 | |
- close
- close
|
|
Topic
Top news source/blog that we're missing
Why do you recommend this news source?
|
||
WIKI ANALYSIS
Freeport-McMoRan Copper & Gold Inc (NYSE:FCX) is a miner, smelter, and refiner of copper, gold, and molybdenum. Copper production represents over 80% of 2007 revenues, with FCX owning mining and smelting operations in North and South America, Indonesia, and Europe.[1] The company's total proven reserves in its three primary outputs range from 17 to 28 times 2007 output, with over a billion dollars already invested in developing what are estimated to be the largest undeveloped copper and molybdenum reserves in the world.[2]Prices for all three key outputs in the commodities markets have been at historically high levels since approximately 2004, leading to increased revenues for the company. Further increases in spot prices would lead to more positive financial effects, while any kind of downward corrections would lead to fairly elastic decreases in operating income. The no value-added products the company sells leaves it intimately vulnerable to commodity price fluctuations.
In March 2007, FCX acquired former American rival Phelps-Dodge, greatly expanding its copper output and reserves and entering the molybdenum market. Combined with existing mining holdings in Indonesia, Freeport-McMoRan is one of the world's largest mining companies.[3]
Corporate Overview
Freeport-McMoRan itself is a holding company, operating through three main subsidiaries: Phelps-Dodge, PT-Freeport Indonesia, and Atlantic Copper. Its operating segments are involved with mining, smelting, and refining copper, gold, and molybdenum.[4] Each subsidiary is either fully or majority-owned by FCX.
- Phelps-Dodge, a former rival purchased by Freeport-McMoRan for $25.9 billion in March 2007,[5] is responsible for the company's North and South American mining operations. Previously one of the largest copper miners and suppliers in the Americas, Phelps-Dodge continues to operate fully integrated mining, smelting, and refining outfits.[6]
- PT-Freeport Indonesia is responsible for FCX's Indonesian mining and controls the Grasberg mining operation, which contains the world's largest known reserve of gold and one of the largest copper reserves.[7] FCX effectively owns and controls over 90% of PT-Freeport, and the rest is owned by the Indonesian government. Since 1996, FCX has had a joint venture agreement with competitor Rio Tinto (RTP); under this agreement, Rio Tinto will gain a 40% total interest in the Grasberg operations after 2021, though it will also share a proportional amount of administrative and operating costs.[8]
- Atlantic Copper is Freeport-McMoRan's wholly-owned copper smelting operation based in Spain. In both absolute and relative terms, this is by far the smallest of FCX's subsidiaries, with relatively negligible impacts on both total revenue and net income.[9]
Chart detailing the geographical distribution and crucial asset ownership stakes of FCX's main operating segments[10]
Business Segments
Copper (82% of 2007 Mining Revenues)
Over 3/4s of FCX's revenues come from the sale of refined copper, of which over 75% is bought by third-parties for use in construction or the manufacture of electrical appliances and industrial machinery.[12] Worldwide copper consumption has been growing at an annualized rate of approximately 3.1% since 1990, representing a strong increase in demand for FCX's core product over the past two decades.[13] As of the end of fiscal year 2007, Freeport-McMoRan's total proven reserves of copper amounted to over 24 times 2007’s output.[14]
Molybdenum (12% of 2007 Mining Revenues)
Molybdenum, with useful applications in steel alloy production, is almost wholly mined by FCX's American operations.[15] As of the end of fiscal year 2007, Freeport-McMoRan's total proven reserves of molybdenum came to over 28 times 2007 output.[16]
Gold (6% of 2007 Mining Revenues)
Gold, which is used in jewelry and certain sensitive electronics, is mined primarily in Indonesia by PT-Freeport.[17] As of the end of fiscal year 2007, Freeport-McMoRan's total proven reserves of gold added up to over 17 times 2007's output.[18]
Business Financials
| Metric | 2005 | 2006 | 2007 |
|---|---|---|---|
| Total Revenue | 4,179 | 5,791 | 16,939 |
| Operating Income (Loss) | 2,177 | 2,869 | 6,555 |
| Net Income (Loss) | 995 | 1,457 | 2,977 |
| Diluted Earnings (Loss) Per Common Share ($) | 4.67 | 6.63 | 7.50 |
| Long-Term Debt | 1,188 | 661 | 7,180 |
| Total Shareholders' Equity | 1,842 | 2,445 | 18,234 |
| Operating Margin (%) | 52.1 | 49.5 | 38.7 |
| Net Profit Margin (%) | 22.4 | 24.1 | 16.3 |
The March 2007 acquisition of rival North American miner Phelps-Dodge was the key factor driving the noticeable jumps in FCX's revenue, shareholders' equity, and long-term debt between fiscal years 2006 and 2007.
