1975, Duval completed the
construction of new facilities, adjacent to the Esperanza Property, for
the production of ferro-molybdenum in the domestic market. This plant is
designed to produce 3,500,000 pounds of ferro-molybdenum annually, and
currently processes approximately 45% of that portion of Duval's molybdenum
concentrates converted into ferro-molybdenum. The conversion of the
remainder of the molybdenum concentrates into ferro-molybdenum is currently
done for Duval by others on a toll basis for sale in the European market.
C. RESERVES
The following table sets forth reserve information concerning the metals
operations at Duval:
Reserves1
Average Mineral Content
Ore
Gold
Silver
(Thousands
(Ounces
(Ounces
Property
of Tons)
Copper
Molybdenum
Per Ton)
Per Ton)
Esperanza
25,779
0.42%
0.022%
_
Mineral Park
55,502
0.29%
0.038%
-
-
Battle Mountain:
Copper Canyon
6,144
0.52%
-
0.034
0.37
Copper Basin
821
1.04%
-
0.025
0.25
Sierrita
489,5772
0.32%
0.033%
-
-
^"As of December 31, 19 76, as estimated by Duval.
2
The stripping ratio during the operational life of the mine, excluding
pre-mining stripping of waste overburden, is estimated to be 0.93 to 1,
while the stripping ratio during the first five years of operations was
approximately 1.72 to 1.
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Arthur D Little, Inc
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D. SMELTING, REFINING, MARKETING
Duval's copper production accounts for approximately 8-10% of domestic
mine copper production. Substantially all Duval's copper sales recently
have been made in the U. S.
Asarco currently smelts and refines substantially all Duval's copper con-
centrates and precipitates. Under existing arrangements, Asarco purchases
a portion of the copper production (in the form of copper concentrates and
precipitates) and smelts and refines the balance on a toll basis for re-
delivery to and marketing by Duval. Duval's current sales are made to a
number of wire and brass mills. During 1976, approximately 52% of Duval's
total copper production was toll-smelted by Asarco; 25% was purchased by
Asarco; 11% was processed in the start-up operations of Duval's CLEAR
plant; 7% was sold to other refiners; and 5% was added to inventory.
At December 31, 1971, Duval suspended its mining and milling operations
at Esperanza until January 16, 1973, as a result of an Asarco work stoppage.
In 1975, because of an accumulation of concentrate inventory resulting
from an Asarco work stoppage in 1974 and decreases in demand for copper,
operations at Esperanza and Mineral Park were curtailed from a seven-day
week to a five-day week. The curtailment resulted in approximately a 17%
reduction in the rate of Duval's total copper production until September
1976, when both properties resumed a seven-day week.
The copper-bearing material from Duval's Battle Mountain mines are handled
by Asarco's Tacoma operation. The material from the other Duval mines is
handled by all of the Asarco smelters.
The contractual arrangements governing the processing of Duval's copper-
bearing materials by Asarco are, we believe, presently being renegotiated
by Duval and Asarco. Our understanding is that both parties seek an
omnibus contract covering a stated amount of concentrates per year company-
wide. Apparently, no agreement has yet been reached. We were not and
are not privy to any details.
Duval and Duval Sierrita are limited partners in a partnership formed by
Asarco which has constructed and is now operating pollution control
facilities at Asarco's Tacoma, Washington and El Paso, Texas smelters.
While the planned facilities are expected to reduce the emission of sulfur
oxides at the plants by approximately 50%, Duval has been advised by
Asarco that substantially greater emission controls may be imposed upon
Asarco's smelters at any time.
Effective January 1, 1976, Duval declared its own price basis for its
refined copper. Previously, Duval copper was priced on the basis of the
Metals Week wirebar average for U. S. producers, delivered. As of July 1,
1977, the quoted U. S. producer price was 68c/lb, back to where it was in
February. Pennzoil stated in its 1976 Form 10-K report, that if con-
struction, automobile production, and capital expenditures continue at
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Arthur 13 Little, I nc
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February, 1977 levels, it is expected that the market for copper will con-
tinue to be adversely affected.
Duval competes with a number of companies in sales of molybdenum products.
The quoted domestic price per pound to the steel industry for molybdic
oxide has increased from $1.65 in August, 1973 to $2.90 at March 1, 1976,
and $3.82 at February 1, 1977.
E. DUVAL SIERRITA2
In November, 1967, the United States Government through the General Services
Administration (GSA) and Duval Sierrita Corporation, an operating sub-
sidiary of Duval, entered into a domestic copper production expansion con-
tract pursuant to the provisions of the Defense Production Act of 1950 for
the development of a low-grade copper-molybdenum ore body (Sierrita Property)
adjacent to Duval's Esperanza Property. Construction of a mill and re-
lated facilities was substantially completed in March, 1970. Approximately
$181 million was required to develop the original project (not including
the cost of the expansion project referred to below) of which $83 million
was obtained from the GSA in the form of advances against future deliveries
of copper produced from the property; $48.75 million from commercial bank
loans guaranteed in part by the GSA; $10 million from Pennzoil; and the
remainder from Duval in equity or loans.
The contract with the GSA provided for repayment of advances by delivery
of about 218.4 million pounds of copper to the GSA prior to June 30, 1975,
the advances credited at the rate of 38c for each pound of refined copper
delivered. While the contract provided that certain minimum deliveries
be made, Duval Sierrita was entitled to sell in the open market its molyb-
denum and byproduct silver production and such amount of its copper pro-
duction as may be necessary to cover all cash operating expenses and
maintain working capital. Asarco entered into a ten-year Hayden smelting
agreement with Duval Sierrita, and also agreed to purchase 50% of the non-
GSA concentrate production.
In May, 1970, these contracts were amended to provide for an increase in
the mine and mill capacity at the Sierrita Property. Duval Sierrita
agreed to spend not less than $8 million on additional facilities of
about $13 million and guaranteed the GSA an average rate of ore throughput
on an annual basis of not less than 72,000 tons per day. In turn, the
GSA and the commercial banks agreed to permit Duval Sierrita to sell on
the open market for its own account 90% of production attributable to any
ore throughput exceeding 72,000 tons/day. The remaining 10% of such
production (net of sales required to meet cash operating expenses
attributable thereto) were to be delivered to the GSA at a fixed price of
38 c/lb.
Start-up operations commenced in the first quarter of 1970. The facilities
for integrated copper-molybdenum milling operations were not completed
until the latter part of 1970, and normal production did not commence
until 1971. Sierrita produces "clean" concentrate.
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In 1975, Duval arranged for a new $55 million bank credit for substantial
acceleration of deliveries to the GSA. The negative contribution of
metals operations in 1975 (see Table G-l) reflects the acceleration of
copper deliveries (65,000 tons), principally in November and December, 1975,
to discharge at 38
-------
TABLE G-2
DUVAL COPPER MINING AND MILLING
Property and Year
Esperanza
Ore
Milled
(Thousands
of Tons)
Mineral Content
Copper Molybdenum
Gross
Revenues
Per Ton
Sold2
Costs
Per Ton
Sold3-''
1971
1972
1973
1974
1975
1976
Mineral Park
6,006
6,628
5,341
5,409
Suspended Operations
0.34X
0.31
0.26
0.29
0.039%
0.039
0.041
0.037
$4 .47
5.89
4.33
7.39
$3.32
3.46
4.51
4.02
6.48
1971
1972
1973
1974
1975
1976
Battle Mountain
6,976
6,648
6,247
5,620
4,743
0.41
0.38
0.36
0.30
0.28
0.036
0.042
0.040
0.043
0.048
3.88
5.46
5.29
4.28
4.57
3.65
2.81
3.66
3.81
4.13
5.01
1971
1972
1973
1974
1975
1976
Sierrita
1,625
1,781
1,730
1,690
1,716
0.84
0.63
0.55
0.66
0.71
6.72
5.67
7.72
9.36
13.20
5.50
5.66
5.38
7.67
8.72
11.63
1971
1972
19 73
1974
19 75
1976
28,304
29,885
30,885
31,387
32,968
0.29
0 .28
0-29
0.33
0.35
0.029
0.031
0.026
0.030
0.035
3.01
3.94
4.66
3.84
6.75
2.67
2.65
3.01
3.81
3.97
5.14
Design milling capacities at Esperanza, Mineral Park and Battle Mountain
(near the Copper Canyon mine) are 15,000, 19,000 and 4,000 tons of ore
per day, respectively. From the commencement of mining operations at the
Battle Mountain mines through December, 1976, the Copper Canyon mine has
accounted for approximately 82% of the tonnage milled at Battle Mountain,
Design throughput at Sierrita is 82,500 tons of ore per day.
Excludes revenues from leach-precipitation operations.
