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BHP says Escondida copper output to fall 30%

Production from the world's biggest copper mine, Escondida, will decline by 30% this fiscal year, owner BHP Billiton said, as it posted falls in quarterly output and remained wary about the future.

BHP reported on Wednesday an unexpectedly large decline of 14% in production of copper - a manufacturing staple in everything from toilet taps to computer chips - in its third quarter to end March.

Iron ore and aluminum production also fell, and the company said it stood ready to halt operations as demand weakened.

“BHP's production scorecard is a little light across most business units versus our expectations. There is little cause for optimism,” Deutsche Securities said in note, referring to BHP's cautious outlook.

“In the medium term, we expect that market conditions will remain uncertain,” said BHP, the world's biggest mining group, which has been cutting production and shelving projects amid the worst global recession in decades.

“All our operations will remain under review. We will continue to take appropriate actions in any business that is cash negative and set to remain so, or where there is lack of demand,” the company added in its production report.

By contrast, rival Rio Tinto Ltd/Plc, which holds minority stake in Escondida, last week showed a 33% gain in quarterly copper production, boosted by higher output from other mines it owns.

Last year, Chile-based Escondida produced 1.2 million tons of copper, or just under 5% of global output, so a 30% drop equates to about 360,000 tons.

BHP manages the mine, in which it holds a 57.5% stake. Rio Tinto holds 30% and Mitsubishi Corp 10%. Rio has agreed to sell China's Chinalco half its stake.

Copper is part of BHP's base metals unit, which was one of the worst bottom-line performers when interim results were released in February, sinking to an operating loss.

A BHP spokeswoman said the company had initially anticipated Escondida's production would slip by around 20%-25% in the company's fiscal year to June 30.

BHP said the mine had suffered due to lower ore grades and weaker milling operations.

“The copper number is particularly of concern because copper is a bellwether of the wider state of the industrial commodities sector,” said Andrew Harrington, Sydney-based mining analyst for the Patersons brokerage.

The price of copper has shed more than 6 percent this week, though it is up nearly 50% this year, leading some analysts to say the worst of the commodities slump could be over.

A scrapped proposal by BHP to buy Rio with shares that was worth up to $193 billion at one point would have significantly lifted BHP's exposure to copper.

Speculation BHP may make a second offer resurfaced in the last week, though takeover regulations mean it must wait until November 27, 2009 - unless it can get the support of Rio's board.

So far, BHP's biggest curtailment has been in nickel, with the closure of the Ravensthorpe nickel mine in Australia. Analysts say more cutbacks could follow in other commodities, such as alumina and aluminum.

Coal output in Australia already has turned down as Asian steel-mills hit hard times, with metallurgical coal output down 25% from the previous quarter. Iron ore, another steel-making commodity, is also feeling the pinch.

BHP reported a 1% drop in iron ore production and 4% fall in aluminum year-on-year, down 2% and 4% respectively on the previous quarter. Nickel rose 10% year-on-year and was off 4% on the second quarter.

Iron ore sales by BHP into higher-priced long term contracts fell to 72% of overall output from its Australian mines over the last three quarters as buyers asked to defer long-term sales contracts because of weakening demand.

All the deferred ore was being sold on the spot market, BHP said. (Reuters)