Mining company Freeport-McMoRan Copper & Gold Inc. on Monday lowered second-quarter guidance for its copper production, hurt by high clay content found in a section of a mine.

The company said it expects to mine about 235 million pounds of copper and 275,000 ounces of gold in the second quarter. Previously, the company said it expected to mine 280 million pounds of copper. Gold guidance remains unchanged.

The shortfall is due to a section of a mine with abnormally high clay content, which has hurt ore flow, mill recoveries and concentrate grades, the company said.

The company said it was taking steps to offset the shortfall such as blending the material found in the high clay-content mine with ore from other sections of the mine.

Agnico-Eagle Mines Limited today announced a number of major steps in its strategy of expanding gold output and gold reserves:

- Kittila gold project (on the Suurikuusikko deposit) in northern Finland to be built for $135 million, and is expected to produce an average of 150,000 ounces of gold annually at average total cash costs of approximately $250 per ounce. Production expected to begin by the middle of 2008 and extend over 13 years.

- Lapa gold project in Quebec to be completed for an additional investment of $90 million, and is expected to produce an average of 125,000 ounces of gold annually at average total cash costs of approximately $210 per ounce. Production expected to begin by the fourth quarter of 2008 and continue for seven years.

- Expenditures on Pinos Altos project in Mexico increased to an estimated $23 million to conduct an extensive exploration program and complete a feasibility study by the end of the second quarter of 2007.

- Agnico-Eagle to raise $250 million in a marketed equity offering to fund its growth initiatives and for general corporate purposes.

"With today's project decisions, Agnico-Eagle has set the stage for a significant increase in its gold output with four gold projects under construction and a potential fifth new mine entering the feasibility stage," said Sean Boyd, Vice Chairman and Chief Executive Officer. "Our existing cash position and strong cash flows combined with the proceeds of the proposed $250 million equity issue should enable us to finance our growth and maintain a strong financial position," added Mr. Boyd.
Kittila Mine to be built on Suurikuusikko deposit

Construction will begin immediately at the Kittila Mine (on the Suurikuusikko deposit) in northern Finland, approximately 900 kilometers north of Helsinki. The Kittila mine, named after the nearby community of the same name, will initially be extracted via open pit followed by underground mining via ramp access. The mining operation will feed a 3,000 tonne per day surface processing plant.

The feasibility study has recently been reviewed by independent third parties. The study's base case projects an after tax rate of return of 15.0%, based on a gold price of $450 per ounce, and a US$/(euro) exchange rate of 1.20. Annual gold production is expected to average 150,000 ounces at total cash costs of $250 per ounce, with initial gold production occurring by the middle of 2008. The feasibility study anticipates capital expenditures of $135 million and incorporates minesite costs per tonne of $34 and sustaining capital expenditures of approximately $5 million per year. Current probable reserves are 2.4 million ounces of gold, from 14.2 million tonnes grading 5.16 grams per tonne yielding an estimated mine life of 13 years. See Note to Investors regarding the Use of Non-GAAP Financial Measures.

Eight drills are currently operating at the Kittila mine project and are focused on converting the large gold resource to reserve and on drilling the extensive land position along strike of the known gold reserve. The Kittila mine project contains a measured resource of 0.1 million tonne containing 4.07 grams of gold per tonne, an indicated mineral resource of 1.5 million tonnes containing 4.39 grams of gold per tonne and an inferred mineral resource of 6.7 million tonnes containing 4.35 grams of gold per tonne. See the notes to U.S. Investors Relating to the Use of "Resources".
Lapa Mine to be completed by 2008

The Lapa mine project is located in northwestern Quebec, approximately 11 kilometres east of Agnico-Eagle's operations at LaRonde, providing operating synergies. The initial phase of construction began in July 2004.

The shaft, currently at a depth of 760 metres, will be extended to approximately 1,370 meters below surface. In April 2006, 2,800 tonnes of development ore was extracted at Lapa and sorted through a sampling tower to form a representative appraisal. Together with the results of a diamond drilling program, the ore was estimated to contain on average 10.65 grams per tonne of gold. These results, and results from other sampling methods, predicted higher gold grades than the Company's reserve model from February 2005. These results were incorporated into a revised feasibility study.

A revised feasibility study on the Lapa mine project was recently completed and reviewed by independent third parties. The study's base case projects the mine reaching full production in the fourth quarter of 2008 with an after tax rate of return of 21.8%, based on a gold price of $450 per ounce, and a C$/US$ exchange rate of 1.25. Based on current estimates of mineral reserves and grades, annual gold production is expected to average 125,000 ounces annually at total cash costs of $210 per ounce.

