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Mining Weekly 51/’12: Freeport, Xstrata, & Bumi

December 16, 2012 Comments off

Top Stories of December:

  • Freeport diversifies further into oil & gas
    • Copper miner Freeport McMoran surprised the market by acquiring two American oil & gas companies for approx. $9bn, taking on a lot of target debt to make a total deal size of approx. $20bn, the second largest acquisition in the industry this year.
    • Freeport did not request shareholder approval for the diversifying acquisitions, leaving a large part of the shareholder base unhappy with the deal and the stock price dropping approx. 15%.
    • Sources: Freeport presentation; Wall Street Journal; Financial Times
  • Xstrata puts Tampakan project on hold
    • Xstrata’s $5.9bn Tampakan copper project in the Philippines is put on hold while waiting for government approvals: the federal government doesn’t want to give the go ahead before the mining law is reformed, and the local government is opposing the issuance of an environmental permit based on a ban on open pit mining.
    • Sources: Reuters; Sagittarius / Xstrata
  • Bumi, Bakrie, and Rotschild continue their fight
    • The board of Bumi plc has indicated that it favors the Bakrie offer to buy out the assets of the Indonesian coal producer over Rothschilds offer to increase the stake in those assets. Bakrie’s offer implies that the shared ownership of assets by Bumi and Bakrie comes to an end.
    • The board also indicated that it does not intend to sell the stakes in Berau to Bakrie, which would mean the company does not completely revert to a cash shell.
    • Sources: Financial Times 1, 2; Jakarta Post

Trends & Implications:

  • Deloitte published its annual report with the top trends in the mining industry for the coming year: on top of the list is the continued high cost of doing business, which is forcing many companies to reconsider development projects (see Tampakan above). The full list of trends is:
      Deloitte - tracking the trends 2013

    • Counting the costs: Paying the price of bullish behavior
    • Managing demand uncertainty: Conflicting market indicators magnify volatility
    • Capital project deceleration: Quality trumps quantity in the project pipeline
    • Preparing for the M&A storm: Market indicators point to rising deal volumes
    • Governments eye the mining prize: Resource nationalism remains
    • Combating corruption: Miners are being held to higher standards
    • Climbing the social ladder: A new level of responsible behavior
    • Plugging the talent gap: Skills shortages still loom
    • Playing it safe: Using analytics to generate insights and improve safety outcomes
    • At the IT edge: Getting the most out of emerging – and existing – technologies
  • Xstrata’s decision to put the Tampakan project, one of the largest development projects in the copper industry, on hold fits two trends: the increasing importance of alignment with both federal and local governments in developing countries, especially around when governments and legislature are changing; and the hesitance to undertake any large investments in a time of rising costs and uncertainty around demand growth.

2012 | Wilfred Visser | thebusinessofmining.com

Check my latest column in the free online journal The International Resource Journal on the importance of iron ore derivatives.

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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

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

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