Freeport-McMoRan defies the odds. One particular lineament that justifies my outlook is its demeanor with regard to the labor issue in Indonesia. To the disappointment of critics, Freeport has tactfully handled the delicate issue. Although the disruptions caused by workers come as a big blow to operations, Freeport has not resorted to any radical measures. This demonstrates Freeport’s peerless foresight.
Apparently, a section of workers in the Indonesian unit have taken the steering wheel and in the process thrown diplomacy out of the window. These workers have resolved to violence and intimidation in the hope of streamlining interests among the workforce. This new chapter of discord is an outgrowth of last year’s strike. Those responsible for the current disruptions are returning workers, evidently disappointed in the standpoint taken by non-striking workers. All the same, Freeport has joined hands with the government and the union to put a lid on the problem.
Freeport actually recorded a 59% dip in fourth-quarter earnings last month, tracing the drop to last year’s strike.
Still, in light of the Indonesian disputes, I am particularly amused by the fashion through which Freeport has taken the new Indonesian mine rules. Although these rules will not in any way affect Freeport, it was wise of them to take their stand. The CEO said that although Freeport was not subject to the new laws, it would fully cooperate with the government. This not only snuffs out tension built up among workers but also sets the copper heavyweight in the government’s good books. The new rules (which as I stated earlier, have no impact on Freeport), will require foreign investors to slowly tighten up on their stake in coal and mineral mines from previous highs of 80% to a maximum of 49%. Luckily for Freeport, its contract of work — signed in 1991 and active for 30 years — gives it a shielding against the new legal reforms.
Another thing that may weigh on Freeport is the expected deficit in the copper market this year. In fact, the expected deficit will leave a global footprint. The deficit primarily stems from the industry’s inability to maintain a frictionless flow of activities. To aggravate the situation, China’s consumption is not going to decrease any time soon. This eastern nation accounts for close to 40% of the global output. This paints a dim picture as, demand being higher than supply, it ultimately leads to an inevitable deficit; there are no two ways about it. Luckily, for Freeport it is not alone in the line of fire. I am even impressed that as has been noted — the situation from afar — news of the expected deposit came from the CEO.
Southern Copper Corp. (SCCO) and Newmont Mining Corp. (NEM) are Freeport’s prime sources of competition. Taking a look at the numbers alone, it is notable that these competitors are not widely spaced. In fact, Southern Corp. moves in the shadow of Freeport and even posts a higher quarterly revenue growth rate. All the same, Freeport still enjoys more favorable economies of scale and better prospects in copper mining.
On the other hand, Newmont is pushed to the hedges. In fact, there is a prevalent bearish outlook on the stock. Friday (July 6, 2012), it was labeled loser of the day after it recorded the worst figures in its space and further contributed to the dip in the mining sector. Being smaller than Freeport, it cannot afford to perform poorly. This not only gives Freeport an edge but also makes it harder for Newmont to rally aggressive competition.
To round up, I would say that I am confident in Freeport. It exhibits the potential to pass trying moments. Its 3.6% dividend is also a plus. It’s a buy!