Additional capital costs to bring the Lapa mine into production are projected to be $90 million. Based on an operation of up to 1,500 tonnes of ore per day, the revised feasibility study incorporates minesite costs of C$70 per tonne and average sustaining capital expenditures of approximately $4 million per year. See Note to Investors regarding the Use of Non-GAAP Financial Measures.

The Lapa deposit contains 1.1 million ounces of gold reserves from 3.4 million tons of ore at a grade of 10.17 grams per tonne, sufficient for an initial mine life of approximately seven years. Lapa also contains an indicated mineral resource of 1.1 million tons grading 5.92 grams of gold per tonne and an inferred mineral resource of 1.4 million tonnes grading 9.36 grams of gold per tonne. See the notes to U.S. Investors Relating to the Use of "Resources".
Pinos Altos program to explore property and prepare feasibility study

An estimated $23 million exploration and feasibility program will be initiated at the 100% owned Pinos Altos project in northern Mexico. The objectives of the program include:

- 29,800 meter drilling program to convert resources to reserves;
- 21,400 meter drilling program to drill at depth and expand the resource by drilling in under-explored regions along strike;
- completion of a feasibility study by the end of the second quarter of 2007;
- development of a 1,330 meter underground ramp to provide a deeper drilling platform, and to expose ore for sampling and examination.

The deposit remains open at depth and only approximately one third of the entire property position has been drilled. The Pinos Altos project's indicated resource contains 12.5 million tonnes at 3.9 grams per tonne gold, and 102.3 grams per tonne silver. The project's inferred resource contains 3.2 million tonnes at 5.2 grams per tonne gold, and 111.0 grams per tonne silver. See the Notes to U.S. Investors Relating to the Use of "Resources".

Agnico-Eagle's preliminary analysis contemplates a 3,000 tonne per day mining scenario with the open pit and underground operations each supplying 1,500 tonnes per day. The preliminary estimate of capital cost required to bring the project into production is approximately $150 million.
$250 million underwritten equity offering is prudent for growth plans

The Company plans to offer common shares under its existing shelf prospectus filed in Canada and under the multijurisdictional disclosure system in the United States. The Company proposes to raise approximately $250 million in an underwritten offering. The Underwriters will also have the option to purchase up to an additional 15% of the common shares issued to cover over- allotments. The offering is to be lead-managed by Merrill Lynch and it is anticipated to close in mid-June 2006.

Over the next three years, the Company projects consolidated capital expenditures of $170 million in 2006, $250 million in 2007 and $115 million in 2008, excluding any potential construction expenditures on the Pinos Altos project. The Company expects that financing of these expenditures, including those anticipated at Pinos Altos, will come from the proposed offering, existing cash balances and cash flows from its LaRonde mine. Additionally, the Company maintains substantially undrawn credit lines of $150 million.

BHP Billiton, the world's biggest mining company, spends 61 cents to produce a pound of copper and sells it for $3.15.

The market's largest-ever profit margin is evidence copper is headed for a record plunge, perhaps as much as 25 percent in a day, said John Tumazos, the Prudential Equity Group LLP analyst who made Institutional Investor magazine's quarterly All-America Research Team 40 times. Copper doubled in the past year on betting by speculators, the 50-year-old Tumazos said.

After a fivefold increase since 2001 to a record high in May, copper fell 11 percent in one week, the most ever and a sign that the rally may be over. The volatility, or rate at which a price moves up or down, of copper the past 10 weeks is the highest in history, according to data compiled by Bloomberg. Prices fluctuated by 48.5 percent in the week ended May 26.

"I've never seen anything quite like this in my entire life," said Leonard Kaplan, 55, president of Prospector Asset Management in Evanston, Illinois, who's been trading metals for 30 years. The volatility of the 1980s "was news-related. Now, you have extreme volatility for no apparent reason at all. The appetite for risk is greater than these markets can absorb."

A crash in the copper market – a 25 percent drop would be bigger than the 1987 stock-market bust – would hurt speculators and producers. A price correction also would provide relief for users including Tyco International Ltd., the biggest maker of electronic connectors, and for central bankers concerned about accelerating inflation.

In New York, copper for July delivery on the Comex division of the New York Mercantile Exchange rose as much as 4.35 cents, or 1.2 percent, to $3.63 a pound in after-hours trade at 12:34 p.m. Sydney time today.
Popular with funds

Pension funds and hedge funds helped fuel the copper rally by shifting assets out of stocks and bonds into commodities in search of greater returns. HSBC Holdings Plc, Europe's largest bank by market value, said in a May 24 report about $100 billion will be invested in commodity indexes by the end of 2006, compared with $10 billion at the end of 2003.

