Senator Eliot Shapleigh - El Paso, Texas

Asarco LLC, one of the U.S.'s oldest copper mining operations, filed for Chapter 11 bankruptcy protection, pointing to mounting environmental cleanup costs and other liabilities as well as a five-week strike by the company's unionized workers.

The move comes at a time of soaring copper prices, which have fattened the bottom lines of other copper miners. But Asarco, owned by Mexico City-based Grupo Mexico, says high production costs have hurt its operations and cash flow.

The bankruptcy filing -- in U.S. Bankruptcy Court in Corpus Christi, Texas -- could be a boon for the Mexican parent company, which has been looking for a way to shed the troubled operation. A report last week by Merrill Lynch mining analyst Andrea Weinberg touted a 44% upside potential for Grupo Mexico's shares, traded on Mexico City's Bolsa de Valores exchange, if Asarco, based in Tucson, Ariz., went under. Grupo Mexico's shares rose 4% to 20.03 pesos ($1.89) on the Mexican exchange in the wake of the news.

"We are optimistic that by using the Chapter 11 code we should be able to reorganize Asarco's balance sheet," said Daniel Tellechea, Asarco's president.

Court records show dozens of lawsuits pending against Asarco across the U.S., filed both by individuals and the federal government, seeking damages for asbestos exposure and environmental violations at its facilities. Merrill Lynch estimates the company's total liability at around $300 million. Some of these adversaries could conceivably be treated as creditors in a bankruptcy proceeding, funding any future cleanup costs with the sale of Asarco mines and machinery.

In retrospect, Asarco's abandonment looks more like a slow-motion breakup of the U.S. and Mexican groups than a quickie divorce. Six years ago Grupo Mexico outbid copper rival Phelps Dodge Corp.'s $26-a-share offer as both groups raced to build their copper operations, paying a total of $1.18 billion for Asarco.

The deal gave Grupo Mexico 54% of another big copper player, New York Stock Exchange-listed Southern Peru Copper Co., considered the jewel in Asarco's crown, with substantial untapped reserves and much lower operating costs than those at Asarco's U.S. mines. In 2003 Grupo Mexico paid $765 million to Asarco for the Southern Peru position, then last year upped its share through a merger of Southern Peru with Grupo Mexico's Sonora, Mexico assets.

With those deals leaving Grupo Mexico in possession of Asarco's most valuable piece, what remained was mostly a drag on earnings -- $216 million in negative asset value, according to a model prepared by Merrill Lynch's Ms. Weinberg. According to Merrill Lynch, Asarco had long-term assets of $281 million and $834 million in long-term liabilities.

Grupo Mexico, in a statement, said the uncertain outcomes of high environmental and asbestos liabilities and the "grave" impact of the strike by 1,500 workers -- who put down their tools July 2 -- prompted the bankruptcy. The company said "the labor union is neither supporting the company nor acting responsibly."

But the union says the company is just using the strike as a convenient scapegoat. "I think what's causing this bankruptcy is their environmental liabilities," says Terry Bonds, the lead negotiator dealing with Asarco for the United Steelworkers of America. "It's an attempt by them to get out of cleaning up the mess they've made all these years."

The union says labor accounts for only about 20% to 30% of Asarco's costs, so even the deep cuts the company proposed in pay and benefits during labor negotiations wouldn't save much, perhaps a penny from the company's estimated copper-production costs of $1.14 a pound.

In the global commodities market, tight inventories and steady demand from China, the U.S., Japan and other countries have created a copper rally. So far this year, copper futures have jumped 12.5%, or 18.2 cents, to $1.6345 a pound on the New York Mercantile Exchange's Comex division.

--Alison Guerriere Ciaccio of Dow Jones Newswires contributed to this article.