Trends & Forces
The Pace of Global (Especially US New-Home) Construction is an Important Driver of Copper Sales
Construction (both residential and commercial) accounts for over 1/3rd of copper's worldwide end-uses.[24] Copper is commonly used in constructing siding, in frames, and for electrical wiring purposes, uses which apply equally to both the residential and commercial construction markets. Fluctuations in housing or commercial construction demand in Freeport-McMoRan's key markets (especially the US and Asia) are influential drivers in the demand for commodity copper, and have the potential to lift or depress spot prices, with the attendant effects on copper producers' operating incomes.
As of 2007-2008, the US new housing market is in one of its worst downturns in decades, leading to decreased demand in the US for copper (notwithstanding any movement in US commercial construction demand).[25] Increases in home foreclosures due to the subprime credit crisis have helped lead to a glut of homes in the market, making new home construction (to which copper demand is positively tied) an unattractive option in such conditions. A reversal of this trend, with the increase in copper demand it would entail, is hard to predict and accurately time.
This downward trend may be counterbalanced by growth and industrial investment in fast-growing economies such as China and India, where increasing commercial and residential construction raise copper demand and put upward pressure on prices, given limited production.[26]
Continuing Growth in BRIC Countries Puts Upward Pressure on Commodity Prices
Much of the increase in demand for key commodities such as copper, molybdenum and gold has come from fast-growing developing nations intent on industrializing, upgrading private infrastructure and housing, and increasing wealth.[28] In particular, China's share of consumption of these commodities, such as copper and other base and industrial metals, has been increasing at a strong pace. Goldman Sachs reports that Chinese share in world demand for copper and other base metals has more than doubled since 2000 (this roughly parallels to a more than doubling of spot copper prices in the same period).[29] This has put upward pressure on both copper prices and copper producers' operating margins.
Other rapidly industrializing, emerging markets such as Brazil, India, and Russia have the potential to impact demand in a similar manner to China, especially if the pace of modernization efforts picks up. Higher demand for essential construction materials such as copper and molybdenum, encouraging higher spot metal prices, would lead to higher margins for FCX.
The Success of FCX's Key Development Project is Dependent On a Volatile Congolese Government
In addition to the March 2007 acquisition of rival Phelps-Dodge, Freeport-McMoRan has concurrently spent well over a billion dollars in a handful of key development projects.[30] While the company arguably has enough proven reserves to maintain modestly increasing output in the medium run, these investments are closely correlated with the medium-to-long run health of the company's assets and business.
The largest such project, totaling over $900 million (and counting) in expenditures thus far, is the development of the Tenke Fungurume holding in the Democratic Republic of Congo.[31] Estimates indicate that the site may hold the largest undeveloped copper reserves in the world, and FCX expects the first full year of output to commence as early as 2010.[32] The mine's location, however, poses a problem, as it is in a remote, undeveloped, and potentially violent part of the Congo; additionally, the Congolese government has a long history of corruption and corporate harassment, which multiplies the risk of the venture. Serious issues have already arisen, as the Congolese government is trying to force a re-negotiation of its original working contract with Freeport-McMoRan to obtain far more favorable terms.[33] Success for the Congolese in this instance would mean reduced operating and profit margins for FCX.
