Freeport-McMoRan's (FCX) CEO went out of his way recently to tell reporters and analysts that the situation at his company's gigantic Grasberg mine in Indonesia is "stabilizing." During the company's first-quarter conference call, Richard Adkerson said that production at Grasberg is up and labor relations are improved, the Wall Street Journal reported.
Adkerson didn't say that things were back to normal at Grasberg, or that production was back to normal. Instead, he just said, "We are seeing progress in returning to normal operations." Adkerson was addressing labor troubles at the massive copper and gold mine in Papua, New Guinea, that led to a three-week shutdown in March and a three-month strike last year. The troubles involve demands for wage increases and claims that miners have not received pay. Freeport is now milling around 200,000 tons of ore a day at Grasberg. This is a 50,000-ton a day increase. The rate had fallen to 150,000 tons a day because of the labor troubles there.
One issue Adkerson didn't address was violence in the area around Grasberg. The Jakarta Globe, an Indonesian newspaper, has reported that gunmen suspected of being local rebels are shooting at Freeport aircraft and convoys on roads in the area. Indonesian police haven't been able to deal with the situation and have had to call in the nation's army for help. The level of violence could be worse than has been reported elsewhere. The Huffington Post's Michelle Chen reports that there have 15 shooting deaths at Grasberg since 2009. The CEO didn't say what Freeport plans to do if the violence escalates or the guerrillas start attacking the mining operations at Grasberg.
Violence Costs at Grasberg
Freeport itself is certainly aware of the violence. The company reportedly spent $28 million on a security force designed to protect the mine in 2010, up from $22 million in 2009. It also paid the Indonesian national police force another $14 million for the Police Mobile Brigade, a paramilitary force that protects the mines, according to the Asia Times.
That means security is actually one of the fastest growing costs at Grasberg. If the Asia Times figures are true, it means total security costs at the mine in 2010 were $42 million. It also indicates that costs rose by $6 million in 2010 alone. So, the cost of mining in Indonesia is much higher than we thought.
Indonesian Military Could Be Behind Grasberg "Strike"
There is also another side to the labor troubles that sympathetic Western reporters may be ignoring. A reporter for the Asia Times newspaper published an article that hinted that the strike was really organized by Indonesia's army rather than disgruntled miners. There seems to be more to the strike and the labor unrest at Grasberg than meets the eye. Asia Times correspondent John McBeth reports that the leader of the strike is a mysterious character named Sudiro who claims to be a humble mechanic. Sudiro took over the union local at Grasberg in September, right before the strike.
Even though some Western journalists seem to be buying his story, Sudiro sounds more like a secret agent than a labor activist. Sudiro is the son of an influential navy officer who was part of the inner circle of Indonesia's long time dictator, Suharto, McBeth noted. Sudiro is also supposed to be a close friend of General Pramono Edhie Wibowo, the current chief of staff of the Indonesian army. The general reportedly visited Timika where Sudiro lives right before the strike started. If this wasn't enough, McBeth's article notes that Sudiro might have once trained with the Indonesian army's Special Forces.
This could indicate that the Indonesian army and not disgruntled workers is actually behind the strike. It is also an interesting coincidence that the so-called strike occurred just as Freeport started negotiating with the Indonesian government for a new contract.
It should also be noted here that the union at Grasberg, the SPSI, was actually organized by the Indonesian government during the Suharto dictatorship in 1977. So the real cause of this strike could be in politics in Indonesia's capital, Jakharta, rather than the workers' anger over low wages as has been reported. McBeth speculated that the Indonesian army may have started the labor troubles because it is angry that it lost lucrative security contracts at Grasberg to the national police in the early 21st century.
Losses Affect Entire Company
The troubles at Grasberg are certainly affecting Freeport's overall operations. The Journal reported that the company's copper sales fell by 11% in the past year. Gold sales fell by 40% in the last year, so the problems there are having an impact.
