Freeport-McMoran on Copper and China

by: Judy Weil

Freeport-McMoran Copper & Gold Inc. (NYSE:CNI) wrote off nearly $14 billion this quarter, mainly on its acquisition of Phelps-Dodge. But investors were cheered that Freeport seems to be taking a big dose of medicine now, and hopefully none will have to be taken later.

The mining company is banking on good gold sales in 2009 and 2010, but investors might want to consider what Freeport has to say about copper. Copper prices fell by 50% during the quarter, and Freeport cut production and costs. Yet the company expects copper will be a source of growth.

From Freeport-McMoran Copper & Gold Inc.’s Q408 conference call: (NYSE:FCX)

Our sales for the fourth quarter totaled 1.2 billion pounds of copper. For the year, we sold 4.1 billion pounds of copper... Copper sales that were priced at $2.89 at the end of September… Copper was $1.38 at January 23... Our recorded prices for the quarter averaged $1.55 per pound. These were approximately 50% lower than then fourth quarter of 2007... Copper inventories have risen.

We will have reduced volumes of copper sales and molybdenum sales in 2009, 2010 compared with where we were at the end of third quarter. Fourth quarter, by the way, was a record quarter for the combined companies [Freeport-McMoran and acquisition Phelps-Dodge] in terms of copper production… We currently estimate that we’ll produce 9% less copper in 2009, 17% less in 2010.

But demand will not wane:

Copper will respond to global economic conditions and the continued development of infrastructure in China and elsewhere around the world.

The basic problem [is that] the industry is challenged to find new supplies of copper… Copper that is being produced from existing mines is being limited by falling grades and operational issues and other factors… Even though we’ve written down the cost we have the same assets that we had; we haven’t walked away from any of our resources or any of our… long run [growth] outlook for copper and molybdenum.

Q: China is going to be the long term driver for copper recovery. Currently are you seeing any sign of China buying into the copper market or do you think that it’s completely plateaued right now and they are not doing anything?

A: China’s growth rates are down but the fourth quarter GNP was in the range of 7%. [But] 7% growth that involves copper use and they’re investing in infrastructure. They’ve had announced plans to continue to invest. They have the resources to do it. And I’m confident that they will continue to do it… Clearly China is going to be the key factor near term in terms of copper markets. And they’re doing activities within their country that’s going to consume copper.


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