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Posts Tagged ‘Freeport-McMoran’

Mining Week 51/’11: Grasberg back in business

December 18, 2011 Comments off

Top Stories of the Week:

  • Freeport McMoran strikes deal on Grasberg
    • Freeport reached a two year extension of the collective labor agreement at its Indonesian Grasberg mine after a 3-month strike. The new agreement holds a 40% wage increase over 2 years, improved benefits, and the promise to base wage future negotiations on cost of living and competitor benchmarks.
    • Only days after the announcement of the agreement a helicopter transporting Freeport’s workers was shot at close to the mine, wounding one person.
    • Sources: Freeport McMoran press release; Wall Street Journal; Financial Times
  • Further coal consolidation in Australia
    • Less than a year after being put up for sale and then declining all offers made Whitehaven teamed up with Aston Resources to create the largest listed coal mining company in Australia with $5.1bln market value. The deal is structured as a shares only acquisition of Aston by Whitehaven.
    • Sources: Financial Times; Whitehaven merger documentation
  • Anglo reassured in South African court
    • The South African court ruled that the department of mines had no right to grant the mining rights of Sishen iron ore mine in the country to a junior mining company with strong ties to some influential politicians, but that instead the Kumba Iron Ore holds the rights to the mine. Kumba is majority owned by Anglo American.
    • Sources: Anglo American press release; Financial Times; Wall Street Journal

    Trends & Implications:

    • The coal mining industry in Australia is still relatively fragmented, with both the diversified supermajors and many domestic listed and unlisted companies active in the industry. Because the mining districts are much less concentrated than the iron ore or gold districts of the country it is harder to achieve economies of scale that would justify many mergers. The deals taken place are mainly based on transportation and sales negotiation synergies.
    • The Wall Street Journal published a good, readable, article this week describing the developments in the mining industry, signaling the combination of two key drivers this year: declining prices, and increasing costs. The resulting low margins will move the focus of many mining companies in the coming years to cost control. However, the winners of this cycle will be the companies that manage to invest during this period with lower profits to build capacity that will make them benefit from the structural increase in prices that will be caused by the structural price increases in the industry. Clearly not all cost increases are structural: equipment and contractor scarcity is mainly a temporary result of an overheated industry; but cost increases resulting from the move to harder forms of mining will stick.

    ©2011 | Wilfred Visser | thebusinessofmining.com

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Strike Begins at Freeport Indonesia

September 16, 2011 Comments off

“Freeport-McMoRan Copper & Gold Inc.’s Indonesia unit suspended mining operations at its Grasberg mine in West Papua on Thursday, as workers started a strike that could last a month, a labor union spokesman said. ‘All of the mining operations, except for the public facilities, are shut down,’ Juli Parrorongan told Dow Jones Newswires in a text message. All workers at the mine are participating in the strike, which will last until Oct. 15 if the company refuses their demand for higher pay, Mr. Parrorongan said.

Freeport suspended operations during a weeklong strike at Grasberg in July and lost about 35 million pounds of copper and 60,000 ounces of gold output. ‘We are disappointed that union workers decided to implement an illegal work stoppage,’ PT Freeport Indonesia, which is 90.64% owned by Freeport-McMoRan, said in a statement. The company said that since July 20, it ‘has negotiated in a diligent good-faith manner’ with the union toward a collective labor agreement to cover 2011-13.”

Source: Wall Street Journal, September 15 2011

Observations:

  • Grasberg forecasted 2011 total mine sales of 1 billion pounds of copper and 1.3 million troy ounces of gold, representing approximately 3.1% of global copper production and 1.5% of global gold production.
  • Current negotiations started after an 8-day strike in July. Freeport offers a 22% wage increase over 2 years, but unions demand an increase of salaries by more than 100%.

