Rio Tinto plc
Six St. James Square
Incorporated: 1915 as Kennecott Copper Corporation
Absorbed: 1997 into Rio Tinto plc
SICs: 1021 Copper Ores; 1041 Gold Ores
Kennecott Corporation, the world's leader in copper output throughout most of the 20th century, had by 1997 ceased to exist as a separate entity. That year it was divided into a group of wholly owned subsidiaries of the British metals and mining company Rio Tinto plc. Rio Tinto, formed by the 1995 merger of Kennecott's owner RTZ Corporation and CRA Limited, continued to operate Kennecott's chief U.S. businesses: Kennecott Utah Copper, Kennecott Minerals, and Kennecott Energy. However, these operations were absorbed into Rio Tinto's copper and energy units. The RTZ-CRA merger, pulling in all of Kennecott's holdings, made Rio Tinto an international giant in the mining and minerals industry.
Origins in the Alaskan Wilderness
The chain of events that would lead to Kennecott's founding began in 1901. With financial backing from the Havemeyer family, a young mining engineer named Stephen Birch acquired mining rights on a sizeable chunk of promising copper property near the Kennicott Glacier in Alaska (the difference in spelling between the glacier and the company was the result of a clerical mistake). Birch returned East to seek additional investors in the venture, and was introduced by the Havemeyers to J. P. Morgan and to members of the Guggenheim family the following year.
At that time, the Guggenheims were the most powerful force in the industry, controlling the vast majority of copper reserves and nearly all of the smelting capacity in the western United States. These two financial giants formed the Kennecott Mines Company to develop mining operations on the claims purchased from Birch, and Birch was named general manager of the organization. In 1907, Morgan and the Guggenheims, calling themselves the Alaska Syndicate, purchased the Alaska Steamship Co., a large fishing fleet, the Beatson Copper Co. of LaTouch Island, Alaska, and, most importantly, 200 miles of right-of-way on which they completed a $25 million railroad that led to the copper mine. The Alaskan ore proved to be very rich in copper, and with the railroad and shipping line in place to transport the ore to civilization, the operation was quite profitable for the syndicate.
The mine at Kennicott, however, appeared to contain only about 20 years' worth of copper ore. In addition, the high cost of building the Copper River and Northwestern Railroad had required the sale of millions of dollars in stocks and bonds. In 1915, in order to both dilute the railroad's cost and find new ventures for the capital produced by the Alaskan mine, Kennecott Copper Corporation was incorporated out of the various financial interests involved, with Stephen Birch as President.
The Guggenheims were by this time already actively working copper mines in Chile and Utah. Upon Kennecott's creation, they decided to merge their Braden Copper Co. property in Chile, as well as 25 percent of the Utah Copper Co., into Kennecott, concentrating on the smelting end of the industry as the family's primary business interest. These moves gave Kennecott possession of Braden's El Teniente, the world's largest underground mine, in the Chilean Andes. In 1936 Kennecott acquired the remainder of Utah Copper Co. and its huge Bingham copper pit, which would become the heart of Kennecott's operations for decades to come.
The Bingham pit was developed by Daniel Cowan Jackling, the metallurgical engineer who pioneered the mass mining of low-grade ores from open pit mines. Jackling also used his revolutionary methods at mine locations in Nevada, Arizona, and New Mexico, all of which were eventually bought by Kennecott.
Struggles and Expansion During 1930s and 1940s
Unlike many new companies, Kennecott made money every year in its early history. The company did not suffer its first operating loss until 1932, at the bottom of the Great Depression. World War I had created high demand for all metals, and when it ended, the copper industry found itself stuck in high gear, overproducing in the face of slowed demand. Kennecott was able to remain profitable mainly because production at the Alaskan site was among the cheapest in the industry, including extremely low labor costs.
