Freeport-McMoran on Copper and China

Freeport-McMoran Copper & Gold Inc. (CNI) wrote off nearly $14 billion this quarter, mainly on its acquisition of Phelps-Dodge. But investors were cheered that Freeport seems to be taking a big dose of medicine now, and hopefully none will have to be taken later.

The mining company is banking on good gold sales in 2009 and 2010, but investors might want to consider what Freeport has to say about copper. Copper prices fell by 50% during the quarter, and Freeport cut production and costs. Yet the company expects copper will be a source of growth.

From Freeport-McMoran Copper & Gold Inc.’s Q408 conference call: (FCX)

Our sales for the fourth quarter totaled 1.2 billion pounds of copper. For the year, we sold 4.1 billion pounds of copper... Copper sales that were priced at $2.89 at the end of September… Copper was $1.38 at January 23... Our recorded prices for the quarter averaged $1.55 per pound. These were approximately 50% lower than then fourth quarter of 2007... Copper inventories have risen.

We will have reduced volumes of copper sales and molybdenum sales in 2009, 2010 compared with where we were at the end of third quarter. Fourth quarter, by the way, was a record quarter for the combined companies [Freeport-McMoran and acquisition Phelps-Dodge] in terms of copper production… We currently estimate that we’ll produce 9% less copper in 2009, 17% less in 2010.

But demand will not wane:

Copper will respond to global economic conditions and the continued development of infrastructure in China and elsewhere around the world.

The basic problem [is that] the industry is challenged to find new supplies of copper… Copper that is being produced from existing mines is being limited by falling grades and operational issues and other factors… Even though we’ve written down the cost we have the same assets that we had; we haven’t walked away from any of our resources or any of our… long run [growth] outlook for copper and molybdenum.

Q: China is going to be the long term driver for copper recovery. Currently are you seeing any sign of China buying into the copper market or do you think that it’s completely plateaued right now and they are not doing anything?

A: China’s growth rates are down but the fourth quarter GNP was in the range of 7%. [But] 7% growth that involves copper use and they’re investing in infrastructure. They’ve had announced plans to continue to invest. They have the resources to do it. And I’m confident that they will continue to do it… Clearly China is going to be the key factor near term in terms of copper markets. And they’re doing activities within their country that’s going to consume copper.

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Comments

[Conan the B...:]

On the one hand demand will not wane, on the other hand FCX will reduce output by 9% in 2009 and 17% in 2010...huh?

China will use copper in their infrastructure...yadda... yadda.

China will buy internal production as much as possible to stimulate growth in its own Mining sector as well.

New supplies of copper have been found all over the world. Billions of pounds from Peru to Mongolia are within reach but out of reach because of funding constraints, what was feasible at $3-4 copper is not with copper at $1.50. (PCU continues to develop such an ore body with BVN).

Since it looks like Infrastructure in the US will not have an impact on copper until late 2009, at the earliest. Copper still has a chance to drop to $1.00/lb.

Jan 29 07:42 AM

[xom-only:]

thanks for the article ms. weil and i agree with paul ...'huh'

Jan 29 10:07 AM

[nmelendez:]

It's not about the copper, it's about the gold. China has been busy buying mines around the world with US dollars. They've been unloading the dollar, you just have not noticed. Zinjin, one of china's top mining companies has expressed it is intent on buying mines at these low prices worldwide. Imagine that, china has finally become capitalist, buy low and sell High.

Jan 29 11:07 AM

[J. B. Wulff:]

Freeport has been a favorite stock of mine for decades. It has some sharp people who take advantage of opportunities and shut down failures quickly. I believe it is a stock to buy and hold, now more than ever.

Jan 29 03:40 PM

[SA Editor J...:]

Yup, definitely a 'huh.'

But they do have plenty of gold to tide them over...

Jan 29 05:45 PM

[bones33:]

They're making money hand over fist.With copper at 1.5 or 3.5.Theyr'e one of the largest copper,gold, moly and lithium,producers in the world. I'm guessing the reason they're cutting back on production is to drive the price up.Demand from China will be robust as soon as they deplete their current stockpiles.

Jan 29 08:39 PM

[Ian R. Camp...:]

I have long thought as I saw the current economic condition coming that China was a principal key to near and longer-term base metal prices. I continue to think that. I have stayed away from investments in base metals and base metal companies for the past 24 months – with the exception of one small base metal explorer I consider particularly well positioned in what I consider to be a good geo-political environment. That company has large high grade, good metallurgy, and expanding Resources and Reserves. I fully expect this investment to provide me with good returns in time, but have simply ‘parked it’ and think of it for the time being as at least a 3 – 5 year (or longer) hold. My thinking as to when that investment may mature has to do with my own intuitive time horizon for world economic recovery and in particular for what I see as a long-term shift by China from dependence on the U.S. consumer to sustainable self-dependence.

Feb 01 07:58 AM

[Conan the B...:]

Since January of 2008, the number of Tonnes in storage at the LME has increased from around 105,000 to almost 480,000. Inventory in New York warehouses has gone from 5,000 tons to 40,000 tons.

China is indicated to purchase some 150,000 tons for its infrastructure needs.

With copper production still above what the world needs, it will take time for this inventory to be reduced.

Feb 02 08:22 AM