Freeport-McMoRan (FCX) had been outperforming its sector of large mixed-commodity miners for weeks until the week after a May 14 accident at its Grasberg complex in Papua, Indonesia. A training tunnel collapse led to several days of rescue efforts. When the toll reached 28 lives, FCX halted underground operations pending an investigation of the cause or causes. There are about 24,000 workers at the world's second largest copper mine with proven and probable reserves of 31 billion lbs of FCX's total Cu reserves of 116.5 billion lbs. Grasberg also holds 31 million oz proven and probable Au reserves.
The initial May 15 report anticipated a brief delay that has been extended as the death toll was confirmed. This has pushed down FCX share price as have declining Copper futures ($3.30/lb) and news of continued decline in China's manufacturing PMI to 49.6 in May from 50.4 in April. Indonesian government officials including Energy & Mineral Resource Minister Jero Wacik and FCX CEO Richard Adkerson have said the mine will remain closed until an independent review of safety procedures is completed.
This week has seen a sell down from news of the sad events which nearly eclipsed formal approval by Plains Exploration and Production (PXP) shareholders of their acquisition by FCX. Since the deal was approved Monday May 20, FCX shares sold down from $32.88 to $30.42 by May 24. Context for this was a broad three-day decline in the mining sector and across most equity classes. The copper price on Friday made its low for the week amid concern on slowing growth in China.
Deal sweeteners that will impact cash-on-hand contributed to the price decline. To ease approval, PXP's board announced an additional $3/share to be paid to its shareholders upon formal completion (set for June 3). FCX pledged an additional $1/share. Given the merger, FCX will tote the disbursements to its new shareholders. While analysts focus on Freeport's diminished cash position, it is notable that Paulson & Co which owns 9.9% of PXP looked favorably on the results of the M & A. On May 03, Freeport conducted a successful $3 billion multi-tranche bond float, part of which extends repayment to 2027.
In my view, concerns about FCX's cash position and the ability to fuse the various segments of the expanded commodity major are overblown and FCX's price will rebound and rise. It now is a diversified giant resource and commodity company with 26% of its business in American oil and gas. Problems at the Grasberg complex are being and will be addressed.
Let us put the training tunnel collapse at Grasberg in context. Mining is a dangerous occupation. Reviewing American mine fatalities for 2012 or during the last decade reminds us that the work has intrinsic risks and that the recent accident is not specific to FCX. In 2012, American deaths in mining accidents were 36, an all-time low for the second straight year but, despite the record achievement, higher than the tragedy at Grasberg.
Moreover, America's low mine mortality rate comes after a century of improving operations and a work force drawn from experienced labor pools. Early in the twentieth century when America already was the world's leading industrial power and a pioneer in technologies an average of 1500 men died each year in mining-related accidents according to US Bureau of Labor Fact Sheets.
For comparison and perspective on the accident at Grasberg, consider China which reports 1384 mining deaths for 2012, a figure like the annual totals in America a century ago. And this is the official count: independent reports put China's mining deaths above 2000 annually, more than ten times the world average. As this link notes, as recently as the 1990s, mining deaths in China were over 10k / year.
Moreover, China's 2012 fatalities even by the official tally were down 30% from 2011 which claimed about 1800 lives. And China's commodity mining has other lethal effects. Those distressed by the accident at Grasberg should note that China uses coal for over 70% of its energy and exports particulate matter and sulfur pollution to the entire world. The NY Times reports 1.2 million Chinese deaths/ year from air pollution. Moreover China's rare earth mining ravages Inner Mongolia and has caused an epidemic of fatal illnesses. Despite this, some laud China's decline in annual mining deaths while focusing on accidents or even the potential for accidents in Western mining companies. Selective outrage does not save human lives, the ocean or forests laid waste by pollution from China. This brief overview brings perspective on development at Grasberg, a large operation in an emerging nation.
Indonesia had mine accidents with multiple fatalities in 2006 and 2009 and America had a tragedy at Big Branch mine in 2010. These situations are sad and will be amended but many aspects of industrial and technology carry dangers that take decades to reduce or eradicate. For example, an April 17, explosion at a fertilizer company storage facility took 14 lives, injured 200 and flattened much of West, Texas. No one demands the town be abandoned or chemical fertilizer companies shut down. To the extent that the drop in FCX shares reflected coverage of the Grasberg accident and halt in production, it is in the larger view a transient over-reaction that masks long-term growth prospects in share price and profitability. For now, the sector sell-off improves the upside for FCX.
It would be wonderful to minimize or abolish accidents from industry. The Mine Safety Review underway at Grasberg is part of this amelioration.
FCX shares were down 2.31% Thursday May 23, their largest day's drop in months. For comparison, Southern Copper (SCCO) was down 3.12% and the Copper ETF (JJC) fell 1.77%. It was a bad day for large miners generally as Rio Tinto (RIO) fell 1.56% and Vale (VALE) dropped 2.32%, identical to FCX. On Friday, FCX's 1.51% fall was the same as RIO's whose problems are Mongolian politics as well as concerns about slowing growth in China. Investors or fund managers that over-react to the events at Grasberg or to the momentary drain on FCX's cash balance create buying opportunities for those with a larger view.
The vote of McMoRan Exploration's (MMR) shareholders on their acquisition by FCX is scheduled for June 3: the deal is expected to be formalized that evening. FCX is ready to direct its substantial resources and access to credit for developing the oil and natural gas properties in Louisiana, Texas, California and the Gulf of its two acquisitions. Development and production at its sites at Tenke Fungurume in the Congo (56% owned by FCX) and at Grasberg will proceed and expand as recent accommodative comments by Indonesian Mining officials including Minister Mohammad S. Hidayat stated in a Reuters report April 23. I surveyed the effects on FCX outlook including supportive comments by Moise Katumbi, head of the province of Katanga, here. As for Indonesia, FCX already processes a third of its Grasberg copper at PT Smelting in East Java, the island just West of New Guinea, so concerns about export or ore concentrate, already allayed will proceed as Indonesia develops, helped by royalties ($1.3 billion/year) and technology from FCX which will bring mining up to Western standards.
Barring a significant broad-based market decline, expect share prices of FCX to rebound by mid-late June. It is a solid buy with recent upgrades to $38 by Nomura, to $40 by UBS, to $45/share by Morgan Stanley with a consensus estimate of $41.95 by ANR, Analyst Ratings Network. Unhappiness with the merger, negativity from the mine accident and slowing Chinese growth is priced in. With its 4% dividend and its immense and diversified resource and geographic base, FCX is a strong buy at current prices and should outperform peers going forward.
Additional disclosure: I own shares of FCX in a diversified hi-dividend ETF.