"Expect metal-price volatility to be high with the threat of a hefty correction to be ever present," the HSBC analysts, led by Paul McTaggart in London, said in the report.

Prices sank as much as 9 percent on May 24. The day before, copper surged a record 12 percent. While a drop is likely to hurt earnings at Melbourne-based BHP Billiton and Chile's Codelco, the world's biggest copper company, producers say the rally isn't over.
BHP Billiton unfazed

"We are seeing very good economic conditions around the world," said Charles "Chip" Goodyear, the company's chief executive. "The supply side is still struggling to keep up."

Global copper production has been curbed by a strike lasting more than two months at Grupo Mexico SA and a drop in supply from Freeport-McMoRan Copper & Gold Inc.'s Grasberg works, the world's No. 2 copper mine.

A drop in price "would make our life easier," said Bo Samuelsson, president of Helsingborg, Sweden-based Elektrokoppar AB, a maker of cable that buys 140,000 tons of copper a year. Price gains "increase our credit risk tremendously. Your customers may have very good credit but one day, prices suddenly double and change the credit picture."

Tumazos predicted in August copper would average $2 a pound this year. Prices have averaged $2.63 on the Comex division of the New York Mercantile Exchange and reached a record $4.04 a pound on May 11.
'It's fairyland'

"It's fairyland," said Richard Elman, chief executive officer of Hong Kong-based Noble Group Ltd. "We think, ultimately, prices will come back to reality. The economies are fairly strong, but it doesn't justify the price for a lot of these commodities."

A 25 percent drop would produce a return of about 100 percent for a speculator who is selling New York futures. A sale of one July contract would result in a profit of about $22,400, almost twice the exchange-required deposit of $12,150.

"The bull market has reached the stage where you are seeing very, very high volatility," said David Harding of London-based Winton Capital Management, which invests $5.5 billion in hedge funds. "That is characteristic of a more advanced stage in a bull market."

Price volatility often shows that a market has peaked. In 1998, 10-week volatility for soybeans doubled to 28 percent in the six weeks before the market declined. Fluctuations in the price of corn doubled in the weeks ahead of the 2005 and 2004 highs in price. Volatility on the Nasdaq also nearly doubled to 78.41 percent at the time of the April 12, 2000, all-time high, from 40.59 percent at the start of February that year.
Benchmark for commodities

Copper, a benchmark for commodities, may be indicating a decline in other markets. Zinc, which more than doubled in the past 12 months, climbed to a record $4,000 a ton May 11. The contract plunged as much as 12 percent four sessions later.

Silver surged 77 percent in the past 12 months, rising to $15.22 an ounce, the highest in 23 years. It dropped as much as 8.9 percent May 15. Copper has even become a signal for gold prices. The correlation between gold and three-month copper has been 0.789 this year, compared with 0.624 in the past 12 months, according to Bloomberg data. A correlation of 1 would indicate the two metals are moving in lockstep.

"Copper always seems to be the first one to move," said Jon Bergtheil, head of global metals strategy at JPMorgan Chase & Co. in London. "Copper is always the best barometer. It doesn't seem to be different in this cycle."

Copper for three-month delivery soared to a record high $8,800 a ton in London on May 11. The metal has lost almost 12 percent since then on speculation that demand will slow as rising borrowing costs hurts investment and economic growth.
Interest rates

The U.S. Federal Reserve on May 10 raised its key interest rate a 16th time, to 5 percent. The Bank of Canada last week raised its main rate a quarter percentage point to 4.25 percent, the highest in almost five years. European Central Bank policy makers have indicated they will raise rates in June.

"The strong rise in interest rates since the beginning of the year appears to be causing problems for a growing number of property markets around the globe," said Jochen Hitzfeld, a commodity strategist at HVB in Munich. "Slowing growth in the construction industry will hurt copper demand."

Global orders for copper will rise 5.2 percent this year, HSBC forecasts. Growth in China, the world's biggest copper user, increased consumption for use in everything from bridges to appliances. The country's economy expanded 10.3 percent in the first three months of 2006.

"The fundamentals for the global economy still look very positive and that means in an underlying sense commodity prices will keep rising, which will buoy the metals markets," said Rob Henderson, chief markets economist at National Australia Bank Ltd. in Sydney.

Market strategists say that even if demand increases, the rapid changes in copper prices are a bad sign.

"You're getting these whipsaw moves," said Michael Guido, director of hedge fund marketing and commodity strategy at Societe Generale in New York. "It's freaking a lot of people out."

