Freeport-McMoRan Will Rise Above Copper Troubles

By cris vicari - July 17, 2012 | Tickers: FCX, NEM, SCCO | 0 Comments

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Freeport-McMoRan (NYSE: FCX) is the world's lowest cost copper producer, as well as one of the largest producers of gold. They are headquartered in the United States, but their largest mine is the Grasberg mine in Indonesia. As is consistent with the materials industry, the company's financials are very sensitive to economic downturns. Freeport-McMoRan has not really been able to keep up with the price of copper like it had in previous years.

There are several factors to consider here. First, Freeport-McMoRan has had to deal with labor disputes and various acts of violence in their Grasberg mine, thus hindering production. These have not been small-scale disputes, as rebels have purportedly had ties to the Indonesian army. It turns out that mining in Indonesia might be more expensive than everyone initially thought. Second, as a general trend market-wide, copper prices have been declining and are not where they have been in years past. With 70% of Freeport-McMoRan's revenue coming from copper, these decreasing prices did not bode well for the company.

The Indonesian government has announced serious changes and restrictions to be put in place regarding tariffs. The government intends to restrict mineral imports to the 2009 or 2010 levels and implement a 20% tariff on exports of unprocessed metal orders. The analysts are in agreement with the CEO of Freeport-McMoRan, Richard Adkerson, regarding this manner: this move seems to be more of a grandstanding one than a serious attempt to change Indonesian import and export policy. It is more important to look at keeping the rebels who led the labor dispute strikes at bay so that they do not permanently damage Freeport-McMoRan's mining conditions. This appears to be going well, however, as the company has been working on restoring stability to its Indonesian mines, and production has shown signs of increasing after being relatively stagnant in past months.

It is crucial to look at the case in China. Reports have emerged detailing that China has a stockpile of copper. The stockpile reportedly measures 1.9 million tons, which is more copper than the United States consumes in one year. The trends in China are always trends to watch because they can seriously affect the way supply and demand works for the rest of the world. If China's demand for copper is less than analysts initially thought, this could account for the sagging prices.

Richard Adkerson does not appear to be too worried about these prices, citing a report by the Brook Hunt analysis firm that predicts China's demand to drastically increase to 16.4 million tons a year instead of the previous 9 million tons per year. It looks like we will have to wait and see on that one.

Currently though, India also faces slumping prices, and with all the previous months' uncertainty in Europe, we are faced with very weak global markets at the moment. However, a sign of slight turnaround emerged following the Greek elections, London Copper (LME Copper) reported increases in prices for the first time in weeks. This increase was very short-lived, however, as prices fell soon after they rose, providing a false sense of optimism. It was believed that Greece's newly elected center-right New Democracy Party would turn things around, and the world markets will wait on edge to see if this is indeed the case.

Freeport-McMoRan does not intend to take these slumps lightly, however. They are busy making contingency plans and planning for the future; they intend to boost reserves in order to grow future production capacity in their large minerals sector. The capacity for such can be found in North and South America, as well as the Congo. In the short-run, however, Freeport-McMoRan will face increased copper production costs and year-over-year cost acceleration due to diminishing volumes. Freeport-McMoRan is doing everything they can to combat the slumps. It is nothing they are doing wrong, as it is just a bad time for the copper industry.

According to analysts, Freeport-McMoRan has been disappointing these past few months. It has underperformed competitors such as Southern Copper (NYSE: SCCO) and Newmont Mining (NYSE: NEM). After hovering around $29 in May, Southern Copper is now trading near $31.65. Similarly, Newmont Mining dropped below $44 in May, and is now moving above $46. However, analysts suggest holding on to their Freeport-McMoRan stock for the time being. Freeport-McMoRan is a quality company that has a current yield of 3.9%, and once again, the unstable international economic markets are just a sign of the times that we all must contend with. In addition, Freeport-McMoRan has historically been a stable, continuous, and dominant industry leader due to personnel, experience, and financial strengths. They do not take setbacks lightly and do everything they can to constantly move forward.

Investors seem to think otherwise. Back in May, Richard Adkerson tried to reassure his investors with optimism about the Chinese markets and Indonesian labor strikes, but people did not seem to buy into it - the stock fell 3.3% the following day.

Reports seem to all be in agreement: if you do not own stock in Freeport-McMoRan, now might not be the best time to buy. Wait a little and see how China handles their copper stockpiles and how Europe responds to the newly elected Greek officials.

But if you currently own Freeport-McMoRan stock, you might still want to hang onto it for the time being. The troubling copper market is just a microcosm for the larger international economy, and Freeport-McMoRan is doing everything in their power to make sure they are okay through this global recession. They are dealing with the issues of violence and disputes in their Grasberg mine, but those do seem to be on the mend. And, we can't forget about all of their production in North America, South America, and the Democratic Republic of the Congo. Freeport-McMoRan is worth hanging onto to see where it goes.

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