Freeport Bets Copper’s No Oil With Growth to Grab Top Spot
by Matthew CrazeAgnieszka de Sousa
10:47 AM AEST April 13, 2015
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An aerial view of the Cerro Verde copper mine is seen in the Atacama Desert near Arequipa, Peru. As Freeport readies a $4.6 billion expansion at the Cerro Verde mine, Chief Executive Officer Richard Adkerson will join a debate on the supply side’s reaction to slowing demand at the industry’s annual get-together in Santiago this week. Source: Photographer: Mark Dobiey/Freeport-McMoRan via Bloomberg
surplus won’t eventuate, fueling a 10 percent rally. Copper for delivery in three months fell 0.4 percent to $6,014.50 a ton by 11:47 a.m. in London.
In February, Adkerson told a conference in Florida that if copper demand grows at 2.5 percent a year over the coming decade, the industry will need to expand by 10 million metric tons, or more than 50 percent of its global installed capacity, to meet that rate and account for depletion at old mines.
Only two new significant discoveries have been made since Freeport’s 1988 Indonesian find, one of which is in the Gobi Desert and is struggling to expand as its owner, Rio Tinto Group, and the Mongolian government debate terms, said Leon Westgate, an analyst at ICBC Standard Bank Plc in London.
Free Fall
Adkerson and Moffett declined to be interviewed for this article. Freeport shares have lost 40 percent in the past six months, the worst performance among 15 global peers tracked by Bloomberg. Last month, the company cut its dividend by 84 percent as it tries to fund projects and reduce debt that surged after it bought two oil and gas producers.
The divergent views on Freeport’s outlook were exemplified Monday as Citigroup Inc. raised its stock recommendation to buy, citing a copper-price inflection, and Bank of America Corp. lowered it to the equivalent of sell.
Lower copper prices have also deterred exploration, most of which is done by small companies that have been starved of funds since the commodities rout began. Capital expenditure by copper producers tracked by Bloomberg Intelligence is estimated at $72 billion this year, the lowest since 2010.
“You’ve got a hole in the copper pipeline toward the end of this decade,” Westgate said. “A medium-sized project in an unnamed Latin American country in the middle of a jungle is not rapid and unfortunately explorers are so sensitive to price.”
Desert Deluge
Copper mines are deep and prone to production setbacks from floods, mudslides, workers strikes and regulatory frameworks in emerging countries where they are found. Chile, the world’s largest-producing nation, said thousands of tons of production were lost to floods in the Atacama Desert this year. Copper contrasts with iron ore, where BHP Billiton Ltd., Rio Tinto and Vale SA expansions have created a glut.
“If you’re going to dig up an iron ore mine, it’s a bit like digging up a tray of margarine, it’s just scraping off the surface,” said Vivienne Lloyd, an analyst at Macquarie in London. With copper, “you have to dig quite deeply into the ground to get to the high concentration.”
Record Spend
Freeport’s larger rival for the last 44 years has been Codelco, owned by Chile’s government since 1971 after socialist President Salvador Allende nationalized mines owned by U.S. companies. As Chile depleted the mines over the next three decades without large investments, a $25 billion investment now underway won’t come in time to keep up with Freeport.
Freeport is poised to sell about 1.95 million tons of copper next year, compared with output of about 1.85 million tons from Codelco. Making an exact comparison isn’t possible using publicly available data as Freeport purchases some copper to process at its smelter in Spain.
Even with Codelco’s record planned investments, the Santiago-based company’s production will only rise 10 percent as most of the spending will replace lost output. As top producer, Codelco negotiates annual premiums for each ton of refined copper sold in buyers in Asia, Europe and America.
Without the investments, Codelco’s output would slump to 1 million tons, from about 1.8 million tons now.
The Elephant
Freeport’s bet is as much about China, the biggest user of industrial metals, as it is on supply-side constraints.
Copper analysts, bankers, traders and mining executives converge at an annual dinner in Santiago on Wednesday to discuss the dilapidated state of the world’s copper investments. While the Cesco dinner is a must-attend dinner for big mining companies, end consumers of the metal from China are conspicuous in their absence.
“The elephant in the room is how slow the Chinese demand growth will be in the next two years,” Max Layton, an analyst at Goldman, said April 7 in London. “The long-term bull story is there.”
Chinese demand grew 5.9 percent last year to 10.1 million tons, the slowest pace since 2010, according to Morgan Stanley. The rate this year will be 2.6 percent, the weakest since at least 2007, the bank said in a report March 24.
China’s weakness means copper supply will exceed demand by 200,000 tons in 2016, according to a Goldman presentation. The bank sees a deficit of 526,000 tons in 2018 as supply from mines contracts 0.5 percent, the first decline since 2011. Prices surged to a record $10,190 a ton that year.
Excess Capacity
Supply constraints will help copper avoid the plunge seen in iron ore and oil, according to Barclays Plc. Iron ore has tumbled 33 percent this year on an supply glut, while coal also slumped amid excess mining capacity in China. Oil lost 50 percent in the past year as OPEC members engage in a price war with U.S. shale producers.
“The prospect of deficit is what’s guiding us for copper,” Michael Scherb, founder of Appian Capital Advisory LLP, which invests in mining, said by phone from London. “The short term has been way oversold. When you look at the major mining companies, they are throwing off $25 billion in Ebitda, so it’s not completely unhealthy as a market.”
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