Freeport-McMoRan: How China Will Sink This Stock

| About: Freeport-McMoRan Inc. (FCX)
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Weather conditions appear to be disrupting Rio Tinto's (RIO) copper mining production in Australia. Reuters reports that Rio Tinto's first -quarter production down under fell by 13% to 119,500 tons. Analysts had expected Rio Tinto to dig out 140,000 tons in the first quarter; t. That means its deliveries could be off by 21,500 tons.

The reason for the drop in production was that rains disrupted mining operations in Western Australia and storms or squalls held up shipment from the ports of Dampier and Cape Lambert, Reuters reported. The news agency's analysts expect cyclones (the Australian word for hurricanes) and rains to disrupt BHP Billiton's operations in the same region. So far, BHP Billiton (BHP) has not made any announcements about its production.

The impact of this fall off in production will have on copper prices is unclear because of falling demand and growing stockpiles in China. China's rate of economic growth is slowing, and. Chinese copper demand is so slow that the metal has been piling up in Shanghai warehouses. That means the loss of all that Australian production may not be noticed.

Copper exports from other countries could easily take up the slack. Australia is the world's sixth largest copper producer. Chile, Peru, the U.S.A, Indonesia, and China itself all mine more copper than Australia does, according to the International Copper Study Group s World Copper Fact Book, so. So it should not be too hard to find additional copper to fill the demand from somewhere else.

If Australian production stays low, Freeport-McMoRan (FCX) could benefit because of its production at the Grasberg mine in Indonesia's Papua New Guinea region, which is just north of Australia. Grasberg would seem to be in a logical position to take over the slack from Australia.

Labor Troubles and Violence at Grasberg

Unfortunately, labor troubles at Grasberg have been disrupting production there in recent months. Freeport thought it had resolved the dispute, but labor unrest has flared up again over allegations of slow pay. Freeport itself could be making the situation worse by retaliating against union organizers, which is leading to more problems.

The company actually ordered a shutdown of production at Grasberg in February because of safety and security conditions, The Jakarta Globe newspaper in Indonesia reported. A union spokesman told the Globe that the real reason for the shutdown was an effort to divide union and non -union workers.

To make matters worse, there have been some allegations that union members have been trying to intimidate non-union workers. That could mean that Grasberg copper could be unavailable to fill Chinese orders because of labor troubles. The Globe reported that the labor dispute at Grasberg has not been settled, even though miners went back to work in December.

Labor troubles are not the only thing that could disrupt Freeport's operations at Grasberg. Violence seems to be on the rise in Papua, and Freeport itself appears to be one of the targets. The Globe reported that somebody shot up a convoy of Freeport cars on the road to Grasberg on Monday April 16, 2012. Nobody was hurt in the incident, but the shooters apparently got away.

Nobody knows if the shooting is related to the labor troubles or local natives that want to be independent from Indonesia. The Globe speculated that military men or police officers could be responsible. It also noted that police and soldiers receive extra pay for guarding mining operations, which could give them an incentive to take potshots at miners. An Indonesian National Police spokesman interviewed by the Globe went out of his way to deny these allegations.

Monday's attack is only the latest incident of violence on the road that links Tembagapura and Grasberg. A national police officer was shot on the same road in February and that crime has not been solved. Two Freeport employees were shot on another road in the same area in February. Their killers have not been caught either.

The Globe reported that there are concerns that police are no longer able to keep Freeport employees safe. The police have called in the Indonesian military to protect the roads. Indonesia soldiers did come to the aid of the convoy that was shot up on Monday.

Freeport is not the only target of violence in Papua. Somebody fired machine guns at an airliner that was flying over the region on Sunday April 8. One of the passengers on board the plane was killed by the gunfire. This attack could be bad news for Freeport McMoRan because it may have been the work of armed rebels.

The general in charge of Indonesia's State Intelligence Agency (or BIN) told reporters that a rebel group called the Free Papua Organization (or OPM) was responsible for the attack. General Marciano Norman not only said the OPM was responsible, but he also even told reporters that he thinks the OPM is conducting a guerrilla war on Papua's West coast. The Jakarta Globe reported that Norman actually said that an OPM leader named Goliath Tabuni was still hiding out in the forests and conducting guerrilla warfare.

There is no evidence that either the OPM or Goliath Tabuni were involved in the attack on the Freeport convoy near Grasberg. Gunmen have targeted Freeport workers in the past in December; somebody shot at a plane carrying Freeport workers.

It is hard to see how Freeport could keep up production at Grasberg if a full -scale guerrilla war breaks out in Papua. Rebels might target the mine to put pressure on Indonesia's government, which needs the revenue that it generates.

Freeport did shut down production at Grasberg in February after the last spate of shootings there. The Jakarta Globe reported that one of the reasons the company cited for shutting down production was security concerns. It did not say what the security concerns were, but they might have been fear of an attack on the operation.

It seems that violence and labor troubles are disrupting Freeport's Grasberg operations. Whether this will lead to drops in production like the ones that were seen at Rio Tinto's Australian operations is hard to determine.

It is also unclear what effect the violence and labor troubles will have on Freeport's plans to spend $1.3 billion to expand underground mining at Grasberg. Current plans call for Freeport to go underground at Grasberg by 2016. Freeport itself seems to have some doubts about Grasberg's future.

Last April, Freeport CEO Richard Adkerson told analysts that Freeport may continue open pit operations at Grasberg beyond 2016 rather than shut them down as planned, Reuters reported. Freeport is also continuing with efforts to develop the Tenke Fungurume project in the Congo, which is reportedly the world's largest copper project.

The fall in Australian copper production could be an opportunity for Freeport. Unfortunately, problems at Grasberg could mean that Freeport is not in a position to take advantage of that opportunity. It also remains to be seen if the fall in Australian production will affect copper prices.

The slowing Chinese economy could mean that there is no market for the additional copper. That calls all of the recent efforts by major copper producers, including Freeport, to increase production and open up new mines into question. It should also remind us that mining companies are always vulnerable to outside forces, including weather, politics, and labor problems, over which they have little or no control.

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