Freeport-McMoRan Solves The Strike Issue Before Losing Billions

| About: Freeport-McMoRan Inc. (FCX)
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Back in April, Freeport-McMoRan (NYSE:FCX) was again hit by another labor strike issue at its Grasberg mine. The workers staged a one-month strike over unresolved disputes regarding compensation. The workers' salaries are allegedly below the minimum wage and they are demanding a 37% increase within two years. The company's gold and copper production will probably decrease slightly. To estimate how the strike affected Freeport-McMoRan, there are several factors to consider including the number of workers involved. First, it is better to look at the background on the strike.

Background on Strike

According to the Reuters, there were about 1,130 workers on strike coming from three different contractor companies. The problem with Freeport-McMoRan is that the company is not in control over the situation since the workers are not directly employed. They are also not direct contractual workers of the company. However, as a principal company it can greatly help in resolving the issue. But it can only go as far as provide guidance and recommendations to the contractor companies.

While the company said that the strike may slow down the operation, it sees no direct impact on its production. Nonetheless, given its painful experience from past strikes, Freeport-McMoRan moved very fast to solve the issue.


Last week, a Reuters report suggested that the strike has ended with a settlement. According to the report, the workers from the three contractor companies ended their work stoppage at the world's second-largest copper mine. While the details about payment issues are not given, that was a wise move from Freeport-McMoRan's side.

This is not the first time that Freeport-McMoRan's Grasberg mine is hit by a labor strike. Sometime in 2011, the company also faced a labor strike issue that lasted for about three months. As a result, gold and copper production was down 15%. Indonesia lost about $1.5 billion opportunity income from taxes.

Copper and Gold Production: Output and Estimates

During the first quarter of 2013, Freeport-McMoRan reported consolidated copper sales of 954 million recoverable pounds. This is remarkably higher than the 827 million pounds it produced during the same quarter of 2012. Likewise, its molybdenum production grew from 21 million pounds to 25 million pounds during the comparable periods. In contrast, gold sales declined from 230,000 ounces during the first quarter of 2012 to only 214,000 ounces last quarter.

Annually, the company saw an 8.3% increase in copper production for the year 2012 compared with the previous year. It was able to produce 1.363 billion pounds of copper, up from 1.258 billion pounds it produced in 2011. Molybdenum production also slightly increased from 35 million pounds to 36 million pounds in 2011 and 2012, respectively.

Freeport-McMoRan projected the sales of copper and gold this year at 4.2 billion pounds and 1.4 million ounces, respectively. These are relatively aggressive estimates with 18% growth on copper and 37% growth on gold. The estimates for copper were based on expected increased access to higher grade ore at Indonesia and South America.

For gold, the company's higher projection is based on expected access to higher ore grades in Grasberg under normal operation. But with the current depressed gold prices, it is now unsure if Freeport-McMoRan will be able to hit its estimates.

Nevertheless, even if there are slight misses, the company could still end better this year over last year. As the labor problem is quickly resolved, the impact will not be serious, and it may not even cause significant effect on the company's estimates.

Acquisition Strategy

Freeport-McMoRan is a well diversified company. While its main business is in copper and gold mining, it has expanded to other industries. The diversification strategy provides a cushion for the company from the impact of major industry changes and movements.

Recently, the company announced its planned acquisition of Plains Exploration & Production Company (NYSE:PXP). This planned venture will cost around $7 billion. Apparently the board of PXP is very supportive of the merger. Plains Exploration & Production is an energy company that is involved in the upstream gas and oil business. The upstream business engages in the exploration, acquisition, development, and production of gas and oil.

In another announcement, Freeport-McMoRan also plans to acquire McMoRan Exploration (NYSE:MMR). This is an independent company that is engaged in oil and gas exploration, development, and production. The main areas of operation of McMoRan Exploration are in the Gulf Coast areas. It also operates in the shallow waters of the Gulf of Mexico shelf. The acquisition will probably cost around $3.5 billion. Freeport McMoRan expects to finalize this deal in the second quarter of this year.

All in all, the company's planned expansion projects would require capital expenditures of no less than $10 billion. The funds will be sourced through debt and financing. On February 19, the company was able to secure a term loan of $4 billion to finance the acquisition. It was also able to acquire a $3 billion revolving credit facility.

On March 29, Freeport-McMoRan along with Tenke Fungurume Mining completed the acquisition of the Kokkola Cobalt Refinery. The acquisition amount was approximately $334 million. While this is a joint venture, FCX will have 70% ownership; the remaining 30% is owned by Lundin Mining Corporation.

The above data shows the strength of the company and its well-expanded presence in different segments of the industry. It is one of the key players in the industry with market capitalization of $28.8 billion. Freeport-McMoRan is the largest publicly traded copper and molybdenum producer. It is one of the leading gold miners, as well. Its Grasberg mine is considered one of the largest gold and copper mines across the globe with respect to recoverable reserves.

The past and potential future labor strikes may slow down its operations, but it will definitely not stop Freeport-McMoRan from producing copper and gold. However, the depressed gold prices might negatively affect the gold production estimates.

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

Business relationship disclosure: Efsinvestment is a team of analysts. This article was written by one of our equity analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.