Freeport, Once Atop the Mining World, Finds Itself Trapped in Copper Collapse

Freeport, Once Atop the Mining World, Finds Itself Trapped in Copper Collapse

Jakarta Globe
Stewart Baile

Freeport-McMoRan Copper and Gold Inc., the best-performing stock among North American mining companies in 2007, turned into the worst this year. Analysts say the company may not fare much better in 2009 as copper prices slump.

Freeport is the world's second-largest copper producer, and many sites under its control are the envy of the industry. Perhaps the most famous is the company's Grasberg mine in Papua Province, which is the location of the world's largest gold reserve and third-largest copper reserve.

Though often criticized for its environmental record in Papua, the proceeds from Freeport's activities in Indonesia are so massive as to make it the country's single largest taxpayer year after year.

But prized sites have not been enough to keep the company's stock afloat during the commodities downturn. Freeport shares have fallen 79 percent, the biggest loss in the 16-member Philadelphia Gold and Silver Index and the steepest decline since the shares started trading in 1996, as copper tumbled 58 percent in New York Mercantile Exchange trading.

Analysts have set a target price of $34.10 for the Phoenix-based company, a 58 percent increase from its Wednesday closing price in New York trading.

Chief executive Richard Adkerson spent much of 2008 planning to expand until the rout in metals forced cuts in output and jobs and halted dividend payments and share buybacks. Freeport may have to make more cuts next year unless copper recovers because production costs are higher than metal prices for much of its North American operations, according to company data.

The company cut its US workforce by 20 percent and trimmed production plans for next year by 5 percent after delaying production at two mines in November.

"Credit is still dead, inventories are still piling up and there's no demand to build anything," Chris Wang, co-founder of SYW Capital Management LLC in New York, said. Adkerson's "got to cut more at the operations," he added.

Freeport produces two-thirds of its US output at a cash cost of $3.09 to $3.53 a kilogram, the company said this month. That means mines expected to yield 589,670 metric tons of the metal next year, or almost a third of total output, are unprofitable at current prices.

Freeport fell 16 cents, or 0.7 percent, to $21.57 in New York Stock Exchange trading on Wednesday. Copper, which traded at a record $9.39 a kilogram on May 5, closed at $2.80 on Wednesday and has been below $3.53 since Dec. 2.

Adkerson, 61, said he realized in mid-October that demand for the metal used in pipes and wires wouldn't recover soon and told managers to pare unprofitable output and costs.

"It was like driving a racecar down a track fast as you can go, full out, coming up on a very sharp curve unexpectedly and hitting the brakes, gearing down and keeping the car on the road," Adkerson said in a Dec. 3 interview. "We had to make changes so quickly."

One bright spot may be the Grasberg mine. The price of gold produced there has gained 1.3 percent in 2008 as the global recession and the dollar's decline increased its appeal as an alternative investment.

But Freeport's cuts, like those by Mitsubishi Materials Corp., haven't helped copper recover from its worst performance in some 21 years.

Commodities prices tumbled this year as $1 trillion of write-downs at the world's biggest financial companies caused economies to slow, popping a raw materials boom.