Freeport McMoRan highlights positives for copper at Denver

In a presentation at the Denver Gold Forum in September, Richard Adkerson, president and CEO of Freeport McMoRan Copper and Gold (FCX-N), the world’s largest copper miner, pointed out the positive fundamentals of the copper market, while acknowledging the economic headwinds facing the sector.

Adkerson attributes recent price weakness for copper on the global slowdown and its impact on the Chinese economy, as well as a strengthening US dollar. Despite this, global exchange inventories for copper remain at low levels.

The positive fundamentals seen by Freeport are continued supply constraints, an absence of new projects, and urbanization in China and other developing economies. Adkerson points out that, for the years 2005-2007, copper production was lower than projections by an average of 800,000 tonnes per year.

On the demand side, China has replaced the U.S. as the leading consumer of the metal, with an estimated 28% of world consumption in 2008, versus about 12% for the U.S. Looking into the future, Adkerson quotes a projection which estimates world consumption at 300 million tonnes copper for the years 2008-2020, of which China is projected to consume 32% or 96 million tonnes.

Freeport sees a number of challenges slowing copper project development. There are relatively few major projects, and quality is lower than in past projects. There are myriad delays being encountered, from technical factors such as complex underground development, through environmental hurdles, and geopolitical obstacles in the shape of resource nationalism. Construction costs are escalating, and industry structure is still evolving after recent consolidation.

On December 31, 2007, the company’s reserves stood at 93.2 billion lbs. copper, made up of 12.1 million tonnes ore grading an average 0.38% copper. Average sales volume for 2008-2010 is estimated at 4.5 billion lbs. copper per year, and reserve life is estimated at 21 years.

The company is continuing to explore for copper, with 80 drill rigs turning, for an estimated 661,000 metres of drilling this year. Freeport estimates that 80 billion lbs. copper equivalent, made up of copper, cobalt and molybdenum, could potentially be added to reserves in the medium term.

The company has a pipeline of copper projects in North America, South America and Africa which it plans to bring to production.

In a report from the end of September, Citigroup analysts forecast copper at US$3.65 per lb. next year, down from their previous projection of $4.75. Freeport McMoRan is rated a top pick by Citigroup, with a target share price of US$90. The stock was trading at US$35.75 at presstime. Besides its dominant position in the copper market, Freeport is also the world’s largest molybdenum miner.

Website MarketWatch.com quotes analysts at Natixis Commodities Markets as forecasting a surplus of 100,000 tonnes copper this year, and 200,000 tonnes next year. Meanwhile, metal monitoring service Platts reports that the failure of a mill drive mechanism at the Escondida copper mine in Chile will cut production by 15% over the next nine months. Escondida, which produced 1.48 million tonnes copper in 2007, is majority-owned by BHP Billiton (BHP-N), and the largest minority interest is held by Rio Tinto (RTP-N).