Freeport-McMoRan Will Come Roaring Back

In mid-December it looked like the ever-solid Freeport-McMoRan Copper & Gold (NYS: FCX) had solved its three-month labor difficulties at Grasberg, its huge metals mining facility in Papua, Indonesia.

But no sooner had the strikers accepted their agreed-upon pay raises and returned to the mines than they began literally striking their non-union colleagues, thereby once again halting Grasberg's production. Last week, however, the latest round of violence -- including the apparent deaths of two workers -- had been brought under control, and the huge copper and gold operation was again up and running. Nevertheless, Freeport apparently is still operating under force majeure, a prime indication that a return to normalcy lies down the proverbial road, most likely in the second quarter.

The strike's already struck
The final quarter of 2011, which bore the brunt of the Grasberg strike, saw the company earn $640 million, or $0.67 per share, a nearly 60% dip on the net income line from the comparable quarter a year earlier. Also as a result of the strike, revenues for the most recently reported quarter slid 26% year over year.

Freeport wasn't alone among copper producers in experiencing a fourth-quarter strike in Indonesia, however. Newmont Mining (NYS: NEM) saw 400 workers at its Batu Hijau mine on Sumbawa Island walk off the job briefly and with little effect in a November dispute over the calculation of overtime compensation.

However, for the nearly completed March quarter, Freeport management expects to have lost about 80 million pounds of copper sales from the 875 million pounds it had originally forecast. Similarly, gold sales are expected to reach about 300,000 ounces, versus the previous estimate of 425,000 ounces. Analysts who follow the company have arrived at a consensus earnings expectation of approximately $0.84 per share, well below the $1.58 per share recorded in the first quarter of 2011.

Can the red metal stay strong?
However, since Freeport's Grasberg labor unrest, while challenging, was clearly temporary, the real question surrounding the company involves the outlook for global copper supply, demand, and prices. For predictions in those areas, the world traditionally looks first to China, which consumes about 40% of the world's output of the red metal.

It's therefore noteworthy that the big developing country recently shaved its 2012 economic-growth target to 7.5% from the previous 8%. As Premier Wen Jiabao said just last week, China must move toward slower growth and stronger political reforms to prevent an economic faltering.

At the same time, however, it's likely that worldwide copper demand will exceed supply yet again in 2012, this time by an amount approaching 50,000 metric tons. That figure would represent a significant decline from last year's 400,000-ton shortfall. Nevertheless, it hardly represents a complete turnaround, and, for my money, we shouldn't be surprised by a more substantial 2012 figure, given that stockpiles on the London Metal Exchange have declined about 25% this year to a level not seen since August 2009.

Powerful prevailing prices
At the same time, the reduced supply demand shortfall will result largely from an expected refined copper output increase of about 6.7% this year, compared with demand growth that is expected to be closer to 6%. Given those expectations, May contracts on the Comex division of the New York Mercantile Exchange are trading in the vicinity of $3.80 a pound, a substantial hike from the levels just above $3 that prevailed as recently as October.

The increase in worldwide copper production will result from a number of sources. For instance, Vancouver, British Columbia-based Ivanhoe Mines (NYS: IVN) , which is 51% owned by Anglo-Australian mining giant Rio Tinto (NYS: RIO) -- in a less than amicable relationship -- is nearing completion of the first phase of its Oyu Tolgoi copper, gold, and silver project in Mongolia. The project, which may contain gold and copper with a whopping aggregate value of $300 billion, is almost certain to begin production later this year. It was effectively born in the mid-1990s when, for $5 million, Ivanhoe acquired Mongolian exploration licenses from BHP Billiton, the world's biggest mining company.

Freeport's global growth
While Ivanhoe's new operations will ultimately add meaningfully to the world's copper and gold output, Freeport-McMoRan will remain the world's major publicly traded copper company for years to come. Indeed, its recent labor travails notwithstanding, the company continues to build upon the strength provided by its long-lived, geographically diverse operations. Among its current projects, the company continues to ramp up its capacity at open-pit copper mines in Arizona and New Mexico, where it currently operates seven such facilities.

Similarly, it is expanding its assets in Peru and Chile. And at Tenke Fungurume, its copper and cobalt concession in Africa's Democratic Republic of Congo, its still-young facility is producing nearly half again its rated design capacity and is in the early stages of the creation of a second phase, which, at a cost of about $850 million, will add substantially to its initial output capabilities. Further, at Grasberg it is involved in the development of large-scale underground ore bodies beneath the massive facility's open-pit unit.

Given Freeport's steady strengthening since its 2007 acquisition of Phelps Dodge, which was then twice Freeport's size, I strongly suggest that Fools carefully track the company by placing it on their personalized version of My Watchlist.

At the time this article was published Fool contributorDavid Lee Smithdoesn't own shares in any of the companies named in this article. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Try any of our Foolish newsletter servicesfree for 30 days.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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