Includes the cost of mining leach material (except for Battle Mountain and
Sierrita) and all mining, milling, smelting, refining and indirect operating
costs, but excludes depreciation, depletion and interest. The average per
ton depreciation and depletion for mill and leach copper allocable to tons
milled and sold was as follows:
Property
1972
1973
1974
1975
1976
Esperanza
$ -
$ .18
$ .19
$ .16
5 .13
Mineral Park
.29
.31
.20
.19
.13
Battle Mountain
.68
.64
.68
1.19
1.83
Sierri ta
.28
.31
.33
.34
.38
The weighted average rate of escalation in unit mining costs was 13.3X/year.
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TABLE G-3
DUVAL LEACH-PRECIPITATION OPERATIONS
Property and Year
Esperanza
1972
1973
1974
1975
1976
Mineral Park
1972
1973
1974
1975
1976
Battle Mountain
Pounds of
Copper
Produced
2,094
995
1,817
3,960
6,412
8,936
6,431
6,801
6,915
6,817
Gross Revenues
from
Precipitates
Leach-precipita-
tion Operating
Costs'
(Expressed in thousands)
$ 1,153
550
290
521
1,607
5,319
4,011
5,028
3,294
2,803
l 529
346
219
758
2,030
2,281
1,799
2,801
2,205
2,793
1972
1973
1974
1975
1976
13,660
12,762
14,410
11,468
9,902
7,648
7,344
11,890
7,740
6,600
3,258
2,946
4,870
5,220
3,855
Leach-precipitation operations at the Esperanza, Mineral Park and
Battle Mountain Properties accounted for 28%, 18%, 22%, 24% and 26%
of total copper production from these properties during the years
1972, 1973, 1974, 1975 and 1976, respectively.
Operating costs include smelting and refining costs, but exclude mining
costs of leach material (except for Battle Mountain) and depreciation
of the leach-precipitation plants. Depreciation of the leach-precipi-
tation plants in thousands of dollars was as follows:
Property
1972
1973
1974
1975
1976
Esperanza
$ 5
$ 5
$ 44
$ 46
$ 45
Mineral Park
68
78
78
88
107
Battle Mountain
78
84
89
89
89
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P - denote P£ for copper, $/lb
Mo
denote Pc for molybdenum, $/lb
P U, P ° - denote estimated average price received for contained
copper and molybdenum, respectively, $/lb, including
byproduct credits.
Then, for 1975, we have (in millions):
Revenues - Costs = Margin before interest and taxes
QMo(pMo
P M°) + QCu
c ^
$159 - QMopMo
^Cu
)
- P
Cu
16 x $2.50 -
P C" = 0.55
c,75
Mn Pn
16 P + $119 - 313 P = -$13
c c
= -$13
0.05 P
Mo
c, 75
For 1976, similarly:
22 ($3.00 - P M°) + $121 - 202 P Cu
c c
$32.6
P C" = 0.77
c, 76
0.11 P
Mo
c, 76
From the Pennzoil 10-K data, we assumed:
P 76 *
c
Then
1.20 P
P
1.20 P
Cu
c, 75
Cu
c, 75
75
0.77 - 0.11 x 1.20 P
Mo
c, 75
= 0.55 - 0.05 P
Mo
c, 75
Solving,
Cu 0.77
c,75 1.20
Cu
- 0.11
11 - 20 P
Cu
c, 75
P
and P
c, 75
Cu
c, 76
0.474
(1)
(2)
0.569 or 57c/lb (including the effective credit for by-
products)
We estimated the equivalent overall AVC as 29c/lb, by deducting 28c/lb of
estimated smelting, refining, transportation, and depreciation charges
(and reflecting approximately 4c/lb credit overall for gold and silver).
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Arthur D Little, Inc
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In 1978 dollars, we assumed escalation at the five-year weighted average
rate of total production costs, 13.3% per year including inflation and
productivity effects. Thus, the 1978 estimated AVC for copper concentrate
is ^38c/lb at Duval.
To get ATC, we added estimated fixed costs and allowance for return on
investment and taxes, as follows:
Capital Recovery
Depreciation and cost depletion: ^6c/lb based on 10-K data
Cost of Capital
Interest: ^2
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REFERENCES
1) Information from Pennzoil Company's Form 10-K report filed with
the Securities and Exchange Commission for the year ended
December 31, 1976, pp. 9-16.
2) Information from Pennzoil-United's March 23, 1971 prospectus and
Pennzoil Company's 1976 Form 10-K report.
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Arthur D Little, Inc
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APPENDIX H
ORDER-OF-MAGNITUDE COSTS OF A NEW SMELTER AND REFINERY
Tables H-l and H-2 present order-of-magnitude costs for a flash smelter
and a conventional electrolytic refinery. These costs are for illustrative
purposes only and suggest that the costs for such facilities are in the
range of 33-35c/lb.
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TABLE H-l
ORDER-OF-MAGNITUDE OPERATING COSTS FOR A FLASH SMELTER
Units/ $/Ton
Unit $/Unit Ton Cu Cu
A. Capital Investment (CI) $1,000/annual ton
B. Operating Costs
Variable
Silica flux
ton
10.00
0.80
8.00
Fuel oil
MMBtu
2.00
12.70
25.40
Natural gas
MMBtu
2.00
1.30
2.60
Electricity
kwh
0.03
370.00
11.10
Water: process
Mgal
0.05
1.00
0.05
cooling
Mgal
0.08
2.00
0.16
Refractories
ton
360.00
0.01
3.60
Direct operating and
maintenance labor (L)
Man-hour
9.00
6.00
54.00
Supervision (S)
L
15% L
-
8.10
Overhead
(L&S)
65% (L&S)
-
40.36
Maintenance materials
CI
4% CI
—
40.00
Sub-Total
193.37
Fixed
Fixed charges
26.3% CI
263.00
Total
456.37
Sulfuric acid credit
(in Arizona)
ton
10.00
3.33
(33.30:
Source: Arthur D. Little, Inc. estimates.
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TABLE H-2
ORDER-OF-MAGNITUDE OPERATING COSTS FOR AN ELECTROLYTIC REFINERY
Units/ $/Ton
Unit $/Unit Ton Cu Cu
A. Capital Investment (CI) $A50/annual ton
B. Operating Costs
Variable
Sulfuric acid
ton
10.00
0.01
0.10
Fuel oil
MMBtu
2.00
2.00
2.00
Electricity
kwh
0.03
250.00
5.25
Water: process
Mgal
0.20
1.00
0.20
Direct labor (L)
Man-hour
9.00
5.50
49.50
Supervision (S)
L
15% L
-
7.42
Overhead
(L&S)
65% (L&S)
-
37.00
Maintenance materials
CI
4% CI
-
18.00
Sub-Total
119.47
Fixed
Fixed charges
26.3% CI
118.35
Total
237.82
Source: Arthur D. Little, Inc. estimates
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APPENDIX I
JAPANESE SMELTING AND REFINING CHARGES
A. INTRODUCTION
Japan is the largest importer of raw materials in the world. The bulk
of these imports are consumed internally and the Japanese exports (mainly
finished goods) are to a great extent designed to balance the cost of raw
material imports which are required for the functioning of the domestic
economy1. The actual task of raw material imports is carried out by the
large trading companies and associated metal processors. Often trading
companies and an associated bank can provide financial backing for under-
taking new projects. The division between public and private sectors is
blurred in Japan. The principal governmental entity involved in mineral
trade is Ministry of International Trade and Industry (MITI). All major
transactions have to be cleared by MITI and its day-to-day influence on
the activities of the Japanese companies is extensive2. In addition,
MITI approval is required for capital expenditures abroad over a certain
amount, allowing it to control all major overseas resource activity.
In addition to MITI, government financial entities are also an important
influence since Japanese companies carry a high level of debt financing.
The Japanese economy suffered a recession in 1970-71. This slowdown
in industrial expansion caused problems with long-term resource contracts.
These problems were the delivery of "surplus" (i.e. unwanted) materials,
pollution control measures at the smelters, revaluation of the yen, etc.
These problems were resolved through contract renegotiation, force majeure
on deliveries and governmental assistance. Since 1973, some of the old
policies appear to be continuing e.g. government assistance3'4'5 while
others are undergoing gradual modification. In this latter category is
the trend towards greater equity participation in overseas mineral projects
(e.g. Cuajone in Peru4 and CDCP in the Philippines3) and a gradual change
in the form in which the resources are imported (e.g. import of refined
copper instead of concentrates).^ Since the Japanese smelters are of
recent vintage and have had extensive pollution control facilities
installed since 1970, it is likely that the importation of refined
metals will supplement the importation of concentrates but not replace
it until the current technology becomes obsolete.
Canada (British Columbia) and the Philippines are the two largest sources
of concentrates smelted in Japan. The development of the mining and
milling industry in these two countries has followed similar paths.