Implications:

  • Copper price has been relatively stable for the year to date, but the news of the strike at Grasberg coincides with reports of falling production in Chile and increased buying by Chinese traders, potentially leading to a new price rally.
  • Several analysts still expect a modest global copper supply increase for the year. However, if strikes spread to other mines supply for the year might actually decrease for the first time in about a decade. Global production has almost doubled in the past 20 years, only experiencing a short stabilization in 2002-2003.

©2011 | Wilfred Visser | thebusinessofmining.com

Freeport confident of copper boom

July 25, 2011 Comments off

“Freeport McMoran, the world’s biggest publicly traded copper producer, has predicted strong markets that could push its cash flow as high as $9bn this year compared with $6.3bn in 2010. The financial strength of Freeport, which declared a special dividend last year to clear excess cash, reflected even higher demand for copper and gold this year than last.

Richard Adkerson, Freeport’s chief executive, said destocking of copper inventories in China was helping to support the copper price. He noted China’s efforts to cool the economy but said: ‘There is a tremendous amount of spending on infrastructure and housing. China has the financial resources to continue to invest in the face of global economic conditions.’”

Source: Financial Times, July 21 2011

Observations:

  • Freeport says it is spending money as aggressively as possible to expand (planning to spend $2.6bln on capex this year), but still this year’s gold production is forecasted to be lower than last year’s output while copper output is increasing marginally.
  • Mr. Adkerson mentions rising input costs, caused by high demand, as the key issue the industry will face over the coming years.

Implications:

  • The industry is facing rising input costs for fuel, power, labour & equipment while average grades of many flagship operations are falling. As a result both mining and processing costs per unit of product increase rapidly, supporting high commodity prices.
  • Mining contractors and equipment manufacturers are faring well as mining companies face resource shortages (Caterpillar announced a 44% increase in profits this week). Miners are forced to pay high prices and book equipment and contracted services months in advance because of global shortages.

©2011 | Wilfred Visser | thebusinessofmining.com

Mining sector feels heat as Peru turns left

June 8, 2011 Comments off

“Shares in mining companies operating in Peru fell sharply on Monday after a leftwing former coup leader won a narrow victory in the country’s presidential election. Grupo Mexico, a metals mining company with operations in Peru, fell 8 per cent in New York trading. Hochschild, a silver miner, and Southern Copper Corp, tumbled 5 per cent and 11.3 per cent respectively. Shares in Xstrata, which is building one of Peru’s biggest mines, were off 0.86 per cent, while Volcan Compañía Minera, in which Glencore has a stake, fell 8 per cent.

Ollanta Humala’s victory has provoked widespread fears he would lead a wave of nationalisations and higher taxes on foreign companies. Mr Humala has suggested Peru could impose a windfall tax of up to 40 per cent on mining companies, and also raise the 30 per cent rate that miners currently pay. Trading was suspended after Peru’s stock market plunged more than 12 per cent. The precipitous fall dragged down other markets from Chile to Mexico. BHP Billiton, Rio Tinto and Anglo American, none of which have Peruvian operations, escaped the sell-off.”

Source: Wall Street Journal, June 7 2011

Observations:

  • Current corporate tax rate for miners in Peru is 30% + 3% royalties/duties + 4.1% on dividends, which is below international benchmarks (see PWC Global mining tax comparison for details)
  • The most active international mining companies in Peru are Xstrata, Newmont, Freeport-McMoran, and First Quantum. The effect of the election results on the stock price of Newmont is displayed below, showing a sudden 2% loss vs. other gold miners.

Implications:

  • The average stock price decrease of around 10% of Peruvian companies reflects the risk of a tax increase. As the market value is the market’s expectations of future profits, the 10% increase corresponds well with a high likelihood of an approximate 10% tax increase (i.e. 10% after-tax profit reduction) plus the additional risk of increased government control.
  • Besides the risk of tax increase and increased government control, foreign companies face the risk of rapid employment cost increases as the new government will quickly try to make a mark in supporting wage increases.