The trend among copper companies in the 1920s was toward vertical integration. Companies such as Anaconda and Phelps Dodge created their own fabricating operations in order to guarantee outlets for the products of their copper mines. Kennecott participated in this trend, but to a far lesser extent than did its main competitors. The company's only significant non-mining acquisitions during this period were the Chase Companies Inc. (which became Chase Brass and Copper Co.) in 1929, and American Electrical Works (changed to Kennecott Wire and Cable Co.) in 1935.
In 1933, following Kennecott's first unprofitable year, Birch was succeeded as president and chairperson by E. T. Stannard, a director of J. P. Morgan and Company. Around that time, the market was beginning to show the effects of a new flood of copper from Rhodesia. Since Kennecott was set up as a high-production outfit, and also had to keep Chase Brass operating full tilt, cutting back production was not a practical strategy. Stannard instead sought out new markets. Although this policy made no significant gains, Kennecott was bailed out in the late 1930s, as was the copper industry in general, by greatly increased demand for copper in preparation for entry into World War II.
Stephen Birch died in 1940, leaving management of the company firmly in Stannard's hands. Through the first half of the 1940s, the war kept production moving at a healthy pace, and Kennecott's operating revenues reached a peak of $265 million in 1943. When the war ended, however, Stannard saw that Kennecott's continued growth would depend upon its willingness to diversify and explore new geographical and geological arenas. In 1945, Stannard allotted half a million dollars for exploration, a figure comparable to that spent by its main competitors Phelps Dodge and Anaconda.
Oil, gold, and titanium were the principal commodities on which Kennecott began to focus. In 1945, the company teamed up with Continental Oil for a joint prospecting and drilling venture. By this time, Kennecott was already a major U.S. gold producer, since that metal is often a natural byproduct of copper mining. But not until 1947 did the company go looking for gold directly. That year, Kennecott's exploration chief, Anton Gray, was sent gold-hunting in South Africa. This action resulted in the creation of the Kennecott-Anglovaal Exploration Co., Ltd., a joint gold-exploration firm.
More important was the company's entry into the titanium business. Titanium is found in ilemite, one of the most abundant minerals in the earth's surface. Ilemite had been discovered in parts of Quebec in the early 1940s, and Kennecott began its search in the region in 1944. Two years later, Kennecott's explorers, led by Gray, discovered the largest ilemite deposit in the world, over 100 million tons, at Lake Tio in eastern Quebec. Kennecott spent a half million dollars finding, claiming, and measuring the mine. In 1948, Quebec Iron and Titanium Corp. (Q.I.T.) was formed, with Kennecott controlling two-thirds interest and New Jersey Zinc Co., which had been exploring the area as well, owning the remaining share.
An airplane crash in September 1949 claimed the lives of three important company officers: the retiring president; his designated successor, Arthur D. Storke; and R. J. Parker, a vice-president. The executive vacuum created by the disaster was quickly filled by Charles Cox, formerly head of Carnegie-Illinois Steel.
Mid-Century Giant in the U.S. Mining Industry
By 1952, Kennecott was easily the biggest copper producer in the United States; 46 percent of the nation's primary copper output was produced by Kennecott that year. With addition of the Braden mine in Chile, the company accounted for about 25 percent of the entire copper production of the free world. Kennecott was still far less integrated than Anaconda or Phelps Dodge, with only 25 percent of the company's copper production used by its fabricating subsidiaries, Chase Brass and Kennecott Wire & Cable. The Bingham mine in Utah alone provided about two-thirds of Kennecott's domestic copper output in 1952, and 29 percent of the entire nation's production. Braden represented about 30 percent of the company's copper volume. Kennecott's operating revenue reached $470 million that year.