There was usually a long-term contract for supply of concentrates (6-12
years), little equity or managerial participation by the Japanese and
Standard smelting and refining terms (see Appendix A). Debt financing
provided a significant portion of the total capital requirements and
Japanese participation in debt financing was substantial. The contracts
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Arthur!) Little Inc
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used LME refined copper quotations as the pricing basis and contained
formulae for calculating the sales price of the concentrate after smelting
and refining charges (and freight) were deducted.7 As shown in Appendix A,
these formulae are such that the concentrate value varies as the LME price
changes. The smelting and refining charges do not change with the LME
price but increase with changes in fuel and labor costs. This approach
provides the purchaser with security of supply (limited by the force
majeure clause) rather than price stability.
B. JAPANESE SMELTING AND REFINING CHARGES
We do not have in our possession a current smelting and refining contract
between a Japanese smelter and a long-term supplier. We have seen such
contracts in the past (1969-70) when they contained all the features of
the typical contract shown in Appendix A. The published literature7
suggests that there has not been any change in the structure of these
contracts. The following can be gleaned about the current level of
Japanese smelting and refining charges.
Mitsubishi's charges are estimated at 14c/lb (early '77) for treating the
concentrates from Atlas Consolidated in the Philippines.® The charges
to British Columbia mines were estimated to be 13-16
-------
REFERENCES
1) M. A. Galway, "Japanese Involvement in British Columbia Copper"
Mineral Bulletin MR 145, Dept. of Energy, Mines and Resources,
Canada (1975) p. 7
2) M. A. Galway, "Japanese Involvement in British Columbia Copper"
Mineral Bulletin MR 145, Dept. of Energy, Mines and Resources,
Canada (1975) p. 11
3) Metals Week, December 20, 1976
4) Metals Week, September 6, 1976
5) Metals Week, August 30, 1976
6) M. A. Galway, "Japanese Involvement in British Columbia Copper"
Mineral Bulletin, MR 145, Dept. of Energy, Mines and Resources,
Canada (1975) p. 14
7) M. A. Galway, "Japanese Involvement in British Columbia Copper"
Mineral Bulletin MR 145, Dept. of Energy, Mines and Resources,
Canada (1975) p. 30
8) Engineering and Mining Journal, February 1977, p. 118
9) Metals Week, September 6, 1976
10) Metals Week, November 1, 1976
11) Telephone conversation June 22, 1977 with G. Anderson of Asarco
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APPENDIX J
TRANSPORTATION COSTS FOR CONCENTRATES
This Appendix provides the basis for the transportation costs used in this
report.
The cost of all movements on railroads in the U. S. is based on published
tariffs which are rates approved by the Interstate Commerce Commission.
These tariffs do not have built-in escalators and any change in tariffs
requires a review and hearing procedure somewhat similar to that required
of electric utilities. Table J-l shows the rates used in the report for
the movements in 1978 based on the relevant tariffs as published by Southern
Pacific and Pacific Southwest Freight Bureau. All concentrates were assumed
to contain 28% copper and 0.07% moisture in order to convert the published
freight rates to a uniform basis of c/lb of contained copper.
The table also shows a second set of transportation costs based on an
assumption of a significant rate increase. These numbers are used in the
sensitivity analysis.
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TABLE J-l
TRANSPORTATION COSTS FOR CONCENTRATES
Base Higher
1978 1978
Costs Costs
for Sensitivity
Movement Analysis
(C/lb of contained copper)
1. From Battle Mountain, Nevada
to Tacoma, Washington 2.0* 4.0
to Hayden, Arizona 2.0 5.0
to West Coast 2.0 4.0
2. From S. Arizona Mines
to Tacoma, Washington 3.9* 6.0
to Hayden, Arizona 1.0 1.5
to West Coast 2.0 4.0
3. Ocean Freight
from West Coast to Japan 3.0 4.0
from Northern Peru to Tacoma 3.0 4.0
from Philippines to Tacoma 3.0 4.0
4. Lepanto Port to Philippine Smelter 1.0 1.5
*
Weighted average for clean concentrates =3.5
Source: Arthur D. Little, estimates based on published tariffs
and professional judgement.
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APPENDIX K
THE SMELTING OF SCRAP AND PRECIPITATES AT TACOMA
Table K-l shows Tacoma's receipts of various sulfur-free copper-bearing
materials.
TABLE K-l
RECEIPTS OF SCRAP AND PRECIPITATES AT TACOMA
(short tons)
Low Grade
No. 2
No. 1
Year
Scrap
Scrap
Scrap
Precipitates
Total
1971
468
6,120
135
671
7,394
1972
1,185
8,883
0
3,300
13,368
1973
1,085
10,739
0
3,937
15,761
1974
746
11,499
0
5,465
17,710
1975
198
2,366
0
2,839
5,403
About 70% of the scrap is received (more or less uniformly) from the major
urban centers on the west coast (i.e., Vancouver, Seattle, Portland, San
Francisco and Los Angeles). The remainder of the scrap is from the mid-
west and east. The precipitates are mainly from Duval-Battle Mountain,
though precipitates from other mines in the Southwest have been received
from time-to-time.
The bulk of the scrap smelted at Tacoma is No. 2 copper scrap which is
nominally 96% copper (minimum 94%) . Secondary copper smelters (producers
of unalloyed and alloyed copper) are major users of this scrap. For
example, in 1974, about 80% of the No. 2 scrap generated was consumed by
these secondary smelters.1
Overall, Tacoma's competitors for these materials are as follows:
• precipitates: other primary smelters
c scrap: - other primary smelters
secondary smelters of unalloyed copper
secondary smelters of alloyed copper
(brass and bronze)
- export market
The specific locations of these potential purchasers are listed in Table K-2.
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TABLE K-2
POTENTIAL PURCHASERS OF SCRAP AND PRECIPITATES
A. PRIMARY SMELTERS AND REFINERIES1
Anaconda, Anaconda, Montana (S)
Asarco, Hayden, Arizona (S)
Asarco, El Paso, Texas (S)
Kennecott, Garfield, Utah (S&R)
Kennecott, McGill, Nevada (S)
Kennecott, Hayden, Arizona (S)
Kennecott, Hurley, New Mexico (S)
Newmont, San Manuel, Arizona (S&R)
Phelps Dodge, Ajo, Arizona (S)
Phelps Dodge, Douglas, Arizona (S)
Phelps Dodge, Morenci, Arizona (S)
Asarco, Amarillo, Texas (R)
Phelps Dodge, El Paso, Texas (R)
B. LARGE SECONDARY SMELTERS2»3
Cerro Copper, St. Louis, Missouri
H. Kramer & Co., Chicago, Illinois
H. Kramer & Co., El Segundo, California
N. Chicago Refiners & Smelters, Inc., N. Chicago, Illinois
Benjamin Harris & Co., Chicago Heights, Illinois
Asarco; Federated Metals, San Francisco, California
Morris P. Kirk & Son, Los Angeles, California
C. SMALL SECONDARY SMELTERS OR SCRAP PROCESSORS2'3'k'*
Oregon
NL Industries, Portland
Western Smelting & Metals, Dalles
Federated Metals, Portland
Kanematsu Gosho (U.S.A.), Inc., Portland
Washington
Federated Metals, Seattle
Materials Reclamation Co., Inc., Seattle
Non-ferrous Metal, Inc., Seattle
R.E. Van Valey, Inc., Seattle
California
Associated Metals Co. of Oakland, Oakland
Chase Metals Service, Inc., Los Angeles
Pacific Trading Corp., Carson
Kawabata American, Inc., Compton
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TABLE K-2 (Cont'd)
Matrix Trading Co., Encino
S-G Metals Industries, Inc., Gardena
Federated Metals, Los Angeles and San Francisco
Aaron Ferer & Sons, Los Angeles
International Minerals & Metals Corp., Los Angeles
Kanematsu-Gosho (U.S.A.), Inc., Los Angeles and San Francisco
Martin Metals, Inc., Los Angeles
NL Industries, Los Angeles
Zenith Metals, Inc., Los Angeles
Levin Metals Corp., Redwood City, Sacramento, Richmond, San Jose, Stockton
Keystone Resources, San Francisco
Gerald Metals, Santa Clara
Hugo New & Sons, Terminal Island
Pacific Smelting Co., Torrance
Arizona
Kolor, Inc., Tucson
Metals Western, Inc., Tucson
Alimico Smelters & Refiners, Phoenix
Capital Wire & Cable, Casa Grande
Mesa Metals, Mesa
Empire Metals, Phoenix
Montana
Mike Chovanak, Helena
Utah
Chado Metal Processing, Salt Lake City
Mackay, B.R. & Sons, Inc., Salt Lake City
United Refinery, Inc., Salt Lake City
Mackay Smelting Co., Inc., Salt Lake City
Metal Processing, Salt Lake City
Harsco Corp., Provo
Metallurgical Sciences, Inc., Provo
Notes: *These are listed as secondary smelters by the sources cited.
