Freeport’s Labor Issues Could Cause Q4 Miss

Freeport McMoran Copper (NYSE:FCX) in a statement on Tuesday said that they may miss their sales target in the fourth quarter due to the ongoing labor strike at its Grasberg mine in Indonesia. ^[1] We assess the potential impact that this could have on Freeport’s earnings. Freeport McMoran has extensive copper mining and smelting operations in North and South America, Indonesia and Africa. The company competes with other miners such as Southern Copper (NYSE:PCU), Codelco and Newmont Mining (NYSE:NEM).

We currently have a price estimate of $41.50 for Freeport’s stock, which is about 5% above the current market price.

See our full analysis for Freeport McMoran here.

Ongoing strike cutting into production

The labor union at the Grasberg mine has been on strike since September 15th, demanding a wage increase. The mining unit at the location is capable of processing 230,000 tons of ore daily and is now processing only 120,000 tons as the company continues production with the help of non-striking workers and contract workers. ^[1] Freeport had to suspend milling operations on October 22nd after protesting workers damaged the concentrate pipelines. The company had planned to sell 915 million pounds of copper in the fourth quarter, from which 185 million pounds were to come from Grasberg mine. In order to meet this target, the company planned to process 175,000 tons of ore daily in Q4. It is now looking like that target will be increasingly difficult to meet.

Strike could hurt Q4 earnings, long-term outlook remains solid

Freeport’s stock was down 6 percent on the day the company released the statement. Should the company be unable to carry out repairs and solve the labor issue during the quarter, it may lose up to 30 percent of its copper revenue from Grasberg. At current copper prices, that would amount to the loss of around $250 million in revenues. The company will also have to bear significant expenses towards repairing the damaged equipment. We believe that if the issues aren’t resolved quickly then Q4 earnings will be significantly affected. However, we do not expect that this will have a long-term impact on the company’s operations (absent any further labor issues) and as such we have not made any changes to our estimates at this time.

We expect near-term copper demand from China to remain strong despite slowing economic growth there, as importers will start re-stocking copper towards the end of the year. We believe that this will allow for strong copper prices through year-end, which could help Freeport offset some of the losses it will face at Grasberg.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Freeport says Indonesia mine operations lag Q4 goals, Reuters, Nov 2011 [↩] [↩]