Expansion into other metals and oil continued into the 1950s under Cox. In 1952, three test wells were drilled in western Texas as part of the joint program with Continental Oil. About $42 million was invested in the two South African gold mining ventures by 1956. Kennecott purchased the Kaiser Aluminum and Chemical Corp. in 1953, as well as 76 percent interest in a Nigerian firm, Tin and Associated Minerals Ltd. In 1957, the company joined forces with Allied Chemical and Dye Corp. to launch Allied-Kennecott Titanium Corp., formed to build a North Carolina plant to produce and sell titanium. This venture proved to be short-lived, and the company dissolved seven years later. An attempt was made in 1958 to vertically integrate further into the wire and cable fabricating field, with the purchase of Okonite Co. This idea was also thwarted, however, when in 1966 Kennecott was forced to sell Okonite at a loss due to perceived antitrust violations, just as modernization investments were beginning to pay off in increased earnings.
During Cox's tenure as Kennecott's president from 1950 to 1960, difficulties were encountered finding areas in which to expand. In that timespan, the company's copper production actually decreased. Kennecott's domestic copper output dropped from about 418,000 tons to 339,000 tons in the first half of the decade alone. Only $12 million was invested in the Chilean operations between 1946 and 1956, compared to over $200 million invested by Anaconda in that country. Furthermore, Q.I.T. had problems processing the titanium that was mined in Canada, and the South African gold mines turned out to be busts, losing about $36 million. Nevertheless, Kennecott's earnings remained solid throughout the decade, thanks largely to a steady flow of cheaply produced copper from the seemingly bottomless Bingham mine. In 1956, it cost only 12 cents to mine a pound of copper at Bingham, which was the lowest cost per pound in the United States. About half of the company's copper was used to make some type of wire. Thirty percent of the output was used by electric companies, 12 percent by the military, and about 13 percent by automotive companies.
Cox retired in 1961. Frank Milliken, an engineer and metallurgist, was promoted from executive vice-president to take his place. The following year Milliken launched a $110 million program to expand domestic copper production capacity by 28 percent over five years. A new corporate division was organized in 1964, the purpose of which was to develop new mining properties. These new operations included a lead, zinc, and silver mine in Utah, a lead mine in Missouri, and a Canadian molybdenum mine. In 1967, Kennecott sold 51 percent of the El Teniente mine to the government of Chile for $80 million. The company then lent $93 million to Chile as part of an expansion program at the mine.
In 1968, Kennecott undertook its most aggressive diversification project yet, the acquisition of Peabody Coal Co., the largest producer of coal in the United States. The purchase price for Peabody was $622 million, about 70 percent greater than Peabody's market value. Three years later, however, the Federal Trade Commission (FTC) ordered Kennecott to divest itself of Peabody, on the grounds that the company should have diversified by either starting up its own coal operation or by acquiring a smaller one. The FTC argued that purchasing Peabody eliminated a potential competitor from the field. Kennecott fought the ruling for several years, investing over $500,000 in Peabody. However, Peabody did not prove to be especially profitable for Kennecott. Between 1968 and 1976, Peabody's profits were less than one-sixth as high as the $431 million earned by Continental Oil's Consolidation Coal Co., Peabody's nearest competitor in steam coal production. After a number of failed legal challenges, Kennecott finally complied with the FTC in 1977, selling Peabody to a group headed by Newmont Mining for around $1 billion.
1970s: Losses and Corporate Battles
In 1971, Chilean President Salvador Allende nationalized that country's copper mines, stripping Kennecott of its partial ownership of El Teniente, the largest underground copper mine in the world. Aware of growing nationalistic sentiment in the 1960s, company leadership had foreseen the possibility of Chile's appropriation of the mines, and the sale a few years earlier of 51 percent interest in El Teniente to the government of Chile turned out to be a very wise move. By the time of the takeover, the share of Kennecott's income that came from Chile had been reduced to 11 percent from 25 percent in the 1960s, and though the event was certainly unsettling, Kennecott suffered far less than Anaconda, which had continued to invest heavily in that country. In 1972 an agreement was reached with the Overseas Private Investment Corp. (OPIC), the U.S. government agency that had insured Kennecott's 1967 loan to Chile. Under the terms of the settlement, Kennecott received $66.9 million from OPIC, taking a $9.8 million loss on the loans, on which Chile had made only two payments.
