Diversification plan backfires on Arco as recession takes toll
Los Angeles — Like so many major companies, Atlantic Richfield Company here set out a few years ago to diversify. For a number of reasons that seemed quite sound then, Arco officials were increasingly concerned about the firm's almost exclusive involvement in the gas and oil industry.
So in a $700 million deal completed in January 1977, Arco merged with the Anaconda Company. Almost overnight, Arco was able to look at operations that included copper and molybdenum mining and the processing of brass, aluminum, and other metals. Arco's eggs were no longer all in the same basket.
So what has happened since the company sought peace of mind through diversification?
Well, it's a good thing Arco is still heavily committed to oil and gas operations. These operations, despite massive investments made in a hunt for new reserves worldwide, turned in handsome profits last year.
As for the activities acquired in the Anaconda merger, they've been awash in red ink.
Minerals production, mostly copper and molybdenum, were in particularly bad shape, accounting for $332 million in pretax losses for the year. As the recession lingered, demand for copper sagged and prices slid. They are currently hovering at around 76 cents a pound, compared with $1.33 a pound two years ago.
Understandably unwilling to continue absorbing such a beating, Arco in June will suspend operations at its Berkeley Pit in Butte and its East Pit, also in Montana. That decision followed the shutdown of other copper smelters, mines, and a refinery over the last two years.
Molybdenum, used in the production of steel, has also been a losing proposition. So Arco has suspended operations at its mine at Tonopah, Nevada, less than 18 months after starting up. The few sales being made are drawing from accumulated inventory.
The company's chemicals business wasn't much better off as the recession saw demand sink for synthetic fibers and plastics used in home appliances, cars, and other consumer products. The red ink for Arco's chemical company in 1982 flowed to $96 million.
Arco also took a $114 million red-ink bath last year as a fabricator of aluminum ingots, brass sheets and tubing, and metal hoses, among other metal products.
In all, net income was dragged down by losses of $542 million just from those three new areas of diversification - minerals, chemicals, and metal fabricating.
While conceding disappointment in that performance, Arco officials say they didn't expect to generate any quick returns by diversifying. ''We never looked for a quick turnaround and a high-profit mode for the new divisions,''says Robert Rice, manager of fuels and minerals planning.
Back in 1977, he says, the company was worried about restrictions that might be placed on future oil and gas exploration - leaving Arco with no place to grow. Arco had substantial cash reserves, and it decided to move into industries with long-term growth potential.
Mr. Rice admits that no one expected the economy to go into the tailspin and drag down the newly acquired operations. ''No one anticipated there would be a recession, let alone one as deep as this one was,'' he says.
Despite setbacks, there are some bright spots in Arco's mining activities. Its Black Thunder coal mine near Wright, Wyo., set a new production record last year, making it one of the largest surface coal mines in the country. Production also began last year at Coal Creek, Wyo.
In fact, rather than losing faith in minerals, Arco spent some $109 million last year looking for precious metals, some nonferrous minerals, and new coal reserves from Indonesia to Alaska's Cook Inlet. That hunt is part of a corporate strategy that board chairman Robert O. Anderson and president William F. Kleschnick told shareholders involves investments ''where we see specific growth opportunities and acceptable returns.''
And, of course, nothing would put a brighter glow on Arco's diversification moves than an economic recovery.