Freeport Will Explore New Opportunities in British Columbia
Freeport-McMoran Copper (NYSE:FCX) recently inked an agreement with Serengeti Resources through its wholly-owned, indirect subsidiary Phelps Dodge Corporation of Canada (PDCC) to pursue copper and gold mining opportunities in the Mt. Milligan area of British Columbia. The companies may later form a joint venture to develop Serengeti’s Choo and Tchentlo properties in the region, with Freeport owning a 51% stake. [1]
Freeport has mining and smelting operations in North and South America, Indonesia and Africa, and operates the Grasberg mine located at Papua, Indonesia – the world’s largest copper and gold mine in terms of reserves. Freeport competes with other miners such as Southern Copper (NYSE:PCU), Codelco and Newmont Mining (NYSE:NEM).
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Our $59.41 base price estimate for Freeport’s stock is at a roughly 15% premium to market price.
The Deal in Detail
The Serengeti properties which are to be explored by Freeport are located close to the Mt. Milligan copper-gold project being developed by Thompson Creek Metals. The Mt. Milligan project has proven and probable reserves of about 2.1 billion pounds copper and 6 million ounces gold, and there is a huge likelihood of finding similar reserves in the Serengeti properties.
Freeport was brought into the deal because junior exploration companies like Serengeti do not have sufficient resources nor the requisite expertise to explore beneath the thick glacial till that covers the region. Initial drills by Serengeti have shown extensive copper-gold anomalies over a widespread area.
In order to establish the joint venture, Freeport is required to spend $5 million in exploring the Choo and Tchentlo properties over the next 4 years. Considering the company’s expected $2.4 billion capital expenditure in 2011 alone, this figure shouldn’t really be a concern for Freeport.
Freeport also has an option of increasing its stake in the project up to as much as 70%.
What it Means for Freeport
Freeport has been plagued by low ore quality in the recent past which has reduced its production levels. It is hence imperative for it to keep exploring new sources of copper and gold to ensure that production can be maintained at current levels.
Considering the scenario that Freeport discovers copper-gold reserves comparable to the Mt. Milligan project at Serengeti’s properties, it could potentially increase its gold reserves by more than 15% from its current value of 35.5 million ounces at the end of 4 years.
Assuming that the production and sale of gold increases by 10% as a result of this from 2015, this represents an almost 5% upside to our $59.41 base price estimate for Freeport.
See our full analysis for Freeport McMoran stock here
Notes:- Serengeti brings Freeport onboard to hunt copper-gold near Mt. Milligan, Mineweb, May 3 2011 [↩]