) recently inked an agreement with Serengeti Resources through its
wholly-owned, indirect subsidiary Phelps Dodge Corporation of
Canada (PDCC) to pursue copper and gold mining opportunities in the
Mt. Milligan area of British Columbia. The companies may later form
a joint venture to develop Serengeti's Choo and Tchentlo properties
in the region, with Freeport owning a 51% stake.
Freeport has mining and smelting operations in North and South
America, Indonesia and Africa, and operates the Grasberg mine
located at Papua, Indonesia - the world's largest copper and
gold mine in terms of reserves. Freeport competes with other
miners such as Southern Copper (NYSE:PCU), Codelco and Newmont
Our $59.41 base price estimate for Freeport's
is at a roughly 15% premium to market price.
The Deal in Detail
The Serengeti properties which are to be explored by Freeport
are located close to the Mt. Milligan copper-gold project being
developed by Thompson Creek Metals. The Mt. Milligan project has
proven and probable reserves of about 2.1 billion pounds copper and
6 million ounces gold, and there is a huge likelihood of finding
similar reserves in the Serengeti properties.
Freeport was brought into the deal because junior exploration
companies like Serengeti do not have sufficient resources nor the
requisite expertise to explore beneath the thick glacial till that
covers the region. Initial drills by Serengeti have shown extensive
copper-gold anomalies over a widespread area.
In order to establish the joint venture, Freeport is required to
spend $5 million in exploring the Choo and Tchentlo properties over
the next 4 years. Considering the company's expected $2.4 billion
capital expenditure in 2011 alone, this figure shouldn't really be
a concern for Freeport.
Freeport also has an option of increasing its stake in the
project up to as much as 70%.
What it Means for Freeport
Freeport has been plagued by low ore quality in the recent past
which has reduced its production levels. It is hence imperative for
it to keep exploring new sources of copper and gold to ensure that
production can be maintained at current levels.
Considering the scenario that Freeport discovers copper-gold
reserves comparable to the Mt. Milligan project at Serengeti's
properties, it could potentially increase its gold reserves by more
than 15% from its current value of 35.5 million ounces at the end
of 4 years.
Assuming that the production and sale of gold increases by 10%
as a result of this from 2015, this represents an almost 5% upside
to our $59.41 base price estimate for Freeport.
See our full analysis for Freeport McMoran stock