Freeport McMoran Copper (
) is facing quality concerns. The company recently announced that
it expects a 17% decline in copper output from its Glasberg mine in
Indonesia due to lower quality of the copper ore being mined.
Unfortunately, there is not much the company can do in this regard.
Freeport competes with other miners such as the Southern Copper
(NYSE:PCU), Codelco and Newmont Mining (
Freeport is involved in the mining, smelting and refining of
coper, gold and molybdenum. The company runs its mining and
smelting operations in North and South America, Indonesia and
Our $63.42 base price estimate for Freeport's
is at a roughly 15% premium to market price.
Freeport's Indonesian Mine is its Crown Jewel…
The Grasberg mine located at Papua, Indonesia, is the world's
largest copper and gold mine in terms of reserves. The company's
annual report for the year 2010 states that, as of December 31,
2010, the mine had about 33 billion pounds of recoverable copper
reserves and roughly 34 million ounces of recoverable gold
The mine currently has a production capacity of 80,000 metric
tons of ore per day, and could reach 90,000 metric tons per day by
2012 and 240,000 metric tons by 2016.
… but This Jewel Might Have Lost Some Shine…
Freeport's mining during 2011 will take place primarily at a
lower-grade section of the mine, which is why estimated sales for
the year are around 1 billion pounds of copper. In comparison, the
mine sold 1.4 billion pounds of copper in 2009 and 1.2 billion
pounds of copper in 2010.
… and Freeport's Stock Value Could Take a Hit as a
All major copper mining companies are currently ramping up
production to cash-in on rising copper prices. This is evident from
the quarterly increase in quantity of copper sold. The reduction in
copper sales for Freeport at such an inopportune time will likely
weigh on the company.
The exact impact on the company's stock price can be inferred by
dragging the trend line in our modifiable forecast chart for
Freeport's quantity of copper sold from the Indonesian mine.
We currently forecast that annual copper sales from the
Indonesian mine will increase gradually towards 1.3 billion pounds
by the end of our forecast period. But if Freeport does not ramp up
production quick enough to compensate for the lower quality of
copper ore, it may end up producing only 1 billion pounds of copper
each year during this period. This scenario would imply 5% downside
our $63.42 price estimate for Freeport stock
, leaving our number just above $60.
See our full analysis and $63.42 price estimate for