Peru's output of gold soared 17.5% to 52,382kg (1.68Moz) in the first quarter of 2006 against same-period 2005, according to the country's mines and energy ministry (MEM).

In March, the country's production of the yellow metal was up 20.7% to 17,135kg compared to same month last year, MEM said in a statement.

Peru is the region's largest gold producer and the world's fifth biggest with output in 2005 of 6.69Moz. US miner Newmont's Yanacocha gold mine and Canadian Barrick Gold's Pierina and Lagunas Norte gold mines represent nearly 70% of output.
Other metals

Copper production rose 5.8% in the first quarter to 257,025t and by 12.0% to 96,106t in March, both year-on-year, according to MEM.

Meanwhile, output of molybdenum, a by-product of copper mining in Peru, was up 5.4% to 4,481t in the first quarter but off 3.8% at 1,661t in March, the statistics show.

Also performing positively in Q1, silver output rose 2.1% to 799,530kg boosted by a strong March when production of the metal increased 14.3% to 285,115kg.

Meanwhile, Peru produced 1.26Mt of iron ore in the first quarter and 431,727t in March, an increase of 14.9% and 17.7% respectively on same-periods 2005.
The losers

On the downside, production of zinc dropped 13% in Q1 to 269,948t and was off 9.4% to 90,490t in March.

Lead output plummeted 9.4% to 70,114t in Q1 and 11.4% to 23,018t in March, both year-on-year, according to the latest figures.

Finally, the country's output of tin fell 6.5% to 3,360t in March and was off 1.1% to 10,047t in the first quarter.

Gold futures closed higher Monday after Iran warned that U.S. actions could lead it to halt shipments of oil, sending crude prices sharply higher and creating a safe-haven bid for gold

Gold for August delivery closed up $7.70 at $648.70 an ounce on the New York Mercantile Exchange. On Friday, the contract gained $7.50 as the dollar fell sharply following a weaker-than-expected May jobs report.

"If you make a wrong move regarding Iran, definitely the energy flow in this region will be seriously endangered," Iran's supreme leader, Ayatollah Ali Khamenei, warned on state television over the weekend, the BBC reported.

The warning came just days after the permanent members of the United Nations Security Council and Germany reached agreement on a package of incentives to offer Iran in an attempt to persuade it to halt its nuclear research.

Tehran maintains it's aiming to create a civilian energy program, while western powers fear it is trying to create nuclear weapons.

The incentive package is part of a broader effort to solve the dispute diplomatically, but Khamenei's words suggest Iran has not ruled out some sort of U.S.-backed military action against it.

"They appear to be more inclined to outline how they will choke off oil supplies to the West, than how much they will heed the international community's offer of 'carrots or big sticks' coming their way on Tuesday," said Jon Nadler, investment products analyst at bullion dealers Kitco.com. "Now, it all comes down to how one interprets the words "wrong move" as relating to attempts to make the country comply with the will of the majority."

Meanwhile, Citigroup upgraded its gold-price forecasts, predicting that the metal will rally back through its recent peak above $730 an ounce as inflation fears persist.

"Following the current period of volatility and instability we expect investors to refocus on the previous concerns of continuing high oil prices leading to higher inflation, which would ultimately lead to higher interest rates and a subsequent slowing down of the U.S. economy resulting in a weaker U.S. dollar," said Jonathan Battershill, an analyst at Citigroup in Sydney. "All of these factors would result in stronger gold prices."

The dollar was last trading down 0.2% against the yen and down 0.3% against the euro.

Citigroup is now expecting average gold prices of $700 an ounce in 2007 followed by $750 in 2008.

Elsewhere in the metals sector, silver closed up 21 cents at $12.29 an ounce. Platinum rose $13.60 to $1,258.50 an ounce, and palladium rose $5.75 to $358.90 an ounce.

Copper recovered early losses to close up 1.4 cents at $3.60 a pound. The contract was hit by profit taking after Alan Garcia apparently won the Peruvian election over the weekend. Garcia's opponent Ollanta Humala had threatened to nationalize the country's natural resources, following a trend seen in neighboring countries.

Copper was also weaker after Freeport-McMoRan said it expects second-quarter copper sales at its Indonesia unit to fall 16% below forecasts. The company blamed the shortfall on the difficulty mining a small section of ore at one of its properties, which has abnormally high clay content.

On the supply side, gold inventories were lower by 195 troy ounces to 7.79 million troy ounces as of late Friday, according to New York Mercantile Exchange data.

Silver supplies fell by 226,850 troy ounces to 108.2 million, and copper supplies were down by 386 short tons to 9,092 short tons.