One factor that Adkerson doesn't think will affect Freeport's operations is a new Indonesian law that requires foreign operations in the nation to have a majority local ownership. He thinks an agreement the company has made to sell 9.36% of its operations there to an Indonesian national will settle that issue. So far, this sale has not taken place.
Despite the troubles in Indonesia, I believe Freeport will maintain its composure and stay focused on its operations. I recommend buying this stock while keeping an eye on any new developments surrounding Grasberg.
Southern Copper Planning Big Gold and Silver Project in Chile
Southern Copper (SCCO) is reportedly planning a big new silver and gold mine in northern Chile. U.S. media sources indicate that the Pulso newspaper in Chile is reporting that Southern's President Oscar Gonzalez Rocha said his company plans to spend $1 billion on the Cantanave project, which would be located in the Parinacota region in Northern Chile.
No time table on when work on the project would begin was apparently available. Some news reports indicate that Southern's management could make a decision sometime in the second quarter of 2012. If it's built, Cantanave would be the seventh project that Southern is trying to develop in the region. Based on this information, I recommend investors buy this stock with the willingness to hold through 2013 as more information surrounding this news surfaces. Looking at Southern Copper's past success, this $1 billion investment could pay off big in the long term.
Copper Production Falling
Labor troubles, problems at mines, and a decline in the supply of high-grade copper ore have caused the world's supply of the metal to fall to a four-year low, two Barclays Capital analysts told Bloomberg Business Week. The world's copper stockpiles will only be able to meet 2.7 weeks of demand by the end of the year if the present problems continue, Gayle Berry and Nicholas Snowdon told Bloomberg. The two think that this situation will be sufficient to raise copper prices from the $8,300 a ton average in the first quarter to $9,300 a ton in the fourth quarter.
Freeport's problems at Grasberg were among the many factors the analysts cited as evidence to verify their predictions. They also noted that production at the Kennecott Union copper mine in Utah had dropped by 18% in the first quarter. Kennecott is owned by Rio Tinto (RIO).
Berry and Snowdon's prediction is based on increased demand for copper from China and other countries. So far, China's demand for copper seems to have fallen off this year, and there is no indication that it will rebound any time soon.
The CEO of the world's largest copper producer, Codelco, doesn't agree with them. In mid-April 17, Diego Herandez said that he expects copper supply to exceed demand by 2017 because of the increased production in Peru and Chile, Business Week noted. Codelco, the Chilean government's copper company, is among many producers that are expanding production.
Vale Could Be Moving Into Rare Earth Business
Vale (VALE) is planning to enter the rare earth business. Reuters reported that the company is trying to get a contract to supply Brazil's government oil company Petrobras (PBR) with a rare earth called lanthanum oxide. Petrobras currently buys the earth from China.
According to Reuters, Vale wants to supply Petrobras with 900 tons of lanthanum oxide a year. Lanthanum oxide is a chemical used a catalyst in the refining of crude of oil into gasoline. An anonymous source quoted by Reuters said Petrobras currently pays about $50,000 a ton for Lanthanum oxide. Vale plans to charge around $20,000 a ton so the deal could be worth about $180 million a year.
The rare earth would come from either Araxa in Brazil's Minas Gerias state or Catalo in Brazil's Goias state. Reuters reported that Vale purchased large deposits of rare earths in both locations from Bunge Limited (BG). Vale has not yet begun mining or production of rare earth.
The Reuters story also states that Vale and Petrobras are studying the possibility of exporting large amounts of rare earths. The money from the Petrobras deal would be used to finance the new rare earth business. Currently China is the world's largest producer of rare earths and there has been some concern about one nation controlling the supply.
No time line for this deal or the beginning of production has been mentioned. If these reports are true, rare earths could be an interesting new profit center for Vale. I believe this could end up providing a big boost for Vale, especially if speculation on rare earths becomes rampant. I recommend investors take a position in Vale now, and adjust as more information surrounding Vale's move into rare earths comes to light.