DENVER (ResourceInvestor.com) -- Richard Adkerson, President and CEO of Freeport-McMoRan Copper & Gold Inc. (FCX) was certainly bullish-but reservedly so-on both the markets and his company's current and prospective performance. With the amalgamation of Phelps Dodge FCX is the world's second largest copper producer, poised to overtake Codelco if the latter's problems continue. And it's the world's largest molybdenum miner--also reopening a prominent North American mine.
Part of the total reserve package is 41 million ounces of gold. Key in that figure is the world's largest gold mine, Grasberg in Papua, Indonesia, 'disguised' as a copper mine.
Copper has been very weak, and the U.S. market is no exception; FCX supplies half of the copper rod in the U.S. So for a variety of technical reasons, including hedge funds' holdings, resource companies' stocks have been impacted as a result of technical factors and investor perceptions.
"Fundamentally the factors that support a bull market continue. Exchange inventories, at five days' consumption, remain very low, and the market is tight. China continues to build infrastructure. And other parts of the world will develop as well.
Supply keeping up with demand will be challenging. Mines are aging, grades are falling. Escondida, the world's largest copper mine, just announced a 15-18% drop in production for at least a year due to lower grades. Production shortfalls have averaged some 800,000 tonnes annually-for a three year average of -3.0%.
The U.S. surrenders the driver's seat in copper. In 2003 China surpassed the U.S. in copper consumption; they're at about 26% of global consumption while the U.S. has fallen from 20% to about 11%.
Over 20 years, from 1985-2007, some 300 million tonnes of copper was produced. In the 12 years from 2008-2020 the same quantity will be needed, with China taking 32% of it. Where's the copper going to come from? FCX's strategy is to expand its existing mines
Greenfield projects are tougher today. That's why there are fewer major projects. They're lower quality than in the past. Delays encountered can include: technical factors, e.g. complex underground development; environmental; and geopolitical, including resource nationalism. Of course escalating construction costs are no small matter, they've been dramatic and they can make or break project economics. And the industry structure continues to evolve with consolidation. Those conditions are expected to continue.
FCX's North American Projects Include:
Safford Mine Development (Arizona), $675 million
- The U.S.' first new copper mine in over 20 years;
- The SX/EW facility is ramping-up and is approaching its capacity. It produced 24 million lb of copper in 2Q08;
- Start-up issues are being addressed; and
- Design capacity is 240 million lb copper annually.
Miami Mine Restart (Arizona), $100 million (primarily mining equipment)
- The Miami mine is being reopened;
- It should yield 100 million lb copper annually by 2010; and
- Yearend 2007 reserves stood at 600 million lb copper.
Incremental Expansions (Arizona), $370 million
- Morenci, Baghdad, and Sierrita
- Preliminary estimates of 180 million lb copoper by 2010; and
- Considering larger expansions.
Climax Mine (Colorado), $500 million
- Open pit operation;
- Major permits received;
- New mill construction, restart by 2010;
- Construction underway;
- Initial output 30 million lb annually;
- Largest, highest-grade undeveloped molybdenum resource-substantial upside; and
- Facilities designed for future expansion.
South American Projects Include:
El Abra sulfide, $450 million
- Large deposit underlying current oxide pit;
- New leach pad and modifications to existing crushing plant with construction beginning in 2H08;
- Mine life extended by 10 years;
- Yields 325 million copper/year;
Cerro Verde incremental expansion
- Engineering in progress; and
- Considering larger expansions
Indonesian Projects Include:
- DOZ expansion
- Operated above 50,000 tonne/day capacity at record 66,000 level in 2Q08;
- Further expansion to 80,000 tonnes/day by 2010;
- Initiating mine development activities at Grasberg Block Cave;
- Big Gossan to reach full rates in 2011 (125 million lb/year copper and 65,000 oz/year gold
- Mill optimisation
- Crusher master plan for throughput enhancement completed in 2Q08
African Projects Include:
Democratic Republic of Congo, Tenke Fungurume mine development, $1.75 billion
- Engineering, procurement, and construction ongoing as is infrastructure development
- Production target is 2H09 with production of 250 million lb copoper and 18 million lb cobalt; and
- Reserves at yearend 2007 were 100 million tonnes grading 2.3% copper and 0.3% cobalt.
- Drilling has been accelerated and reserves are expected to increase significantly.
Exploration. FCX isn't sitting on its hands with respect to exploration. It has the cashflow to support what's needed, spending $240 million in 2008:
- 50% in North America;
- 20% in Africa;
- 16% in Indonesia;
- 11% in South America; and
- 3% in Australasia and other.
It has 80 drills operating worldwide: 33 in the U.S.; 15 in South America; 19 in Africa; 13 in Indonesia. And the company certainly sees the advantage of the old maxim that, the best place to explore is near an old mine. It views its so-called 'brownfield' holdings as a big plus. Major 'brownfield' opportunities exist at: Morenci, Baghdad, Sierrita, Cerro Verde, and Tenke.
Drilling for 2005 totalled 180,000 meters and for 2008 some 661,000 meters are projected.
Phelps Dodge (PD) reserves at the time of the merger amounted to 64 billion lb copper-equivalent. Now, with the PD reserves and potential additions, the company is looking at 144 billion lb.
FCX's bottomline? It has the cash.