Some of these might be scrap processors or traders.
Sources: 1. American Bureau of Metal Statistics Yearbook
2. Dunn & Bradstreet
3. National Association of Recycling Industries, Inc.
4. Directory of Manufacturers (State)
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The Duval-Battle Mountain mine ships only a part of its precipitate pro-
duction to Tacoma. The remainder is shipped to southern Arizona for
treatment. Battle Mountain is at about the same distance from Tacoma as
it is from several western smelters. Thus, if Battle Mountain were to
switch to another primary smelter, differential transportation costs
would not be a factor in this change (i.e., a shift in relative toll
charges, with transportation cost remaining constant, could bring about
a switch, in this case away from Tacoma).
As shown in Table K-2, there are numerous potential purchasers/processors
of the scrap currently smelted by Tacoma. They are widely distributed
geographically, and, in many instances appear to be closer to the scrap
sources than is Tacoma. Thus, differential transportation costs would
not be a major factor in the switching of this scrap away from Tacoma.
For these reasons, our analysis assumes that the demand function facing
Tacoma on the part of the suppliers of scrap and precipitates is perfectly
elastic. Thus, Tacoma is a price-taker not a price-setter and would run
the risk of losing these supplies if it raises its smelting and refining
charges.
K-4
Arthur D Little, Inc
-------
REFERENCES
1) U. S. Bureau of Mines, Minerals Yearbook, 1974.
K-5
Arthur D Little, Inc
-------
APPENDIX L
ALTERNATIVE APPROACH FOR ECONOMIC IMPACT ANALYSIS
This Appendix presents alternative ways of estimating the economic impacts
of five specific options considered in this report. These options are:
4.2B (Browder improvements, particulate control, OSHA)
3.IB (Browder improvements, particulate control, roaster gas
enrichment, acid plant consolidation)
3.2B (Browder improvements, particulate control, roaster gas
enrichment, acid plant consolidation, OSHA)
1.1B (Electric furnace, particulate control, acid plant
consolidation)
1.2B (Electric furnace, particulate control, acid plant
consolidation, OSHA)
A. GENERAL FRAMEWORK
For each specific option selected for detailed analysis, the step-by-step
analytical process described below was followed:
Step 1: Required Revenues
The annualized compliance costs given in the body of the report were used
to compute required incremental revenues and required total revenues in
each year, as follows:
AR = AC and
t t
R = R + AR
to t
where
AR^: required incremental revenues in year t (t = 1978, 1996);
AC^_: annualized compliance costs;
Rt: total required revenue in year t;
R : total "base" (1978), in the absence of any incremental control
o _
at Tacoma.
L-l
Arthur D Little, lnc
-------
Ro is derived as follows: base year output of contained metal (100,060
short tons x 2,000 lbs/short ton) times 22.7
-------
Step 3: Resulting Cash Flow and Rate of Return
Given the required revenues and the required prices based on them, the
resulting pre-tax net cash flows for each year have been computed (by
taking into account yearly capital expenditures, out-of-pocket production
costs and fixed G&A expenses). The results have then been used to cal-
culate the internal rates of return for each control option.
In view of the lengthy period of cumulative negative cash flow, standard
financial criteria would require the equivalent of about a 20% constant-
dollar pre-tax rate of return, given the risk and the apparent risk-
adjusted cost of capital. Taking into account variation in debt-equity
ratio which might apply to financing the various options, as well as a
range in effective Federal income tax rate due to the use of accelerated
depreciation and the investment tax credit, we would expect the equivalent
pre-tax hurdle rate (minimum expected rate) to fall within the range 15-25%.
If the calculated rates of return would fall below the hurdle rate, the
option would be considered weak from a financial analysis standpoint. If,
however, the results appeared "favorable,"" a next iteration was followed,
noted under Step 4.
Step 4: Microeconomic Analysis
Microeconomic analysis of each control option was conducted to verify the
financial results, by closely examining the dynamics of the adjustment
process caused by upward shifts over time in Tacoma's pertinent cost
functions.
The short-run and long-run demand elasticities of all of the participants
in Tacoma's activities were again examined, in order to clarify and identify
the options enjoyed by and constraints falling upon each of the participants,
taking into account the implications of their respective decisions upon
each other and on Tacoma. In this way, an attempt was made to trace, over
time, the most likely behavior of each participant, particularly to pinpoint,
as closely as possible, when each would make a major move, directly affecting
Tacoma's economic and financial performance as depicted by the earlier fi-
nancial analysis of Step 3.
As part of the microeconomic analysis of each control option, we have
further considered the possibility of Tacoma adopting a differential
pricing approach, basically to prevent the suppliers of "clean" concen-
trates from switching to other outlets (e.g., Japanese smelters, own
smelters, etc.). The basic concept here would be for Tacoma to charge
no more than 27.5
-------
The differential price to be charged in any given year to suppliers of
"dirty" concentrates can be computed as follows:
Let
by
and R ^ be as defined earlier; and
quantity (lbs) produced by Tacoma from "clean" concentrates
(Ql = 46,550 short tons/year or 93.00 million lbs/year);
Q2: quantity (lbs) produced by Tacoma from "dirty" concentrates
(Q2 = 31,560 short tons/year of 63.12 million lbs/year);
sp
R : revenues in year t from suppliers of scrap and precipitates
C (i.e., 44.00 million lbs x $0.23/lb = $10.12 million), which
is given for each year (i.e., constant at the base year level);
P^: Tacoma's price for suppliers of "clean" concentrates
(?l = 27.5C/lb);
P2t: Tacoma's price for suppliers of "dirty" concentrates
(Note: P2t is the unknown).
Then, we have
\ = Q1P1 + Q2?2t + R*p + R^y
from which we can solve for P2t as follows:
Rt - Qipi - R®p- RtY
P2t
which, in numerical terms, becomes
R^ - $25.58 million - $10.12 million - $3.6 million
P2t 62.12 million lbs.
where depends on Rq and AC^ (explained above).
Step 5: Reexamination of Financial Analysis and Conclusions
Following microeconomic analysis of each control option, the earlier finan-
cial analysis was reexamined to ascertain its validity and implications for
investment decision-making, before reaching firm conclusions (as possible)
as to the fundamental conditions under which each option would be considered.
For example, in those cases in which the microeconomic analysis and other
considerations indicated that sensitivity would be appropriate, we looked
at different hurdle rates (Option 1.1B) and at both pre-tax and after-tax
results (Option 1.2B).
L-4
Arthur D Little, Inc
-------
B. DISCUSSION OF OPTION 4.2B (BROWDER IMPROVEMENTS, PARTICULATE CONTROL,
OSHA)
Tables L-l and L-2 present the required incremental and total revenues
and therefore required incremental prices and total price levels, as well
as calculations leading to pre-tax net cash flow at Tacoma for each year
over the impact analysis period. These calculations, yielding 27.5%
internal rate of return1, reflect recovery of the incremental pollution
abatement costs and the assumption that Tacoma's present customers will
not switch to alternative service outlets or will not be forced into
closure (i.e., full cost "pass on").2
Although these financial calculations make Option 4.2B appear favorable,
a closer microeconomic examination of these results lead to far less
favorable conclusions.
An examination of che required price schedule would show that Tacoma's
prices (p^) after 1981 would exceed 27.5c/lb which is the trigger point
for Duval to shift to Japan under conditions of domestic smelter capacity
constraints and availability of smelter capacity in Japan. A loss of
smelter feed of this magnitude (i.e., Duval and other southwestern sup-
pliers of clean concentrates) would leave Tacoma with only impure concen-
trate supplies amounting to only about one-third of the baseline concen-
trate input. A smelter's operating costs increase dramatically when
capacity utilization is low.
Furthermore, it appears that Tacoma (or any smelter) would have metallurgi-
cal problems if it smelted only impure concentrates, such as Lepanto's.
Thus, the loss of Duval3 would have a "domino effect" in shutting Tacoma
down.
