Grasberg Production is Key for Freeport Hitting $57

Freeport McMoran Copper (NYSE:FCX) like its competitors Southern Copper (NYSE:PCU), Codelco and Newmont Mining (NYSE:NEM) is poised to benefit from the rising prices of metals such as copper and gold. The company recorded net income of $1.4 billion in Q2 at a growth rate of 110% year over year aided by high metal prices in the spot market as well from its extensive operations in North and South America, Indonesia and Africa. Freeport’s Grasberg mine in Indonesia, which we estimate accounts for one-fourth of its stock value, will be a key driver for the company’s continuing earnings growth. But the mine faces lingering concerns related to lower copper ore quality and more recently a 7-day labor strike for higher wages, temporarily disrupting the mine’s operations.  ^[1] If such events continue, this could impact Freeport’s copper and gold production in the long-term.

While we estimate Freeport’s copper sales from its Indonesian mines will increase from 1.24 billion pounds in 2012 to 1.3 billion pounds by the end of our forecast period, Trefis members predict an increase from 1.29 billion pounds in 2012 to 1.5 billion pounds during the same period. The member estimates imply a small upside to the Trefis price estimate for Freeport McMoran Copper’s stock.

We currently have a Trefis price estimate of $57.60 for Freeport McMoran Copper’s stock, which is about 25% above the current market price.

Grasberg Mine Production Significant for Freeport

The Grasberg mine is considered the world’s largest copper and gold mine in terms of reserves. By end December 2010, the mine had about 33 billion pounds of recoverable copper reserves and roughly 34 million ounces of recoverable gold reserves. However, for 2011, Freeport will focus on the lower-grade section of the mine resulting in lower quality of copper ores and hence lower production estimates for the year. And given the rising demand for metals from emerging markets like India, Brazil and China, Freeport may not be in a position to capitalize on this opportunity.

The company also saw a 7-day labor strike last month at its Grasberg mine with workers demanding higher wages, which led to a temporary stand-off in mining activities, and more of such events in this already insurgency afflicted region can seriously harm Grasberg’s future copper production.

Our complete analysis for Freeport McMoran Copper’s stock is here.

1. Strike at Freeport’s Grasberg Mine Ends, WestPapua Media, July 12, 2011 [↩]