It's been a challenging year for Freeport-McMoRan . The company faced a number of obstacles to its now-closed acquisitions of Plains Exploration & Production and McMoRan Exploration Company. The good news, at least if you were in favor of these transactions, is that the deals are now closed and it can move forward.
Unfortunately, it faces more daunting problems in its legacy mining business that need to be addressed even as it works to integrate these two major acquisitions. It's not enough that its top two commodities, copper and gold, have seen prices plunge this year, which will negatively impact its bottom line. Now, one of the company's mines is being shut down.
This isn't just any mine. This is Freeport's Grasberg mine, the second-largest copper and largest gold mine in the world by reserves, which has been temporarily shut down for three months. The Indonesian government wants to conduct an investigation into why a collapse that led to the deaths of 28 miners occurred last month.
Source: Alfindra Primaldhi (Wikimedia Commons).
It remains to be seen whether this three-month halt in production will have any effect on the copper and gold markets. It's estimated that a three-month work stoppage could take 125,000 tonnes of copper out of the global supply chain. It's possible that copper from Rio Tinto's Oyu Tolgoi mine in Mongolia can pick up some of the slack as it starts shipments later this month. In addition to that, Freeport likely has enough stock to get it through the first few weeks of the closure.
The effect of mine's closure on the gold market is also uncertain at the moment. Gold isn't an industrially traded metal like copper, which is in demand as a basic material for the construction market. Gold prices can be driving more by momentum so it's entirely possible that this could prove to be a short-term catalyst to the gold market. It's also quite possible that gold investors will shrug off the closure.
If the closure of the world's largest gold mine does to prove to be a catalyst, a low-cost gold miner like GoldCorp would be a beneficiary. The company has low cash costs, which has led to higher margins than its peers. Any boost in the price of gold due to the mine's closure will help pad GoldCorp's bottom line.
What this incident does, however, is highlight one of the positive aspects of Freeport's just-closed oil and gas acquisitions. The diversification that the two new companies will provide can help deflect some of the damage caused financially to the company in times like this. Pro forma, the combined company will only rely on mining for around 75% of its EBITDA rather than the previous 100%.
What the company is doing is transforming itself into a global resources company as opposed to a copper-focused global mining company. This is a similar model to the one espoused by BHP Billiton . Not only does the Anglo-Australian giant have major mining operations, including the world's largest copper mine Escondida, but it has global gas and oil operations as well. This has made the company's profits less sensitive to the price movement of any one commodity. For example, a 10-cent-per-pound move in copper has a $200 million impact to BHP's net profit after taxes. That same move in copper prices has a $275 million impact to Freeport's operating cash flow, which is on a smaller base.
The bottom line here is that this mine closure, while bad for Freeport, isn't as bad as it could have been if the company weren't diversifying its business into oil and gas.
Still, after putting together a blockbuster deal to expand into the oil and natural gas industry, Freeport-McMoRan will have plenty on its plate as it tries to adapt to the new industry, since expanding into oil and gas carries plenty of inherent volatility. FCX had a profitable copper business, and on top of this foray into a new industry, it still has to contend with mining industry bellwether BHP Billiton even as it attempts to emulate BHP. With all that's going on at the company, it's important to stay up to date. For more information about Freeport-McMoRan, as well as updates as they occur, The Motley Fool has compiled a premium research report on the company. Simply click here now to access your copy today.
The article The Largest Gold Mine in the World Has Been Shut Down originally appeared on Fool.com.
Fool contributor Matt DiLallo owns shares of BHP Billiton (ADR). The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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