Tacoma can, in principle, exercise differential pricing for its services,
charging Duval and other southwestern mines only 27.5c/lb and others a
higher price. Under these conditions, Tacoma's required price for the
impure concentrates would have to be 29
-------
TABLE L-l
OPTION 4.2B
CALCULATIONS OF REQUIRED REVENUES AND PRICES FOR TACOMA3
b T°talC
A Required Required Tacoma s Required Total Required
Revenue Revenue Incremental Price Price
1978
—
49.00
0
22.7
1979
1.62
50.62
1.04
23.7
1980
4 84
53.84
3.10
25.8
1981
6.46
55.46
4.13
26.8
1982
8.68
57.68
5.56
28,3
1983
10.90
59.90
6.98
29.7
1984
13.12
62.12
8.40
31.1
1985
13.34
62.34
8.54
31.2
1986
13.56
62.56
8.68
31.4
1987
13.78
62.78
8.82
31.5
1988
14.00
63.00
8.96
31.7
1989
14.22
63.22
9.10
31.8
1990
12.82
61.82
8.20
30.9
1991
11.42
60.42
7.31
30.0
1992
10.62
59.62
6.80
29.5
1993
9.82
58.82
6.28
29.0
1994
9.02
58.02
5.77
28.5
1995
8.22
57.22
5.26
28,0
1996
8.22
57.22
5.26
28.0
1997
8.22
57.22
5.26
28.0
Notes: a. Assumes no loss of concentrate feed.
b. A required revenue = annualized compliance costs.
c. Total revenue = A required revenue + 1978 ("base") revenue.
L-6
Arthur D Little, Inc
-------
TABLE L-2
PRE-TAX CASH FLOW FOR OPTION 4.2B ASSUMING REQUIRED
REVENUES ARE OBTAINED3
Total Required
Revenues
(new receipts)
Capital
Expenditures
Out of Pocket
Production
Costs
Fixed
G&A
Expense
Pretax
Net Cash
Flow
— — $MM 1978 — — — — — —
1978
49.00
-11.18
-41.00
-3.5
-6.68
197 9
50.62
-11.18
o
0
1
-3.5
-5.06
1980
53.84
- 7.63
-42.60
-3.5
0.11
1981
55.46
- 7.63
-43.20
-3,5
1.03
1982
57.68
- 7.63
-44,40
-3.5
2.15
1983
59.90
- 7.63
-45.60
-3.5
3.17
1984
62.12
- 2.92
-46.80
-3.5
8.90
1985
62.34
- 2.92
-46.80
-3.5
9.12
1986
62.56
- 2.92
-46.80
-3.5
9.34
1987
62.78
- 2.92
-46.80
-3.5
9.56
1988
63.00
- 2.92
-46.80
-3.5
9.78
1989
63.22
- 2.92
-46.80
-3,5
10.00
1990
61.82
- 2.92
-46.80
-3.5
8.60
1991
60.42
- 2.92
-46.80
-3.5
7.20
1992
59.62
- 2.92
-46.80
-3.5
6.40
1993
58.82
- 2.92
-46.80
-3.5
5.60
1994
58.02
- 2.92
-46.80
-3.5
4.80
1995
57.22
- 2.92
-46.80
-3.5
4.00
1996
57.22
- 2.92
-46.80
-3.5
4.00
1997
57.22
- 2.92
-46.80
-3.5
4.00
Internal Rate of Return = 27.5%
Notes: a. Assumes no loss of concentrate feed.
L-7
Arthur D Little, Inc
-------
As long as Asarco/Tacoma's copper price expectations are lower Tacoma
would not adopt a differential pricing strategy, for fear of losing Lepanto.
Moreover, about 1983-84*, when the Philippines smelter is expected to be
in operation, Lepanto would obtain smelting and refining services at a
price equivalent to Tacoma charges of 30c/lb (i.e., 33c/lb less 3
-------
Year
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
Notes
TABLE L-3
OPTION 3.IB
CALCULATION OF REQUIRED REVENUES AND PRICES FOR TAC0MAa
Required Totalc
Revenue b Revenue
$MM
-
49.00
.60
49.60
2.20
51.2
2.20
51.2
3.68
52.68
5.16
54.16
12.14
61.14
13.62
62.62
13.83
62.83
14.04-
63.04
14.25
63.25
14.46
63.46
14.07
63.07
13.68
62.68
13.89
62.89
12.62
61.62
11.35
60.35
10.08
59.08
8.81
57.81
8.81
57.81
Tacoma1sa
Required Total
Incremental required
price price
C/!b.
1.28
22.7
.38
23.1
1.41
24.1
1.41
24.1
2.36
25.1
3.30
26.0
7.77
30.5
8.72
31.4
8.86
31.6
8.48
31.7
9.13
31.8
9.25
31.9
9.01
31.7
8.76
31.5
8.90
31.6
8.08
30.8
7.27
30.0
6.45
29.2
5.63
28.3
5.63
28.3
a. Assumes no loss of concentrate feed.
b. A required revenue = annualized compliance costs.
c. Total revenue = A required revenue + 1978 "base" revenue.
L-9
Arthur D Little, lnc
-------
TABLE L-4
PRE-TAX CASH FLOW FOR OPTION 3.IB ASSUMING
Total
Modified
Required
Required
Out of
Modif iei
Revenues
Revenues
Pocket
Fixed
Pre-Tax
Pre-Tax
(Net
(Net
Capital
Production
G&A
Net Cash
Net Cas:
Year
Receipts)
Receipts)
Expenditures
Costs
Expense
Flow
Flow
o w 1 0 7 Q.
1978
49.00
49.00
- 5.18
-41.00
- 3.5
- 0.68
- 0.68
1979
49.60
49.00
- 5.18
-41.00
- 3.5
- 0.08
-- 0.68
1980
51.20
50.00
- 1.63
-42.00
- 3.5
4.07
2.87
1981
51.20
51.00
-10.36
-42.00
- 3.5
- 4.66
- 4.87
1982
52.68
52.00 °
-10.36
-42.00
- 3.5
- 3.18
- 3.86
1983
54.16
54.00
-10.36
-42.00
- 3.5
- 1.70
- 1.86
1984
61.14
58.00
-10.36
-47.50
- 3.5
- 0.22
- 3.36
1985
62.62
60.00
- 2.89
-47.50
- 3.5
8.73
6.11
1986
62.83
60.00
- 2.89
-47.50
- 3.5
8.94
6.11
1987
63.04
60.00
- 2.89
-47.50
- 3.5
9. .1.3
6.11
1988
C3.?5
62.00
- 2.89
-47.50
- 3.5
9.36
8.11
1989
63.46
62.00
- 2.89
-47.50
- 3.5
9.57
8.11
1990
63.07
62.00
- 2.89
-47.50
- 3.5
9.18
8.11
1991
62.68
62.00
- 2.89
-47.50
- 3.5
S. 79
8.U
1992
62.89
62.00
- 2.89
-47.50
- 3.5
9.00
8.11
1993
61.62
62.00
- 2.89
-47.50
- 3.5
7.73
8.11
1994
60.35
62.00
- 2.89
-A7.50
- 3.5
6.46
8.11
1995
59.08
62.00
- 2.89
-47.50
- 3.5
5.19
8.11
1996
57.81
62.00
- 2.89
-47.50
- 3.5
3.92
8.11
1997
57.81
62.00
- 2.89
-47.50
- 3.5
3.92
8.11
Internal Rate of
Return =
>35%
r^2b7o
Notes:
a. Assumes no loss
of concentrate feed.
b. Modified by inspection; see text.
L-10
Arthur D Little, Inc
-------
Table L-4 shows the effect of modifying required revenues and resulting
net cash flow. The required revenue was decreased in years 1981-1992 and
increased beyond 1992 in order to decrease the internal rate of return
from about 35% to 25%. It can be seen, that in spite of this, the price
in 1984 would exceed 27.5c/lb and trigger the same phenomenon discussed
above.
Tacoma can, in principle, exercise differential pricing for its services
charging Duval and other southwestern mines only 27.5c/lb and others a
higher price. Under these conditions, Tacoma's required price for impure
concentrates would be 34.6c/lb in 1984 and 37.7
-------
Year
1978
197 9
1980
1981
1982
1983
1984
1985
.1985
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
Notes
TABLE L-5
OPTION 3.2B
CALCULATION OF REQUIRED REVENUES AND PRICES FOR TACOMA3
__ ] ci
Tacoina s
A Re-k Required Total
quired Totalc Incremental Required
Revenue Revenue Price Price
-$MM c/lb. •
—
49.00
22.7
] .62
50.62
1.04
23.7
4.84
53.84
3.10
25.8
6.46
55.46
4.13
26.8
10.16
59.16
6.50
29.2
13.86
62.86
8.87
31.6
17.56
66.56
11.2
33.9
24.54
73.54
15.7
38.4
24.94
73.94
16.0
38.7
25.34
74.34
16.2
38.9
25.74
74.74
16.4
39.1
26.14
75.14
16.7
39.4
24.92
73.92
15.9
38.6
23. 70
72.70
15.2
37.9
23.03
72.08
14.7
37.4
20.58
69.98
13.4
36.1
18.88
67.88
12.1
34.8
16.78
65.78
10.7
33.4
15.70
64.70
10.0
32.7
15.70
64.70
10.0
32.7
a. Assumes no loss of concentrate feed.
b. A required revenue = annualized compliance costs.
c. Total revenue = A required revenue + 1978 "base" revenue.
