James Moffett, the no-nonsense chairman of
While things aren’t quite that bad, producers of the red metal are being forced to emulate their beleaguered gold counterparts in a cost-cutting spree aimed at improving their down-trending bottom lines.
Freeport faced a dual challenge in that its main asset, the Grasberg mine complex in Irian Jaya, produces both copper and gold, metals that are not finding much favour with investors these days. As a result, the company’s efforts this past year were focused on the “Hunker Down and Go” program, which involved cutting costs and boosting production and sales.
Freeport’s first-quarter numbers provide solid proof that the program is working. The Grasberg operation turned out 346.3 million lbs. copper and 599,400 oz. gold during this period, up from 288.2 million lbs. copper and 419,800 oz. gold a year earlier.
These amounts represent Freeport’s 81.3% share of total production of 391 million lbs. copper and 722,900 oz. gold for the 1999 quarter, and 341.5 million lbs. copper and 516,00 oz. gold in the comparable 1998 period. The increased production was the result of record mine/mill throughput of 221,700 tonnes per day, which offset the effect of lower grades being processed in the newly expanded mill facilities.
On the cost-cutting side, results are even more impressive. Freeport’s average cash production costs (including gold and silver credits) were a mere US11 cents per lb. copper — 42% lower than the US19 cents reported in the 1998 first quarter. These results have allowed the company to maintain its status as the lowest-cost copper producer in the world.
On the financial front, Freeport posted net earnings of US$17.7 million on revenue of US$415.8 million for the 1999 first quarter, down from US$26.5 million on revenue of US$396.1 million a year ago.
The 1999 results reflect “voluntary additional royalties” tied to the expansion of production, which came into effect early this year. Freeport agreed to pay these royalties on production above 200,000 tonnes per day, in amounts equal to the contract of work (CoW) royalties for copper, and twice the CoW royalties for gold and silver. The voluntary royalties are remitted, for the most part, to the local province in Irian Jaya.
Freeport is the largest single employer in Irian Jaya, and one of the largest private-sector employers in Indonesia. The company also funds social and economic development programs, and invests in infrastructure. In three of the past five years, Freeport’s Indonesian unit has been the largest taxpayer in Indonesia.
At the end of 1998, the Grasberg project hosted proven and probable reserves totalling 2.48 billion tonnes averaging 1.13% copper, 1.05 grams gold and 3.8 grams silver per tonne. This estimate includes new reserves identified last year in the Grasberg open pit, as well as the Kucing Liar and DOZ underground deposits, each of which added more than 100 million tonnes.
After including additional resources, the project’s overall tonnage swells to 3.8 billion tonnes, with aggregate recoverable metals of 66.5 billion lbs. of copper (49.1 billion lbs. net to Freeport) and 86.8 million oz. gold (65.2 million oz. net to Freeport), making the Grasberg mineral district one of the largest copper-gold mining camps ever discovered.
Yet the exploration story is far from over. Freeport continues to explore, with encouraging results, ground near and surrounding Grasberg. In the latest quarter, US$2.9 million was applied toward these efforts.
The company’s land package covers a large mineral belt trending through the island of New Guinea. The original Block A covers 24,700 acres, whereas Block B covers 1.6 million acres. The CoW covering this ground was signed in 1991.
In 1994, a Freeport subsidiary signed a CoW covering three tracts of land totalling 1.25 million acres in Irian Jaya. Freeport also holds an additional CoW comprising about 1 million acres in a joint venture with
The latter holds about 23.9 million Freeport shares, or 15% of the outstanding stock. In addition, the major has the right to earn a 40% interest in future development projects on ground covered by its exploration joint venture with Freeport. It also helped fund Freeport’s fourth concentrator mill expansion, completed in early 1998, in return for a 40% interest in certain assets and future production exceeding specified amounts of metals through 2021.
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