Avoid Freeport; Buy Barrick, Billiton Instead

Includes: ABX, AEM, AU, BHP, RBYCF
by: Cris Frangold

Freeport McMoRan (NYSE:FCX) may be a major competitor in the mining industry, but it is still having problems with its miners in Indonesia as they get ready for a demonstration in June. It is worthwhile to quickly consider the background of the events in Indonesia.

Much violence has surrounded the company's Grasberg mine. In the middle of May, Freeport expressed concern about the situation. The company entered into a discussion with the Jakarta government about a plan to limit foreign miners' operations and profits. It hoped to resolve the situation peacefully. The biggest concern was the integrity of the mine.

Acts of violence and vandalism were perpetuated against the mine, which impacted production in the area. At the same time, the company had to deal with a strike, leading it to declare a force majeure. This released Freeport from all contractual obligations due to events beyond its control. The strike led to further damage on the mine and a great deal of unrest in the workforce. Worsening the company's situation were the new bans imposed by the Indonesian government. All of this made the Grasberg mine a point of concern for investors in Freeport stock, and the issue needs to be properly resolved to restore investor confidence.

Now, miners in Indonesia plan to demonstrate in June. This is something that will only add to the stress that the mining company has already been facing. According to the miner's union, the planned demonstration is responding to the dismissal of three employees and the security problems that are apparently plaguing the mine. The three employees were supposedly dismissed in a way that is not in accordance with procedure, angering the miners that were left behind. The security problems are specifically related to the frequent shootings that occur near the mine as part of the daily violence that plagues Indonesia. The workers feel that their lives are in danger and that Freeport is not doing enough to protect them from this violence.

At this point, we do not know any details about the planned protest. This is far from ideal. If we knew the specifics, we would have a better idea about how the demonstration will affect the mining stock. As things stand, however, we will simply have to wait and see what happens. We do know that the last strike, which is the longest strike ever recorded, hit the company hard in financial terms. The last strike caused an increase in copper prices across the board, and if the miners have the same effect this time, it could take a while for Freeport to recover from the situation. At this point, we have not heard much from the company, so we have yet to learn what Freeport's concerns are.

From my point of view, Freeport needs to either find a way to prevent these upheavals from occurring or get out of Indonesia altogether. Too many negative events have been adding together, having a harmful effect on the company. As a result, Freeport stock will likely continue to drop as concern continues to grow.

In contrast to Freeport's struggles, Barrick Gold (NYSE:ABX) has good ideas for moving forward in the mining industry. For one thing, the company has chosen to focus on its existing pipeline of resources instead of making acquisitions, which goes against the recent trend from other companies. Barrick is focusing its energy on profitable ventures such as its Cortez mine in Nevada, and it recently announced its intention to purchase land from Victoria Gold. This purchase will extend the Cortez project by about 7000 acres. I think this may be a winning strategy to adopt in the present climate, and I believe Barrick stock will be improving as a result.

Bad press generally has a bad effect on a stock, even if it is not necessarily a direct reflection on that stock. A Freeport competitor may be facing this situation. An 18 year old was shot and killed at an AngloGold Ashanti (NYSE:AU) mine in Geita, and this could cause problems for the mining company. For example, it may raise questions about whether or not the company operates in accordance with human rights requirements. Investigations have been launched internally and externally, and the investors certainly hope these will lead nowhere. This is still bad press for the company though, so I expect AngloGold Ashanti stock to be decreasing in the near future.

Another competitor has recently made a very interesting move that requires a lot of attention from its stockholders. Agnico-Eagle Mines (NYSE:AEM) has rid itself of a substantial portion of its shares in Rubicon Minerals (RBY). This could explain why there was a spike in trading of Rubicon shares recently, but a direct correlation cannot be officially drawn. The situation is a mysterious one, as shareholders have absolutely no idea why the company would have done this. No details are available at the moment, but we can only hope that Agnico-Eagle will shed some light on the situation. Stockholders need to know the company's rationale, and until this becomes clearer, the stock may be going down a little.

BHP Billiton (NYSE:BHP) is facing better news, as the expansion of the Olympic dam project will not be delayed. This is a significant project for the company, so this is definitely good news. There seem to be a number of concerns about the dam project, however, that have yet to be resolved. One specific thing that has caused concern for investors is that BHP Billiton recently backed away from $80 billion worth of projects, citing financial reasons. Regardless, this good news will have a positive impact on the stock. The continued concerns will simply limit this impact.

Barrick and BHP Billiton appear to be decent stocks to back at the moment. In contrast, Freeport may be the worst of the company's I have mentioned. The issues in Indonesia continue to escalate and harm the company, and since there are few details about the upcoming demonstration, the uncertainty will work against the stock. I think Freeport stock will be decreasing already, and if things go badly with the demonstration, there may be even bigger losses in the future.

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

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