L-12
Arthur D Little, Inc
-------
Year
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
Note
TABLE L-6
PRE-TAX CASH FLOW FOR OPTIONS 3.2B
ASSUMING REQUIRED REVENUES ARE OBTAINED^
Total Re-
quired
Revenues
(Net Receipts)
Capital
Expenditures
Out oi:
Pocket
Reduction
Costs
- $>£11978-
Fj.xed
G&A
Expense
Pre-Tax
Net
Cash
Flow
49.00
-11.18
-41.00
-3.5
- 6.68
50.62
-11.18
-41.00
-3.5
- 5.06
53.84
- 7.63
-42.60
-3.5
0.11
55.46
-16.36
-43.20
-3.5
- 7.60
59.16
-16.36
-44.40
-3.5
- 5.10
62.86
-16.36
-45.60
-3.5
- 2.60
66.56
-10.36
-46.80
-3.5
5.90
73.54
- 3.97
-52.30
-3.5
13.77
73.94
- 3.97
-52.30
-3.5
14.17
74.34
- 3.97
-52.30
-3.5
14.57
74.74
- 3.97
-52.30
-3.5
14.97
75.14
- 3.97
-52.30
-3.5
15.37
73.92
- 3.97
-52.30
-3.5
14.15
72.70
- 3.97
-52.30
-3.5
12.93
72.08
- 3.97
-52.30
-3.5
12.31
69.98
- 3.97
-52.30
-3.5
10.21
67.88
- 3.97
-52.30
-3.5
8.11
65.78
- 3.97
-52.30
-3.5
6.01
64.70
- 3.97
-52. ;
-------
with only impure concentrate supplies amounting to only about one-third
of the baseline concentrate input. The loss of clean southwestern con-
centrates would have a "domino effect" in shutting Tacoma down.
Tacoma can, in principle, exercise differential pricing for its services
charging Duval and other southwestern mines only 27.5<:/lb and others a
higher price. Under these conditions, Tacoma's required price for impure
concentrates would be 42.3c/lb in 1984 and 54.8
-------
TABLE L-7
PRICE SCENARIO FOR TACOMA UNDER OPTION 1.1B
Year
Solution:
Tacoma
Price for
Smelting
& Refining
(c/lb)
Required
Cash In
Revenues
Cash Out
Capital
Expenditures
0 & M
$MM 1978
Present Value of
Pre-Tax Cash Flow
Discounted at @ 20%
1978
22. 7
49.
00
4.4
44.50
C1
1979
23.0
49.
48
4.4
44.50
C2
1980
23.8
50.
76
15.6
45.30
C3
1981
25.4
53.
14
15.6
45.30
C4
1982
26.9
55.
52
15.6
45.30
C5
1983
28.4
57.
90
15.6
45.30
C6
1984
31. 9
49.
00 + 156(Ap)
3.5
51.10
c7
1985
31.9
3.5
51.10
CS
1986
33-9
3.5
51.10
C9
1987
31.9
3.5
51.10
c10
1988
31.9
3.5
51.10
C11
1989
31,9
3.5
51.10
Cl2
1990
31.9
3.5
51.10
^13
1991
31. 9
3.5
51.10
c14
1992
31.9
3.5
51.10
c15
1993
31.9
\
/
3.5
51.10
Cl6
¦20.12 + 219.lAp
Results: Solve for Ap with P.V. Cash Flows - 0
Ap =¦ ||Y57f " °-092 = 9.2c/lb
PSSR Tacoma - Ba8e + SP ° 31.9c/lb
If Duval drops out, Ap = 9.2 x 156 HMlbs = 13.8c/lb
104 MMlbs
^ S&R Tacoma ~ 36.5c/lb
L-15
Arthur Dl.it tie, Inc
-------
of the baseline concentrate input. The loss of clean southwestern con-
centrates would have a "domino effect" in shutting Tacoma down.
Tacoma can, in principle, exercise differential pricing for its services
charging Duval and other southwestern mines only 27.5c/lb and others a
higher price. Under these conditions, Tacoma's required price for impure
concentrates would be 36.5c/lb beyond 1984. This means that Asarco/Tacoma
will have to assume that copper prices will exceed 90c/lb since this is
the price range that Lepanto would require. As long as Asarco/Tacoma's
price expectation is below this range, Tacoma would not adopt a differential
pricing strategy for fear of losing Lepanto.
After the Philippines' smelter is in operation, Lepanto could consider
expanding mine capacity and ship its concentrates to both smelters.
Asarco/Tacoma is not likely to embark upon a differential pricing course
under such an expectation.
Based on the above, we conclude that differential pricing is unlikely to
work beyond about 1983. Hence, under these conditions, Duval would find
it advantageous to switch Japanese smelters. This would further precipi-
tate a decision by Lepanto to switch to its home smelter at about the same
time. As a consequence, Tacoma would be forced into closure. Faced now
with such a prospect, Asarco/Tacoma is not likely to undertake the incre-
mental pollution abatement expenditures required under Option 1.1B.
F. DISCUSSION OF OPTION 1.2B (ELECTRIC FURNACE, PARTICULATE CONTROL, OSHA)
Tables L-8 and L-9 present the required incremental revenues and therefore
the required incremental and total price levels as well as calculations
leading to net pre-tax and equity cash flows at Tacoma for each year over
the impact analysis period. These calculations yield a 19% internal rate
of return on pre-tax cash flow. Both tables reflect the assumption that
Tacoma's present customers will not switch to alternative outlets or will
not be forced to close (i.e., full cost pass on).1
If Tacoma were able to receive the revenues and cash flows as illustrated,
the resulting pre-tax DCF rate of return would be about 19%. If we assume
30% debt financing on the incremental investment, the after-tax, after
interest. DCF rate of return would be about 10%. However, cumulative pre-
tax net cash flow is negative until 1986, and it would take another 10
years before the positive sum equalled the incremental investment.
Table L-10, a pro-forma P&L statement for Tacoma, illustrates Option 1.2B
under a conventional accounting framework, e.g., as might be reported to
management and/or stockholders. We have calculated profit margin on sales,
Except, of course, to suppliers of scrap and precipitates for whom Tacoma's
price has to stay at 23c/lb. Beyond this price, they would switch away
from Tacoma.
L-16
Arthur 1) Little, Inc
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Year
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1959
1990
1991
1992
1993
1994
1995
1996
1997
TABLE L-8
OPTION 1.2B
, a
CALCULATION OF REQUIRED REVENUES AND PRICES FOR TACOMA
A Re- Tacoma's Required
quired Total Incremental Total
Revenue Revenue Price a Price
$MM c/lb. - - -
49.00
22.7
1.50
50.50
0.96
23.7
4.40
53.40
2.82
25.5
8.40
57.40
5.38
28.1
13.00
62.00
8.3
31.0
17.60
66.60
11.3
34.0
28.00
77.00
18. 0
40.7
28.50
77. SO
18. 3
41.0
29.00
78.00
18.6
41.3
29.50
78. 50
18. 9
41.6
30. 00
79.00
19.2
41.9
30. 50
79.50
19.6
42.3
29. 50
78.50
18.9
41.6
28.50
77.50
18.3
41. J
25.60
74.60
16.4
39.1
22.70
71. 70
14.6
37.3
19.80
68.80
12. 7
35.4
17.45
66.45
11.2
33.9
16.90
65.90
10.8
33.5
16.90
65. 90
10.8
33.5
a. Assumes no loss of concentrate feed.
b. A required revenue = annualized compliance costs.
b. Total revenue = A required revenue + 19 78 "base" revenue.
