These Mining Stocks Could Sink On Executive Pay Outrage

Includes: BHP, FCX, RIO
by: Stock Croc

Freeport-McMoRan (NYSE:FCX) CEO Richard Adkerson had a very good year in 2011. His take home pay for the year was $69 million, according to the Arizona Republic newspaper. That means Adkerson effectively received a $33.7 million raise in 2011, as his pay in 2010 was $35.3 million. Most of the reimbursement came in the form of stock options.

The Phoenix Business Journal also noted that Freeport's Chairman James Moffett was paid $31 million in 2011. The Journal also found that Mr. Adkerson and Mr. Moffett both receive some very expensive perks from the company. Moffett spent $348,000 on aircraft and $176,000 on cars and security in 2011. Adkerson spent $238,000 on private jets and $164,500 on cars and security.

A Freeport Spokesman, Eric Kinneberg, defended Mr. Adkerson's salary as justified under the company's pay for performance philosophy. Adkerson is 18 on Forbes magazine's list of highest paid CEOs in the U.S.

If this wasn't enough, Adkerson, Moffett and Chief Financial Officer [CFO] Kathleen Quick have some great golden parachutes. If Freeport gets bought out by a rival such as BHP Billiton (NYSE:BHP), Adkerson and Moffett would likely each receive $61 million if they were replaced.

Such revelations about executive pay and exit plans could have a very negative effect on stock value. Investors are likely to view Adkerson, Moffett and Quick as cashing out rather than running the company, now that copper prices and demand for copper is falling, and the company is having serious troubles in Indonesia. This definitely sends the wrong signal to investors.

To make matters worse these three could quickly sink Freeport's stock value if they tried to sell all of those options off quickly. Large scale sales of Freeport's options would definitely send its stock value down.

More Labor Troubles at Grasberg Mine

Freeport's stock value could take another hit in June because workers at its mammoth Grasbreg mine in Indonesia are planning yet another protest. Workers are planning to demonstrate sometime in June, a union spokesman told Reuters. The miners will be demonstrating because of the firing of three employees for fighting and security problems at the mine.

The union is worried about security, because of the increase of shootings around the mine in Papua, New Guinea. In recent months, gunmen identified as rebels fighting for independence have been taking potshots at Freeport vehicles, planes and employees. Reuters revealed that at least 50 people have been killed in violence at Grasberg since 2009.

This news could really hurt Freeport badly, because a strike shut Grasberg down for three months last year. Escalating violence could also eat into Freeport's profits and dividends because of higher security costs. That means Freeport could see another quarter with falling profits.

The news about Mr. Adkerson's salary is liable to make the situation at Grasberg worse. The workers there only receive a few dollars an hour, even with raises granted after their last strike. If the workers see stories about executive pay, they could be inspired to strike again. The worst case scenario would be a rebel attack on Grasberg followed by a strike. That could send Freeport's share prices down by several dollars.

Looking back to executive pay, it is possible that this issues could also hit mining giants such as Billiton, Rio Tinto (NYSE:RIO) and Anglo American (NASDAQ:AAL). The Financial Times reported that major institutional fund managers were among the shareholders. The fall in commodities prices and the $500 million in losses at Billiton in recent months could drive pay outrage among investors in these companies.

Based on Freeport's CEO pay and the Grasberg mine issues, I would recommend staying away from this stock at this time.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.