Outlook for Freeport’s Copper Sales from Grasberg Mines

Freeport’s McMoran Copper’s (NYSE:FCX) copper sales from its Indonesian mines at Grasberg are facing hurdles due to the lower quality of copper ore being mined. This has caused the company to lower its copper output guidance by 17% for this year. While other miners such as Southern Copper (NYSE:PCU), Codelco and Newmont Mining (NYSE:NEM) can profit from rising copper prices led by strong copper demand, the reduction in copper sales from Freeport’s Indonesian mines can pressure the company’s outlook (see Freeport Plagued by Lower Copper Ore Quality). According to our analysis, Freeport derives roughly 26% of its stock value from its Indonesian copper mines.

But are the current high copper prices sustainable? If the price keeps increasing, manufacturers may choose to substitute copper with aluminum to save costs, thereby impacting Freeport’s copper sales. While we anticipate Freeport’s annual copper sales from the Indonesian mines will rise to 1.3 billion pounds by the end of our forecast period, Trefis members predict that sales could cross 1.4 billion.

We currently have a price estimate of $63.42 for Freeport McMoran Copper’s stock, roughly 10% ahead of market price.

Importance of Grasberg Mine to Freeport

The Grasberg Mine in Indonesia is one of the largest copper and gold mines in the world. Freeport owns around 90% of PT Freeport Indonesia, which operates the Grasberg mine, while the Indonesian government owns the remainder. The mine currently has a production capacity of 80,000 metric tons of ore per day, and could reach 90,000 metric tons per day by 2012 and 240,000 metric tons by 2016. Despite having diversified operations in North America, South America and Africa, the Grasberg mine remains a key asset for Freeport.

The Grasberg mine, however, has experienced severe political and social strife over the past several years. The rebels in the eastern province of Papua, where the Grasberg mine is located, view the mine as a symbol of government exploitation of the area’s natural resources.  ^[1] Regular attacks around the mine, in a politically volatile environment, could weigh on Freeport.

Aluminum as a Copper Substitute Could Hurt Freeport Sales

While Freeport is benefiting from rising copper prices due to increased demand from countries like China, this questions the sustainability of high copper prices in the long term. Aluminum is seen as a more cost-effective and feasible substitute for copper if the price of copper crosses the $3.5 per pound mark. In the last five years, aluminum has already substituted 2-3% of the copper market, and this number will likely increase. Alcoa (NYSE:AA), the world’s leading aluminum producer, predicts that if copper prices continue to rise at the current pace, then aluminum could potentially substitute 20% of the global annual refined copper market. (see: Long-Term Concerns for Freeport on High Copper Prices)

Trefis Community Forecast

Trefis members forecast that Freeport’s copper sales from Indonesian mines could grow from 1.2 billion in 2010 to 1.4 billion by the end of our forecast period, compared to the baseline Trefis estimate of an increase to 1.3 billion during the same period. The member estimates imply a slight upside to our $63.42 price estimate for Freeport’s stock.

See our complete analysis for Freeport McMoran Copper’s stock here

1. Freeport: Mine operations normal after fatal attacks, azcentral.com, July 14, 2009 [↩]