L-17
Arthur I) Little, Inc
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Year
1978
1979
1980
1981
1932
1983
1984
1985
] 986
19S7
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
Note
TABLE L-9
CASH-FLOWS FOR OPTION 1.2B ASSUMING
REQUIRED REVENUES ARE OBTAINED3
After-Tax,
Aftcr-
Out-Of- Federal Interest,
Pocket Fre-Tax Income Cash
Production Fixed xct Cash Taxes^ For
Costr, G&A Flowc (Credi t) Equity ^
- $MM 1978 -
49.00
-10.43
-41.00
-3.5
- 5.93
- 0.54
- 6.47
50.50
-10.43
-41.00
-3.5
- 4.43
- 0.26
- 4.88
53.40
-21.61
-42.40
-3.5
-14.11
(0.95)e
-13.54
57.40
-21.61
-43.00
-3.5
-10.71
(1.14)e
-10.34
62.00
-21.61
-44.20
-3.5
- 7.31
(1.09)e
- 7.38
66.60
-21.61
-45.40
-3.5
- 3.91
(0.85)e
- 4.61
7 7.00
- 4.56
-52.40
-3.5
+16.54
- 1.24
13.36
77.50
- 4.56
-52.40
-3.5
17.04
- 2.11
13. 00
78.00
- 4.56
-52.40
-3.5
17.5
- 2.78
12. 78
78.50
- 4.56
-52.40
-3.5
18.04
- 3.65
12.45
79.00
- 4.56
-52.40
-3.5
18.54
- 4.18
12.42
79.50
- 4.56
-52.40
-3.5
19.04
- 4.99
3.98
78.50
- 4.56
-52.40
-3.5
18.04
- 5.23
7.93
77.50
- 4.56
-52.40
-3.5
17.04
- 5.36
3. 64
74.60
- 4.56
-52.40
-3.5
14.14
- 4.64
1.85
71. 70
- 4.56
-52.40
-3.5
11.2
- 3.87
0.07
68.80
- 4.56
-52.40
-3.5
8.3
- 2.86
- 1.43
66. 45
- 4.56
-52.40
-3.5
6.0
f
f
65. 90
- 4.56
-52.40
-3.5
5.4
f
f
65.90
- 4.56
-52.40
-3.5
5.4
f
f
Total
Revenues Capital
(Net , Expen-
Receipts) ditures
a. Assumes no loss of concentrate feed.
b. A required revenue = annualized compliance costs.
c. NPV = 0 @ 19.2% internal ROR.
d. Assumes incremental investment is financed with 30%
of debt, 70% equity.
e. Assumes credit available in year for use by paren company.
f. Present value of After-Tax Sums nil for these years.
L-18
Arthur I) Little,Inc
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TABLE L-10
ILLUSTRATIVE TACOMA PRO-FORMA PROFIT AND LOSS STATEMENT-OPTION 1.2B
(millions of 1978 dollars)
c
i
t-"
vO
BASIS:
TABLES
V-7, V-21
, V-22.
SF.E TEXT.
Invusi-
Book Return on
BeRinninK Capital
Ft-
•du t j 1
mcn I
Book
(Net
1ncomc
Pre—Tax
ProfiL
Income 'lax
lax
Current
Nc I
After Taxes
Cos C
G&A
Expense
7o on
68%
68%
Crodii
Taxes
Af ter
Pluri
1n teres t)
Required
o f
Deprec
inn on
Book
% on
Net
1 ax
Book
Tax
(10% on
P.i^nbLe
Current.
% Net
Incremental
Interest'1
Yea r
Sa les
Sn 1 us
O.H .
Book
1n\
Basis
Sa 1 es
P1 n n l
Ba s l s
Dep.
Dep.
Ca p . Ex p .
.)(Crud it)
Taxes
Plant
Adiusted
1978
69.00
61.00
3.5
1 . 2
1.2b
3.3
6.7%
-
3.3
1.58
1 .58
1.06
.56
2.76
2.76
-
-
1979
50.50
61.00
3.5
. 19
2.15
3. 1
3.66
7.2
8.5%
2.71
1.76
1 .30
1.06
.26
3.60
3.59
8.3
11.8
1930
53.60
62.60
3.5
. 38
3.10
6.6
6.02
7.5
7 8
2.52
1.93
1.21
2.16
( .95)
6.02
6.60
8.5
11.6
1931
57.60
63.00
3.5
.77
5.06
8.0
5.07
8.8
7.3
2.13
2.63
1.02
2.16
(2.09 cf)C5.07
5.86
8.6
10.6
1982
62.00
66.20
3.5
1. 16
7.02
10.9
6.12
9.9
7.1
2.26
2.93
1.07
2.16
C3.18 cf) 6.12
7.28
8.6
10.1
1983
66.60
65.60
3.5
1.55
8.98
13.6
7.17
10.8
7.2
2.73
3.66
1.31
2.16
(4.03 cf) 7.17
8.72
8.6
10.1
1986
77.00
52.60
3.5
1.96
10. 9
15.6
8.26
10. 7
7.3
3.56
3.96
1.70
.66
(2.79 c
t) 8.26
10.20
9.0
10.3
1985
77.50
52.60
3.5
1.96
11.3
16.3
8.36
10.8
7.8
5.36
6.01
2.57
.66
( .68 cf) 8. 36
10.30
9.6
11.0
1986
78.00
52.60
3.5
1.96
11. 7
13.6
8.66
10. 8
8.6
6.76
6.06
3.26
.66
2.10
6.36
8.30
8.1
9.8
1987
78.50
52.60
3.5
1.96
12. 1
12. 3
8.56
10.9
9.5
8.56
6.11
6.10
.66
3.65
6.91
6.85
7.3
8.9
1988
79.00
52.60
3.5
1.96
12.5
11.5
S. 66
10.9
10. 1
9.66
6.16
6.66
.66
4.18
6.68
6.62
7.5
9.3
1989
79.50
52.60
3.5
1.96
12.9
10.3
8.76
11.0
11.2
11.36
6.20
5.65
.66
4.99
3.77
5.71
7.3
9-2
1990
78.50
52.60
3.5
1.75
12.6
9.0
8.25
10.5
11.8
11 .85
3.96
5.69
.66
5.23
3.02
6.77
6.8
8.9
1991
77. 50
52.60
3.5
1.56
12.1
7.9
7.96
10.2
12.9
12. 16
3.81
5.82
.66
5.36
2. 58
6.16
6.7
9.1
1992
76.60
52.60
3.5
1.17
10.5
6.9
7.03
9.6
13.0
10.63
3.37
5.10
. 66
4. 64
2. 39
3.56
6.6
9.6
1993
71. 70
52.60
3.5
. 78
9.2
6.0
5.82
8.1
12.0
9.02
2. 79
6.33
.66
3.87
1 .95
2.73
5.7
8.8
1996
68.80
52.60
3.5
.39
7.6
5.6
5.11
7.6
11^9
6.91
2.65
3.32
.66
2.86
2. 25
2.66
6.0
9.6
16-year
Average
9.7%
9.6%
7.1%
9.9%
Notes and Sources: a.
b.
c.
d.
30% debt financing of investment in environment controls with 11-year loans at 6% interest.
Normalized estimates.
Denotes loss carry-forward.
Includes, in addition to net income plus incremental interest, $1.5MM/year of inputed
interest associated with ongoing Tacoma operations on the present basis.
Arthur D. Little, Inc., estimates.
C
-t
o
3
n
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return on book value, and return on long-term capital employed in the
operations. The latter calculations were performed on two bases: (1) with
incremental interest on the incremental investment, and (2) with the sum of
(1) plus imputed interest. The imputed interest was assumed to be $1.5MM/
year in 1978 dollars, and is built into the fixed G&A expense as a corpo-
rate overhead item at Tacoma. The $1.5MM figure seems consistent with the
ratio of Tacoma net plant to total Asarco net plant, the proportionate
Asarco corporate overhead allocation to Tacoma, and total Asarco interest
expense excluding new debt associated with Tacoma.
In comparison with Table L-10, we estimate that the Tacoma complex as it
presently exists, would produce pre-tax profit of $3.3MM on sales of $49MM
and net plant of $32MM in 1978 dollar terms. Thus, its normal pre-tax
profit margin would be 7%, return on book value about 10%, and net income
plus interest about 10% of net plant. Adding in normal net working capital,
which we estimate at 25% of revenues, the corresponding return on total
capital employed would be about 8%.
Table L-ll, a pro-forma balance sheet, is a companion table to the P&L pro-
jections of Table L-10. We have just shown net plant and net working
capital accounts, and have not cast the figures into a complete balance
sheet showing the structure of both assets and liabilities. As stated
above, we have assumed 30% debt financing for the incremental investment
of Option 1.2B for this illustration.
As will be discussed below, the conditions under which Tacoma would be
able to achieve this essentially full cost recovery pricing are difficult
at best: relatively high copper prices on a sustained basis, plus no less
expensive alternatives available to customers. Thus, even with high copper
prices, customers may have an incentive to build or utilize more captive
smelter capacity, since this is likely to cost less than the cost at
Tacoma under Option 1.2B.
Table L-9 shows that Tacoma's prices after 1981 exceed 27.5c/lb, the trig-
ger point for Duval and other southwestern concentrates to shift to Japan.
This loss would have a "domino effect" in shutting Tacoma down.
