Investment Commentary — Freeport gets nod for improved financial results

In the copper world, things don’t get much better than US8 cents per lb., which is the lowest cost of production ever reported by Freeport-McMoRan Copper & Gold (FCX-N) from its vast Grasberg mine in Irian Jaya, Indonesia.

A year ago, the company made news when it reported cash costs of US16 cents per lb., including gold and silver credits. During its latest quarter ended Sept. 30, the New Orleans-based company slashed production costs by 50%, entrenching its position as the lowest-cost copper producer in the world.

In a recent research report, mining analyst Roger Chaplin of T. Hoare Canaccord predicts an even stronger performance in 2000 now that an expansion program at Grasberg is kicking in. “With growing earnings on the back of both improved operations and better metal prices, we continue to recommend Freeport as a buy,” he writes.

Daily mill throughput of 221,800 tonnes began in this year’s third quarter, up from the 216,800 tonnes per day handled in the second quarter of this year and the 207,400 tonnes handled in the third quarter of 1998. In addition to the mill expansions, the company has been carrying out a cost-cutting and optimization program called “Hunker Down & Go.”

Chaplin also notes that Freeport has not yet seen the full benefit of the improved copper price in the third quarter. Prices averaged US78 cents during this period, though the company reported an average realized price of US73 cents per lb. “We can look forward to sales now being completed at a significantly higher price,” he adds.

Freeport sold 365 million lbs. copper and 633,200 oz. gold during the 1999 third quarter. Freeport’s share (net of Rio Tinto Mining’s interest) is about 350 million lbs. copper and 500,000 oz. gold.

The company posted net earnings of US$26.8 million on revenue of US$473 million in the 1999 third quarter, up from earnings of US$23.8 million a year earlier. And it recorded net earnings of US$63.4 million on revenue of US$1.34 billion for the first nine months of this year, down from earnings of US$76 million a year earlier.

Freeport’s Indonesian unit does not hedge its gold and copper production, which is expected to total 1.4 billion lbs. copper and 2.1 million oz. gold this year.

Chaplin concludes that Freeport’s improved earnings will soon be reflected in an improved balance sheet.

“One of the perceived negative points about Freeport has been its high level of debt, which stood at US$2.4 billion at the end of 1999,” he notes. “The strong financial performance in 1999, including cash flow, has allowed Freeport to begin repayment of this debt, with the total being brought down by US$200 million to US$2.2 billion at the end of September.

“Clearly, there is still some way to go, but the structure of the debt, with long-term repayment schedules, will not put Freeport under any pressure, and it is now possible to see a steady level of repayment from cash flow.”

Freeport has 164 million shares outstanding and has been trading at about US$16.50 in a 52-week range of US$18.69 to US$9.13.

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