Freeport Strikes Gold with its Copper Mining Operations

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Freeport

Freeport McMoran Copper (NYSE:FCX) is involved in mining, smelting and refining of coper, gold and molybdenum. The company runs its mining and smelting operations in North and South America, Indonesia and Africa. Freeport competes with other miners such as Southern Copper (NYSE:PCU), Newmont Mining (NYSE:NEM) and Codelco.

Early in December 2010, Freeport announced a $1 per-share special dividend which cost the company $471 million. [1] Freeport also announced a two-for-one stock split effective February 1, 2011. With the company also announcing its results for Q4 2010 recently, we have updated our price estimate to $63.42. Our price represents a premium to the company’s current market price, which we believe can be attributed to our positive outlook for the prices of copper and gold in the years to come.

The Copper Business and its Impact on Freeport’s Stock Price

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Freeport is one of the world’s largest copper, gold and molybdenum mining companies in terms of reserves and quantity produced. The company’s Grasberg mine in Indonesia contains the largest single recoverable copper and gold reserve in any mine in the world. As of December 31, 2009, the company’s reserve totaled 104.2 billion pounds of copper, 37.2 million ounces of gold and 2.6 billion pounds of molybdenum.

Freeport’s copper mining business is geographically diversified with mines located in Indonesia, North America, South America and Africa. According to our analysis, the copper division alone contributes more than 70% of Freeport’s equity value.

Freeport’s average realized price per pound of copper has hovered around $3 over the past few years. However, its operations in Indonesia and South America are significantly aided by low labor costs, which has resulted in gross profits in excess of 50% there. In fact, the gross profit in Indonesia is beyond 60% due to the added economy of scale benefits of the company’s large operations.

With the global demand for copper expected to increase in the years to come, led primarily by an increase in demand from China, [2] we believe Freeport could see healthy growth in its earnings per pound of copper sold.

See our full analysis and $63 prce estimate for Freeport McMoran

We estimate the average realized price per pound of copper for Freeport, across all its geographic locations, will increase from its current value of $3.5 to around $5.5 by the end our forecast period. With most of Freeport’s mines running at close to 80% capacity, and gross margins likely remaining at current levels, copper prices could be the primary contributing factor to value growth in this division.

Notes:
  1. Freeport-McMoRan Sets Special Dividend Stock Split, The Wall Street Journal Online, Dec 9 2010 []
  2. Copper outlook – diminishing surpluses and new uses ahead, Mineweb, July 9 2010 []