Tacoma can, in principle, exercise differential pricing for its services
charging Duval and other southwestern mines only 27.5c/lb and others a
higher price. Under these conditons, Tacoma's required price for impure
concentrates would be 50.7c/lb in 1984 and 62.1c/lb in 1990. This means
that Asarco/Tacoma will have to assume that copper price will exceed
113-115c/lb since this is the price range that Lepanto would require. As
long as Asarco/Tacoma's price expectation is below this range, Tacoma
would not adopt a differential pricing strategy, for fear of losing
Lepanto. After the Philippines smelter is in operation, Lepanto could
consider expanding mine capacity and ship its concentrates to both smel-
ters. Asarco/Tacoma, is not likely to embark upon a differential pricing
course under such an expectation.
Based on the above, we conclude that differential pricing is unlikely to
work beyond about 1981. Hence, under these conditions, Duval would find
L-20
Arthur D Little, Inc
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TABLE L-ll
ILLUSTRATIVE TACOMA PRO-FORMA BALANCE SHEET OPTION 1.2B
(millions of 1978 dollars)
1978
1979
1980
1981
1982
1933
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
Net working capital
12.3
12.6
13. 3
14.3
15.5
'.6.7
19.3
19. 4
19.5
19.6
19.8
19.9
19.6
19.4
18.7
17.9
17.2
N'et plant beginning year
43.0
51.25
69.75
86.29
10 l. 87
113.50
107.2
100.5
93.4
85.9
78.0
69.7
61.7
54.2
48.3
43.7
Add gross investment less
depreciation
8.25
18.5
16.54
14.58
12. 6
-6.3
-6.7
-7.1
-7.5
-7.9
-8.3
-8.0
-7.5
-5.9
-4.6
-2.8
Net pJar.t yoai end
A3.0
51.25
69.75
86. Vi
100.87
113.50
107.2
100.5
93.4
85.9
78.0
69. 7
61.7
54.2
48.3
43.7
40.9
Total net assets
55.3
63.9
83.1
100.6
116.4
130.?
126.5
119.9
112.9
105.5
97.8
89.6
81.3
73.6
67.0
61.6
58.1
BASIS: Tables V-7, V-21, V-22, and Arthur D. Little, Inc., estimates. See Text.
-------
it advantageous to switch to Japanese smelters. This would further pre-
cipitate a decision by Lepanto to switch to its home smelter at about the
same time (about 1983-1984). As a consequence, Tacoma would be forced
into closure. Faced now with such a prospect, Asarco/Tacoma is not likely
to undertake the incremental pollution abatement expenditures required
under Option 1.2B.
L-22
Arthur D Little, Inc
-------
APPENDIX M
INCREMENTAL SO? CONTROL AND OSHA COSTS
A. INCREMENTAL SO? CONTROL
The compliance cost estimates used in our impact analysis for incre-
mental SO2 control are those estimated by PEDCo Environmental
Specialists, Incorporated (Cincinnati, Ohio) as presented in the
report entitled "Evaluation of Sulfur Dioxide and Arsenic Control
Techniques for Asarco-Tacoma Copper Smelter" (September, 1976).
The PEDCo report shows operating costs (in 1978 dollars) on an
annualized basis, where the annualized cost estimates contain fixed
charges. However, for an analysis of projected future cash flows
at Tacoma, it is necessary to know, separately, initial capital
expenditures and direct annual operating and maintenance costs (O&M
costs).
The following procedure was used to convert PEDCo's "net annualized
operating costs" into O&M costs. The example below refers specifically
to PEDCo's Table 3-18 (p. 3-55). The same procedure was used in other
cases.
1. Add "credit for sulfuric acid" ($8,431,000) to "net annualized
operating cost" ($6,586,000) to obtain "total annualized cost"
($15,017,000).
2. Deduct fixed charges at 17.65% of capital investment ($55,909,000
x 0.1765 = 9,868,000) from the "total annualized cost." Also add
back $700,000 "annual credit for replacement of existing acid
plant" for reasons explained below. This procedure yields,
through subtraction of fixed costs from total annualized costs,
the annual O&M costs implicit in PEDCO1s estimates for use in our
economic impact analysis.
The following issues are pertinent to the use of these deduced annual
O&M costs for impact analysis.
1. Accounting for facilities shutdown and resultant savings: If the
electric furnace option were implemented Asarco would have to
shutdown the reverbs. In Table A-8 (page A-21) PEDCo estimated
the incremental annual operating costs for this option. This
estimate allowed for credits for (or savings of) natural gas
that will no longer be used if the reverbs are replaced. However,
PEDCo's estimates of natural gas savings ignored the fact that,
in the absence of natural gas, Tacoma would no longer realize a
waste heat stream credit which amounts to annual cost savings
of about $ 790,000/year. This would have reduced PEDCo's estimate
M-l
Arthur D Little, I nc
-------
of savings that would accrue to Tacoma for not using natural gas
from the estimated $3,154,000/year down to about $2,364,000/year.
In spite of this, we are in general agreement with the general
procedure used and have not adjusted PEDCo's estimates for this
omission (if we had adjusted PEDCo's estimates, the O&M costs
would have increased by about $790,000).
PEDCo on page A-24 performed a parallel calculation to estimate
the savings from acid plant consolidation. We agree with the
approach used (i.e., the operation of two acid plants, one old
and one new, was compared with the operation of a new, larger
consolidated acid plant). PEDCo states that "the savings from
building one large plant occur only from the reduced labor and
maintenance requirements." Both labor and maintenance are
variable costs; yet, the $700,000 saving was apparently derived
by PEDCo by using different fixed charge coefficients.
The validity of the $700,000 saving can be assessed as follows:
If the controls for the two acid plants are installed in the same
control room, the incremental labor is essentially zero or at
most an extra person on the day shift costing about $20,000/year.
A common control room is used for acid plants Number 5, 6, and 7
at Kennecott's Garfield smelter.
The maintenance requirements for any plant are estimated at
4-5% of total initial capital investment. (PEDCo uses 4%—see
page A-14). For older plants, the relevant capital investment
is replacement investment, rather than total initial investment.
Thus, the savings on maintenance requirements resulting from
plant consolidation may be estimated as follows based on PEDCo's
Figure A-8.
Since Asarco's existing acid plant is a single absorption (SA)
type, the costs for double absorption (DA) plants given in
Figure A-8 have to be discounted by 15-20%.
Saving = Maintenance requirements for existing SA plant @ 160 TPD
+ maintenance requirements of new DA plant @ 400 TPD
- maintenance requirement of new consolidated DA plant
@ 560 TPD
= 0.04 (0.8 x 7.7 x 106 + 13.4 x 106 - 16.4 x 106)
= $128,000/year.
Thus, the probable saving is under $150,000/year. This is small
enough to be ignored.
M-2
Arthur D Little, Inc
-------
2. Particulate Control Costs: These relate to the incremental
particulate control system agreed to by Asarco as a part of the
5-year variance application of December 5, 1975.
The total cost of these improvements is described in Asarco's
application as being from $4.7 million to about $5.1 million.
We used the lower figure of $4.7 million and converted it to a
1978 basis using an inflation escalation factor of 6%/year.
The application for the variance does not give details on O&M
costs. These were estimated by us to be about $0.8 million.
PEDCo's report presents estimates of SO2 control costs in
Chapter 3 and particulate control costs (based on Asarco's
application for variance) in Chapter 4. The capital investment
figure given in Table 4-2, identical to the cost figure given
in Asarco's 1975 variance application but designated "1978 basis",
is $5.1 million. This is within 10% of the number we have used.
PEDCo's annualized cost figure of $1.4 million is equivalent to
an O&M cost of $0.53 million (Table 4-3). While the table is
labeled "Asarco proposal" we were unable to find any O&M cost
figures in that proposal. We have hence used an estimated $0.8
million for O&M costs associated with particulate control.
B. OSHA COSTS
The estimates of compliance costs with OSHA regulations used in this
report are from a 1976 report prepared by Arthur Young & Company for
U. S. Department of Labor, Occupational Safety and Health Administration,
entitled "Technological Feasibility Analysis and Inflationary Impact
Statement for the Proposed Standard for Inorganic Arsenic (40 FR 3392)."
The compliance costs given by Arthur Young & Company for the proposed
standard of 0.004 mg As/m^ were converted to a 1978 dollar basis.
Other estimates exist for meeting the same standard which are
significantly higher. At the OSHA hearing on the proposed standard,
Mr. Knowlton J. Caplan, a Board-certified Industrial Hygiene Engineer
and President of Industrial Health Engineering Associates, Inc.,
testified1 that these costs are understated. His reconstruction of
compliance costs at Tacoma, using the same methodology as was
employed by Arthur Young & Company, resulted in compliance cost
estimates 1-1/2 to 3 times greater than those given in the Arthur
Young & Company report.
M-3
Arthur D Little, Inc
-------
REFERENCES
1) OSHA rulemaking on Inorganic Arsenic Hearings, Washington, D. C.,
(September 13, 1976), Exhibit 166.
M-4
Arthur D Lit tit- Int:
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