Competition
According to FCX's company profile, it is the largest publicly owned copper company. In terms of output, it ranks second globally behind the privately-held Codelco.[34] Freeport-McMoRan is also the world's largest miner of molybdenum, and one of the largest gold miners.[35]
Codelco and rival American company Southern Copper (PCU), are FCX's largest competitors in the copper and molybdenum mining businesses. Newmont Mining (NEM), the world's largest gold miner, directly competes with FCX in the precious metals business.
| Company | Total Revenues | Operating Income (Loss) | Net Earnings (Loss) | Net Diluted Earnings (Loss) Per Share ($) | Long-Term Debt | Total Shareholders' Equity |
|---|---|---|---|---|---|---|
| Freeport-McMoRan (FCX)[36] | 16,939 | 6,555 | 2,977 | 7.50 | 7,180 | 18,234 |
| Southern Copper (PCU)[37] | 6,085 | 3,497 | 2,216 | 7.53 | 1,289 | 3,848 |
| Codelco[38] | 17,080 | N/A | 3,340 | N/A | N/A | N/A |
| Newmont Mining (NEM)[39] | 5,526 | (963) | (1,866) | (4.17) | 2,683 | 7,548 |
References
- ↑ FCX 2007 Form 10-K, Item 1, 'Business'
- ↑ FCX 2007 Form 10-K, Item 7, 'Management's Discussion and Analysis'
- ↑ FCX 2007 Form 10-K, Item 1, 'Business'
- ↑ FCX 2007 Form 10-K, Item 1, 'Business'
- ↑ FCX 2007 Form 10-K, Item 1, 'Business'
- ↑ PD 2006 Form 10-K, Item 1, 'Business'
- ↑ 'Grasberg MineSite,' Global Infomine
- ↑ FCX 2007 Form 10-K, Item 1, 'Business'
- ↑ FCX 2007 Form 10-K, Item 7, 'Management's Discussion and Analysis'
- ↑ Freeport-McMoRan Company Profile - Organizational Structure
- ↑ FCX 2007 Form 10-K, Item 1, 'Business'
- ↑ FCX 2007 Form 10-K, Item 1, 'Business'
- ↑ FCX 2007 Form 10-K, Item 1, 'Business'
- ↑ FCX 2007 Form 10-K, Item 1, 'Business'
- ↑ FCX 2007 Form 10-K, Item 1, 'Business'
- ↑ FCX 2007 Form 10-K, Item 1, 'Business'
- ↑ FCX 2007 Form 10-K, Item 7, 'Management's Discussion and Analysis'
- ↑ FCX 2007 Form 10-K, Item 1, 'Business'
- ↑ FCX 2007 Form 10-K, Item 8, 'Financial Statements and Supplementary Data'
- ↑ FCX 2006 Form 10-K, Item 8, 'Financial Statements and Supplementary Data'
- ↑ FCX 2007 Form 10-K, Item 8, 'Financial Statements and Supplementary Data'
- ↑ FCX 2006 Form 10-K, Item 8, 'Financial Statements and Supplementary Data'
- ↑ US Census Bureau New Residential Construction June 2008 Report
- ↑ FCX 2007 Form 10-K, Item 1, 'Business'
- ↑ US Census Bureau New Residential Construction June 2008 Report
- ↑ 'BRICs' Chapter 20: 'BRICs and Global Commodities Markets,' Goldman Sachs
- ↑ FCX Presentation - Goldman Sachs Basic Materials Conference 2008
- ↑ 'BRICs' Chapter 20: 'BRICs and Global Commodities Markets,' Goldman Sachs
- ↑ 'BRICs' Chapter 20: 'BRICs and Global Commodities Markets,' Goldman Sachs
- ↑ FCX 2007 Form 10-K, Item 7, 'Management's Discussion and Analysis'
- ↑ FCX 2007 Form 10-K, Item 7, 'Management's Discussion and Analysis'
- ↑ 'Tenke Fungurume Project May Cost More Than $900 Billion,' 02/26/08, Mining Weekly Online
- ↑ FCX 2007 Form 10-K, Item 7, 'Management's Discussion and Analysis'
- ↑ Codelco Company Profile, Yahoo! Finance
- ↑ FCX Company Profile - Our Industry Standing
- ↑ FCX 2007 Form 10-K, Item 8, 'Financial Statements and Supplementary Data'
- ↑ PCU 2007 Form 10-K, Item 8, 'Financial Statements and Supplementary Data'
- ↑ Codelco Company Profile, Yahoo! Finance
- ↑ NEM 2007 Form 10-K, Item 8, 'Financial Statements and Supplementary Data'
| ||||||
|
|