©2011 | Wilfred Visser | thebusinessofmining.com

Copper wars: Lundin deciding on sale

May 13, 2011 Comments off

“Lundin Mining Corp. expects to say by the end of May whether it can reach a deal for the sale of the company as a whole or for the sale of individual assets. ‘We should be in a position…to give some indication (by the end of this month) in terms…of whether a transaction is likely to arise or not,’ Chief Executive Phil Wright said on a conference call Wednesday, following the release late Tuesday of the copper miner’s first-quarter results.
Lundin reported higher year-over-year earnings, but they still fell short of expectations as sales suffered from shipping disruptions. Toronto-based Lundin effectively put itself up for sale at the end of March, after a bid by Equinox Minerals Ltd. scotched plans for a merger with Inmet. Barrick Gold Corp. then agreed to buy Equinox, but Lundin executives said at the time they would continue to seek a buyer. Lundin is open to proposals to either sell the company outright or to sell off its assets piecemeal. But a sale or breakup of Lundin is ‘not a certainty,’ Mr. Wright said Wednesday.”

Source: Wall Street Journal, May 11 2011

Observations:

  • Lundin management is considering options to sell the company after they did not succeed in merging with Inmet and they decided not to cooperate with a sale to Equinox.
  • The company’s most valuable asset is a 25% stake in the world-class Tenke Fungurume project in Congo. Freeport-McMoran holds the majority stake in this project and has the first right to buy Lundin’s stake if Lundin decides to sell.

Implications:

  • The difference in taxation of an asset sale compared to a share sale will be an important consideration for Lundin, although the $100mln taxation hit of a total asset sale corresponds to only some 2% of the company value. Most likely it is easier to get a good price for individual assets (especially Tenke Fungurume) and in that way maximize total value for Lundin’s shareholders.
  • The actions by Lundin’s management to put the company up for sale seem to indicate mr. Lundin, the founder and chairman of the company, has given up the hope to keep his company independent or to merge it with another small party to create a larger player.

©2011 | Wilfred Visser | thebusinessofmining.com

Freeport-McMoran profits up on copper demand

January 21, 2011 Comments off

“The accelerating bull market in copper, which is facing a stagnant supply base amid rising demand, lifted pre-tax profits at Freeport-McMoRan 46 per cent to a record $8.5bn last year. US-based Freeport, the largest publicly traded producer of the red metal, offered the first indication on Thursday of the financial bonanza that the big copper miners were enjoying. The New York-listed company published its annual results ahead of Rio Tinto, Anglo American and Xstrata, other copper miners expected to unveil similar windfalls from copper.

Freeport’s earnings per share rose 56 per cent from $5.86 last year to $9.14 in the year to December. The company closed 2010 by declaring a $1 per share special dividend that cleared $472m of excess cash from its books. Copper production slid from 3.35bn pounds in 2009 to 3.14bn pounds last year, continuing long-term stagnation that has hit the industry. Rio this week revealed it mined 16 per cent less copper year in 2010 versus the previous year.”

Source: Financial Times, January 20 2011

Observations:

  • Reuters notes that the share price of Freeport is falling behind on copper future price since February of this year.

    Reuters' analysis of FCX stock vs. copper future

  • FCX currently expects capital expenditures to approximate $2.5bln for the year 2011. Still the company is turning out a special dividend worth almost $500mln.

Implications:

  • The results of the company missed the analysts estimates, resulting in drop of the stock price. The main reason for dissatisfaction is the decrease in production to 3.14bln pounds. Production is expected to increase by over 20% in 2011. The company does not appear to have more growth options at the moment, returning excess cash back to shareholders instead of investing above the planned $2.5bln.
  • Country risk of Congo, where the Tenke Fungurume project is located, will cause the production outlook to remain uncertain. Freeport has signed a deal with the government in October that appears to be promising. However, 2011 will have to prove the stability of the deal.

©2011 | Wilfred Visser | thebusinessofmining.com

Mining companies fail to use YouTube

December 22, 2010 1 comment

YouTube has over 2 billion views per day. It is the world’s second largest search engine. It hosts more video material than has ever been broadcasted on television. Consumer goods companies use YouTube to scan for trends, market their goods and interact with potential customers. Still, mining companies fail to use YouTube.

