The international mining company Freeport-McMoRan (FCX) has really struggled over the past year, with its volatile stock dropping from the mid $50 per share range last July to its current price of about $32 per share. In that time, Freeport-McMoRan saw its stock drop lower than $29 per share in large part due to global economic frailty.
With the global economic struggles continuing, it does not appear Freeport-McMoRan will turn around any time soon. As over 70 percent of its revenue comes from copper, Freeport-McMoRan will continue to struggle as the world demand for copper continues to drop. The price of copper in India has dropped due to lower demand that originated from a slump in industrial production.
Similarly, the sluggish economic outlook of China, which largely determines the global price of copper by the amount it demands, has started to lead to less copper demand. However, CEO Richard Adkerson cited a Brook Hunt report that shows Chinese copper demand should grow from 9 million tons this past year, to 16.4 million tons in 2025. While this would be great news for investors, unless the global economy turns around, this seems an unlikely reality.
Naturally, lower prices and demand for its main product leads to lower revenues for Freeport-McMoRan. Unless the copper market turns around, Freeport-McMoRan may have trouble sustaining its business, just like any consumer goods company would if its most popular product became obsolete.
Freeport-McMoRan is boosting the exploration of the areas near its current mines in order to increase production capacity and in turn grow future revenues. However, in the near term, the company is confronted with higher costs from copper production and lower demands at the same time. This potential continued increased costs and loss of demand for its main product is the first reason I do not recommend buying stock in Freeport-McMoRan.
Freeport-McMoRan production in Asia is facing further issues as well. Violence at Freeport-McMoRan's largest producer and asset, Grasberg copper and gold mine in Papua, New Guinea, may disrupt production and in turn allow Freeport-McMoRan's stock price to plummet. CEO Adkerson admitted concern over the violence, which appears to be about Papau, New Guniea's independence from Indonesia.
Since Grasberg mine is Freeport-McMoRan's largest producer, letting this situation get out of hand can seriously hurt the value of the company. If production is forced to halt, Freeport-McMoRan will be forced to completely overhaul their business model so they can stay profitable. Managements unwillingness to make their plan of action public leads me to believe the situation may be worse than they are willing to admit.
On the other hand, halted production due to violence may not be managements largest concern, with Grasberg mine workers planning a demonstration for later in June. They plan to protest, in which they will completely stop work, over the dismissal of certain employees and security problems.
Yet another problem faces Freeport-McMoRan, this one in the form of the Indonesian government. Its government is putting strict restrictions on the mining industry, including limiting mineral imports to 2009 levels. Furthermore, it is implementing a 20 percent tariff on exports of metal orders. Perhaps the most significant new regulation is one that will force foreign mining companies to sell Indonesian operations to local owners after ten years of business.
Whether or not the Indonesian government will successfully implement these restrictions, this market, in which Freeport-McMoRan is so invested, seems to be moving in the wrong direction given that strikes and violence are prevalent. These issues in Asia are another reason that I do not recommend investing in Freeport-McMoRan.
Similarly to Freeport-McMoRan's problems in Indonesia, AngloGold Ashanti (AU) has a similar violence problem in the Democratic Republic of Congo. Rebels are mining for gold in the same location AngloGold Ashanti would like to build a gold mine. The rebels, who are armed and organized, seem intent on not moving. With up to as many as 200,000 rebels, it seems likely AngloGold Ashanti would need an army to remove them. This would be very costly for AngloGold Ashanti and this situation could result in damaging AngloGold's gold mining production plans.
However, AngloGold Ashanti, Barrick Gold (ABX), and Resolute Mining are benefiting from increased gold production in Tanzania. Production is up 13% in Tanzania, which has produced 40.4 tons of gold in the past fiscal year. This will definitely help increase the value of these companies through higher production and revenue numbers. This increase in gold production may lead to an especially welcome future boost in stock price for Barrick Gold, since it dipped to its 52-week low very recently.
One mining company that seems to be in more trouble than Freeport-McMoRan is Vale. Currently sitting at its 52-week low, Vale recently was presented with health and safety charges over the deaths of two workers in a Canadian mine. In my opinion, this type of publicity can be damaging to a point that is irreversible. Furthermore, Vale declared force majeure at an Australian coal mine, which completely shut down production.
Vale is facing some of the negative turns that this industry is prone to. The company will do its best to bounce back but that process could be slow. Freeport McMoRan and others are poised to pick up some market share as they can speed past Vale, but that shouldn't be any kind of boost for its stock or profit margin.
In summary, there are many problems facing the mining industry. Between violent conflicts and the struggling global economy, I cannot recommend investing in the mining industry at the moment. Freeport-McMoRan, more specifically, is a company I would not invest in, although you could do worse within the mining industry.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.