Miners face losses, closures as metal prices fall

SINGAPORE, Oct 15 - Miners are facing their first potential losses on metals production in around five years as prices for zinc, aluminium and nickel drop below the cost of production, likely forcing more companies to shut mines.

While modest production curbs are already taking place in places like Australia, North America and China, in a number of metals, more could be on the cards, as the impact of lower prices bite.

But analysts say prices of copper -- which outpaced most other industrial metals on the way up -- must fall by at least another third before stemming the immediate flow of supply.

"In base metals, everything except copper is pretty close to mine closures," said Julian Emery, analyst at Ambrian Capital.

Those shut-downs -- plus a dimmer outlook for new supply from costlier projects that were counting on higher prices to deliver profits -- should begin to help stem the sharp fall in prices in recent weeks, the market's biggest ever sell-off.

Tight credit and plunging equity markets also mean companies will struggle to get funding to develop projects, adding to project timelines and delaying new supplies.

"The credit crunch will delay projects and the high cost of money also means loss-making producers won't be able to continue for as long," William Adams, analyst at BaseMetals.com said.

Copper prices have fallen by 45 percent since touching record highs in mid-July, trading below $4,800 a tonne this week and moving closer to marginal costs of production pegged by analysts at Barclays Capital at around $3,100 a tonne.

Other analysts said smaller operators' costs may be higher.

Analysts at Goldman Sachs said copper could fall another 30 percent in the next three months to around $3,500.

Other metals, including zinc, nickel and aluminium are already at or below production cost, driving some producers to slow down or refocus mining efforts.

This turnaround in prices threatens to turn mines that were once cash cows into money pits.

"We could lose 5 percent of world copper production and losses in zinc might be greater -- maybe 7 percent because many zinc producers are already feeling pain," ANZ's senior commodities analyst Mark Pervan said.

He added that nickel could see the biggest output hit.

"We have probably lost most or all of the nickel pig iron producers. They accounted for 90,000-100.0000 tonnes or about 8 percent of output."

"If some of Canadian, Australian or Indonesian assets also trim output we could see another 10 percent decline."

Aluminum Corp of China Ltd (Chalco), the country's top producer of primary aluminium, may shut down some high-cost aluminium capacity due to low prices, its investor relations manager said on Friday.

Emery added that some of the gold producers on London's Alternative Investment Market are near marginal costs, especially those in the early stages of production when costs are typically higher.

Uruguay Mineral Exploration Inc., a South American gold producer, said on Friday average cash costs jumped to $792 an ounce in the first quarter from $425 in the year-earlier period.

LONGER-TERM SUPPORT

But price weakness now may strengthen the long-term outlook for commodities by delaying and discouraging projects, sowing the seeds for another leg-up in industrial raw materials when demand growth recovers.

"The world has changed," said Stephen White, a director at Sydney-based risk advisory and funds management firm, Noah's Rule.

"The reality is that we are in tough economic times ... Anything that requires capital will have difficulty, but good projects are good projects and will come through."

In August, Australian owner, Aim Resources, said it scrapped plans to develop zinc mining in Burkina Faso due to funding problems linked to low zinc prices.

Australia's Minara Resources Ltd has deferred its Australian $300 million ($273.5 million) nickel expansion plans and the Russian Copper Company has shelved separate projects to expand into nickel and build a zinc plant due to the financial crisis.