Why should mining companies use YouTube?

Establishing a presence on YouTube can be a very effective tool in managing public opinion about the company. The YouTube user is not the investor or the business partner, but the average person using the mined goods. Mining companies are traditionally trying to hide from public attention. Most attention is negative attention, focused on environmental destructiveness and corporate greed. However, communicating with the world out there would help to make more people realize the relevance and the challenges of mining and at the same time serve as a way to gather feedback about the perception and public issues around the company. The public opinion has been a powerful weapon in the mining industry this year in both the decisions about mining tax changes in Australia and BHP Billiton’s attempt to acquire PotashCorp. YouTube can be a powerful  tool to influence public opinion.

How are mining companies currently doing?

The lack of use of YouTube by the world’s largest mining companies is shocking. Out of a list of ten of the world’s largest mining companies only 3 have established a YouTube channel (Anglo American, Rio Tinto, Vale); 5 appear to have claimed their channel’s name (Teck, Vedanta, Alcoa, Newmont, Freeport McMoRan), but are not yet using it, potentially because he name has been ‘hijacked’ by a proactive YouTube user. This is clearly the case for the remaining 2 companies (BHP Billiton and Xstrata). Their channels are broadcasting video material totally unrelated to the mining industry. Almost all of these firms have video material available on their websites that could easily be used to communicate on YouTube. The companies certainly do have a presence on YouTube: many videos about the companies have been posted by journalists and activists.

The performance of the 3 companies active on YouTube diverges widely. Anglo American started the channel in November 2010 and has posted 1 video about HIV Aids. Rio Tinto made a promising start in the summer of 2009 by uploading 10 videos about various topics, but the last visit date of the account owner is 7 months ago. Still, the videos have been viewed almost 400 thousand times in the past year. Vale has opened a comprehensive YouTube channel. The page and most of the videos are in Portuguese, but this makes sense when considering the geographic location of most of Vale’s operations. A point for improvement is the use of the channel to interact. The company has disabled the option to comment on the videos, making the channel a pure broadcasting station.

The importance of interaction

Simply broadcasting videos on YouTube is not the optimal way of using the site. People will react, and the reactions shape the public opinion. Responding quickly to the reactions gives an opportunity to show empathy, present the facts and win critics over. Below an example of reactions on Rio Tinto’s YouTube channel:

What happens when polluting industries find themselves surrounded by housing development? People get sick, the companies won’t move. This is the situation in Kilburn, South Australia, right now.

Rio Tinto may be a ‘leading mining company’, but it is also one with one of the most appalling international reputations. Type ‘bougainville’ + ‘mercenary’ + ‘RTZ’  into google to find out about their connection to atrocities in Papua New Guinea after the natives refused them permission to mine.

The reaction of Rio Tinto to these comments? Complete silence.  Missed opportunities to explain the company’s position to important opinion makers.

A 5-step guide for Mining Companies to start using YouTube

What should mining companies do to use the potential of YouTube?

1. Appoint a Content Manager – Appoint the person that will be running the show. The Content Manager should not just be responsible for selecting and managing the broadcasted content, but should also be responsible for participating in online discussions and answering to comments.

2. Explore the environment – Don’t plunge into uploading videos without finding out what is going on on Youtube and defining the strategy of content type and structure. For example, most likely YouTube users are much more interested in the environmental performance of the company than in the latest profit figures.

3. Establish a presence – Upload videos, add tags, select favourite videos featuring the company from other sources.

4. Monitor environment and reactions – Don’t only read the comments on the uploaded video’s. Do the same the YouTube user will do: search for information about the company; click-through to related videos; gather all user-generated content about the company.

5. Interact – Respond to both positive and negative reactions. Invite critics to explain, explain the situation and the facts. Feed the most important topics found online to the executive and marketing team.

©2010 | Wilfred Visser | thebusinessofmining.com

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