Freeport McMoran $44 Fair Value: Chinese Demand Outweighs Indonesian Setbacks

by Trefis Team
-11.14%
Downside
33.01
Market
29.33
Trefis
FCX
Freeport McMoran Copper
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Freeport McMoran Copper & Gold Inc. (NYSE:FCX) derives nearly 80% of its stock value from copper mining operations. One of its most important mines is Grasberg in Indonesia, which is the single largest copper reserve for any mine in the world. Around 20% of the stock value is derived from the Grasberg mine and this manifests its importance to Freeport. However, the company has faced several issues in the past few years relating to Grasberg, and the business prospects can be deeply hurt if it is forced to halt operations in that mine. China has contributed to the majority of demand as a sizable amount of copper from Indonesia goes to China.

We maintain a $44 price estimate for Freeport, implying a 40% upside to the current market price.

See our complete analysis for Freeport McMoran here

Perturbing Indonesian operations

There are two prevailing issues with the Indonesian mine. One is related to safety issues and other is labor dissatisfaction. Since July 2009, five mine workers have been shot dead and the company’s profits plummeted last year because of the workers’ strike at Grasberg, marked as the longest in the country. [1] The workers have planned to hold a demonstration relating to security issues and the firing of three employees in June, and this is expected to halt operations for a few days.

Separately, the Indonesian government’s fickle policy changes could pose a threat to Freeport’s operations in the country. Earlier in May, the Indonesian government imposed export bans on 14 natural resources, including copper and gold. However, Freeport was exempt from those bans. The looming uncertainty on its production from Grasberg doesn’t bode well for its copper business. There is a downside if its Indonesian shipments drop in coming years.

Drag the trend-line in the following chart to understand the impact on the Freeport’s price estimate.

Chinese demand and Greek Euro pursuits

China’s economy has slowed down a little, according to its recent economic report, on account of wavering European and U.S. macroeconomic environment. China’s stimulus plan to boost economy coupled with its recent news to subsidize vehicle purchases in rural China are welcome moves for copper miners. [2]

Europe, on the other hand, is grappling from Greek travails. Many believe that Greece might have to exit the Euro. However, a lot depends on the Greek elections on June 17. If the party supporting the austerity measures in the country wins, Greece is likely to stay part of Euro. But, a party not supporting the austerity would coerce Greece to move out of Euro.

Greece staying in Euro will likely be reflected as a surge in copper prices. In recent polls, the pro austerity party’s claim to win the elections has intensified. We believe there is an upside to copper prices if the conditions in Europe improve and China starts to match yesteryear growth rates.

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Notes:
  1. Freeport Indonesia workers plan June demonstration, reuters.com, June 1, 2012 []
  2. Copper up on Greek hopes and China stimulus, steelguru.com, May 30, 2012 []
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