The 1970s were sluggish for Kennecott. The copper market was at its most depressed state since the 1930s, with prices down due to an abundant supply from new mines in Africa and elsewhere. New competition arose in the United States from growing companies such as Magma Copper Co. and Cyprus Mines Corp. These developments contributed to a $10.9 million loss for Kennecott in 1976, excluding Peabody, on $956 million in sales. Kennecott's annual capital investments were just over half those of Anaconda or Phelps Dodge during the mid-1970s, even though the production capacities of those two companies was smaller. While Kennecott was losing money in 1976 and 1977, both of those main competitors recorded profits.
Late in 1977, Kennecott acquired the Carborundum Co., a manufacturer of industrial products such as abrasives and pollution control equipment. Although Carborundum was a profitable company, with sales growing at a pace of about 15 percent a year, some stockholders felt that the $568 million Kennecott paid, about half the money from the sale of Peabody and twice Carborundum's market value, was too high. A group of Kennecott stockholders filed a suit to block the acquisition. Though no action came about as a result of the suit, criticism of Kennecott's management began to simmer, focusing on Milliken in particular.
With dissatisfaction growing, a proxy fight was launched in 1978, led by T. Roland Berner, chief executive of Curtiss-Wright Corp., a maker of aircraft engines. Berner promised that, if successful in taking over control of Kennecott, he would immediately sell off Carborundum and use the proceeds to pay out $20 a share to stockholders. By March 1978, Curtiss-Wright owned 9.9 percent of Kennecott's stock. After much complex legal wrangling, Milliken managed to fight off the challenge. One result was the integration of several Carborundum executives into top Kennecott management positions. Another result of the struggle was the occupation by Berner and two associates of seats on the Kennecott board of directors.
Following the proxy battle, Milliken retired. Thomas D. Barrow, a senior vice-president at Exxon, was named Kennecott's new chief executive. Barrow, upon accepting the position, immediately bought over three-quarters of a million dollars of Kennecott stock, making him the company's largest single stockholder. In 1981, Barrow negotiated the sale of Kennecott to Standard Oil Company of Ohio (Sohio) for $1.8 billion. Although Kennecott was still the nation's largest copper producer, it had been severely weakened by the industry-wide problems of the 1970s. With copper shortages expected in the 1980s, Kennecott needed to find hundreds of millions of dollars with which to modernize its facilities in order to take advantage of the elevated copper prices created by the new cycle of short supply. Sohio, flush with cash from its huge oil field at Prudhoe Bay in Alaska, came forward to supply the necessary funds. The purchase in turn gave Sohio an insurance policy against the depletion of its oil reserves.
In 1985 the Bingham Canyon mine was temporarily shut down because of depressed copper prices. During that time, the company invested $400 million to modernize the Utah Copper operations, including construction of an in-pit crushing and conveying system. A few months later, Kennecott purchased part of Anaconda's copper mine at Carr Fork, Utah. Kennecott had been trying to acquire the property, which bordered Bingham Canyon, for several years, and the mine had been closed since 1981. The following year, Sohio decided to focus all of its copper efforts on Bingham Canyon. With that decision, Sohio sold all of its other copper mines, dealing its Ray Mines division in Arizona to Asarco, and selling New Mexico's Chino Mines division to Phelps Dodge.
Buyouts Lead to Absorption into Rio Tinto
Kennecott became a subsidiary of BP Minerals in 1987, when BP purchased an outstanding minority interest in Standard Oil in June 1989. BP Minerals was then acquired by RTZ Corporation plc, Britain's largest mining company. In July of that year, construction began on Kennecott's Denton-Rawhide gold mine in Nevada's Mineral County. A joint venture was launched in 1990 with U.S. Energy Corp. to mine uranium in southern Wyoming.
