Freeport Fights Off The Perfect Storm

By Billy Fisher | October 11, 2011 AAA

An unsettling strike and an epic fall in commodity prices set the backdrop for a perfect storm for Freeport McMoRan Copper & Gold (NYSE: FCX). However, the copper mining company may emerge from the situation better than one might expect, given the circumstances. (For more on commodities trading, check out An Overview Of Commodities Trading.)

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Striking Out
A 30-day strike began at the company's Grasberg mine in mid-September. The Grasberg operations accounted for 34.7% of the company's operating income in Q2. The labor dispute couldn't have occurred at a worse time as it coincided with the worst month for copper prices, in three years. The price of the metal on the London Metal Exchange has plunged 26.9% year-to-date and the iPath Dow Jones-UBS Copper Subindex Total Return ETN (NYSE:JJC) is down 27.5% on the year. This double whammy for Freeport has led its stock price 22.9% lower, in just the past month.

Setting Up For a Rocky Ride
The company has said that the strike hasn'tt hurt production, but in the coming months it is likely that Freeport's stock price will be more volatile than some of its gold-focused competitors. In Q2, copper accounted for more than 80% of Freeport-McMoRan's consolidated revenue. Rival Barrick Gold (NYSE:ABX) derived less than 20% of its Q2 revenue from copper, as the majority of its revenue came from gold. Copper revenue for Newmont Mining (NYSE:NEM) also accounted for less than 20% of the company's operations in Q2. The predominant exposure to gold for Barrick and Newmont has been effective in weathering sinking copper prices, but also seemingly makes for less upside potential than is the case for Freeport-McMoRan.

Although earnings may be adversely impacted on falling copper prices, the pessimism towards Freeport could be overdone. Its stock trades at a forward P/E of only 6.2 and management displayed some confidence, last week, in maintaining a quarterly dividend of 25 cents per share.

The Bottom Line
It'll not be long before the labor unrest will be in the rear view mirror for the company and copper prices are bound to recover, with China as a backdrop for the recent slide. China's economy is growing at a rate of 9.0% and accounts for approximately 38% of the world's copper demand. Freeport is down but not out. (To learn about metals, read Using Base Metals As An Economic Indicator.)

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