Copper, molybdenum and gold producer Freeport McMoRan (FCX) have been much in the news, and FCX has been mostly out of favor since it announced December 5 that it would be acquiring Plains Exploration and Production (PXP) and its 1994 spin-off, McMoRan Exploration (MMR) for $10.3 billion in cash, shares and future convertibles. FCX quickly sold down from $38 to $30 and was range bound at $30-33 until the recent collapse of commodities and miners dropped it briefly to $27.24. See my April 19 article for'sa summary view. Clouds remain: suits are pending in Delaware from shareholders at all three companies claiming the deal does not do them justice. However, developments last week in three different parts of the world and each pertaining to different FCX products improve its outlook and the chances that its acquisitions will go through with less, rather than more, friction.
FCX closed April 26 at $29.42, down 1.47% on a bad day for miners. For example, giant mixed commodity miners Rio Tinto (RIO) and Vale (VALE) were down 2.02% and 2.05% respectively. Southern Copper (SCCO) which some now prefer to FCX as a window on copper and global growth, was down 2.03%, so FCX is holding up better than related companies. Moreover, after reviewing the acquisition plan and issuance of $6.5 billion in senior notes, UBS in mid-February set a $40 target on FCX for 2013. Still more recently, on April 16 Deutsche Bank reiterated its buy rating on FCX citing a 12-month price target of $40 even after a .55/share charge related to Freeport's debt issue and declining copper prices. So analysts at major institutions look favorably on the deal.
A diversified commodity and geographic base should enable FCX to thrive long term however difficult global economies and fiscal policies may become. Its current dividend annualizes to 4.25% with $3.08 EPS. Moreover, heavy and increasing gold buying by Central Banks, individuals and the move to a new world reserve system are constructive for one of Freeport's major products, gold, which is about to increase from a new site described at the close of this piece.
One potential impediment to FCX's pending acquisitions seems to have been removed April 25-6. Anadarko Petroleum's (APC) drilling at the much - heralded Phobos site in the Gulf of Mexico turned up results an eighth of what PXP had hoped. PXP has a 50% interest in Phobos, APC 30% and Exxon (XOM) 20%. Writing for energy watch publication The Barrel, Starr Spencer noted the gamesmanship in forecasts of reserves in these situations:
Analysts' higher expectations may have come from Plains which reportedly had talked up the prospect as holding gross reserves up to 1.2 billion barrels of oil equivalent [boe].
The current find indicates 150 million boe, although Anadarko touted this as "an outstanding start" for the previously undrilled site. Future development of the Sigsbee block 39 resource area may increase its potential, but would require joint US-Mexican drilling. Spencer concluded that "on balance, this glass is half-full." In other words, it is not likely to break FCX's acquisition of PXP.
As noted in my previous FCX piece, PXP shareholders will vote on the acquisition May 20. It is likely that APC or XOM at some point will attempt another probe of the site though at 28k feet below the ocean surface (20k feet below the ocean floor), but this may take a while. The two oil giants also could work with fellow major FCX, given its talent and access to credit. Its rating is bright again after retiring the bridge loan required for the acquisitions deal.
A second development important for Freeport's prospects emerged April 23 in a Reuters report on flexibility from Indonesian government officials about their plans to ban export of unrefined copper ore from Freeport Indonesia and other companies. While President Yudhono made headlines by warning miners "not to be greedy," the context was accommodating. Mining Minister Mohammad S. Hidayat in the Reuters item said:
We can give them extra time, facilities or incentives, but they have to start building a smelter or work with another company to build one.
This is the familiar good-cop, bad-cop routine common to politics generally as well as resource nationalism. One moment it's "no exceptions" the next it's "the government could consider relaxing policies" as various officials take turns at a podium.
While commenting that miners "have to follow our rules and regulations," Hidayat added that the companies simply need to begin constructing smelters in Indonesia: the completion date is flexible so long as the projects get underway "soon." FCX and Newmont (NEM) are the major miners affected, FCX through its subsidiary PT Freeport Indonesia, which owns Grasberg 90.64% to 9.36% owned by the government of Indonesia, which wants more value added in country. Hidayat said:
If they start building a smelter now, even if it's not finished by 2014, the government could consider relaxing policies for them.
In short, ore exports will continue so long as progress is made building smelters in Indonesia which will need to supply electricity that is not yet available. Plenty will be needed in those mountains because the mining complex is heading to 260k metric tons of copper ore/day in 2014.
Freeport's mine at Grasberg (established 1988) contains the largest known gold reserves in the world. Falling copper prices have made it reluctant to build new smelters rather than continue to export to its existing refiners. But production and exports will continue with the government's blessing. The military, gang and inter-tribal conflict in the area around the West Papua mine remains a chronic but contained problem. Grasberg operates by a "contract of work" that runs through 2021 plus two 10-year extensions to 2041.
The third positive for FCX concerns ongoing but little-reported development of its high grade copper and gold deposits at Bor, Serbia. In summer 2012, initial drilling found ore belts of 5-9% copper, whereas standard ore-bearing bodies are a fraction of 1%. New drillings conducted by FCX and announced at the PDAC (Prospectors and Developers Association Conference) in Toronto in March 2013 identified a new lode several hundred feet long with up to 16% copper, including gold. This is the same mineralization belt that runs from Greece north through Serbia into "the golden quadrilateral" in Romania where Eldorado Gold (EGO) has its Certej project. Bor and Certej respectively are the southern and northern ends of the area of highest mineralization. Canadian junior Reservoir Minerals (OTCPK:RVRLF) is Freeport's partner (45%) in the Timok development site. Reservoir has been trading between $2 and $3 YTD as exploration proceeds. Three mines already are operating near this major copper-porphyry and gold complex.
The ongoing projects in Serbia, the flexibility in Indonesia about the smelter construction timeline and the underwhelming result at PXP's Phobos site all contribute to the positive outlook for Freeport McMoRan. Its properties, including large reserves of copper and cobalt in the Congo already support significant growth, while the acquisitions of PXP and MMR would enable it to thrive even amid turbulence in global economies and changes in international commerce and monetary systems. As a large diversified mixed commodity miner and energy producer, it likely will be one of the kingpins of the emerging world economic structure.