In December 1991, the Environmental Protection Agency (EPA) issued a complaint charging Kennecott with 217 counts of mishandling hazardous wastes and chemical byproducts. In April 1992 the company reached an agreement in principle with federal and state environmental agencies on establishing a pilot program to clean up the wastes in the area of its Utah copper operations over a ten-year period. President G. Frank Joklik stated that the agreement's framework was "the product of a Kennecott concept brought to the U.S. EPA and the Utah DEQ over a year ago."
The Fourth Mill Line at Bingham Canyon began operating in January of 1992, adding an additional 32,000 tons of copper and 84,000 ounces of gold to the company's production capacity annually. Plans were also made in 1992 for the construction of a new $880 million smelter west of Salt Lake City. It was hoped that the new smelter would enable Kennecott to process all of its own concentrate, rather than send 40 percent elsewhere to be refined.
Restructuring and Shaky Market in Late 1990s
In 1995, Kennecott's parent RTZ merged with Australia's CRA Limited, forming the RTZ-CRA Group, the largest mining company in the world. In mid-1997, that company's name was changed to Rio Tinto plc and headquarters were established in London. The merger, while creating a multinational mining giant, also created the need for a management restructuring, which ultimately shook up the Kennecott operations. In 1997, Rio Tinto announced the closing of the Salt Lake City corporate headquarters, as well as the division of Kennecott Corporation into three separate operations: Kennecott Utah Copper Corporation, Kennecott Minerals Company, and Kennecott Energy Company. Kennecott Exploration Company (responsible for seeking new mineral resources) would be connected to and assist all three of these subsidiaries.
Kennecott Utah Copper, as part of Rio Tinto's massive copper unit, had 1997 net earnings of $139 million from production of copper, gold, silver, and molybdenum. It was the third largest U.S. copper producer in the late 1990s, producing 15 percent of the domestic copper supply. The revamped Bingham Canyon open pit mine near Salt Lake City (2.5 miles wide at the rim and half a mile deep) remained the cornerstone of this operation, moving 320,000 tons of ore daily. However, environmental concerns continued to plague Kennecott Utah operations. In 1995, Kennecott, the EPA, and the state of Utah had entered into an agreement under which Kennecott would have to clean up its Bingham Canyon operation, which was largely responsible for widespread contamination of ground waters in the area. A 1998 report by the EPA ranked Utah as the seventh worst state for toxic chemical releases, with Kennecott Utah Copper being the largest releaser in the state of bioaccumulative toxic chemicals. Kennecott Utah Copper hoped that its new plant would drastically cut the amount of future toxins released.
The other Kennecott operations were operating on a much smaller scale than Kennecott Utah Copper. Kennecott Minerals, which also operated from within Rio Tinto's copper unit, was created to develop and operate mineral properties throughout North America. Its headquarters remained in Salt Lake City after the reorganization. Kennecott Minerals accounted for $15 million of Rio Tinto's net earnings in 1997. Kennecott Energy (with $70 million in net earnings in 1997) was a major producer of coal in the United States, via surface mines in Colorado, Montana, and Wyoming. Its chief customers were electric utilities in the western United States.
In the late 1990s, the U.S.-based Rio Tinto operations suffered from an economic crunch, as did many other mineral and metal producers. The United States accounted for almost one quarter of the world's copper production, and consumption had grown steadily through the early and mid-1990s. The U.S. copper mining industry had begun to rely strongly on the expanding markets in Asia, particularly in China, Indonesia, Japan, Malaysia, South Korea, and Thailand. However, it became clear that the Asian economic crisis of the late 1990s would have serious repercussions for the copper mining industry. Copper prices hit a four-year low in December 1997, although there was some recovery in early 1998; the drop in the price of gold was even more serious, reaching an 18-year low. As a result, Kennecott Utah Copper was forced to lay off 150 workers in early 1998. Many experts predicted that the copper market could expect continuing problems.
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Source: International Directory of Company Histories, Vol. 27. St. James Press, 1999.