Freeport-McMoRan Crowned With Tarnished Copper

0415_COMM_Copper[1]

The price of the world’s most important base metal, copper, continues to hover near a five-year low as copper miners struggle with waning demand from their biggest customer, China.

The current price, near $2.70 per pound, is down roughly 40% from the all-time highs reached in 2011.

China accounts for about 40% of overall global copper demand. But, consumption there has slowed as its once red-hot property market cools.

So, when Freeport-McMoRan (FCX) said that it’s going full speed ahead with a vast expansion plan, investors started scratching their heads. Especially since the company recently announced a dividend cut for the first time in seven years!

The company is already the world’s largest listed copper miner, and its goal is to become the overall No. 1 producer, passing up Chile’s state-owned Codelco.

Forging Ahead With Expansion Plans

Competitors in the industry, such as Teck Resources (TCK) and Anglo American PLC (AAUKY), are delaying their expansion plans for copper.

But Freeport is spending $4.6 billion at its Cerro Verde copper mine in Peru to raise its output.

Why is Freeport doing the opposite of the rest of the market?

Well, the company believes that supply won’t be able to keep up with demand in the years ahead.
In February, Freeport’s CEO Richard Adkerson said that if copper demand rises, even just 2.5% annually over the next decade, supply will lag.

Adkerson said that the industry would need to add 10 million metric tons (mmt) of capacity, which is more than 50% of the company’s global capacity, to account for the higher demand and depletion at older mines.

But, if this is true, it seems odd that other copper miners aren’t following along…

Supply-Side Woes

Well, from the supply side, it does make sense.

There have been only two large copper discoveries since Freeport’s massive copper mine was found in Indonesia in 1988. One of which, located in Mongolia and owned by Rio Tinto plc (RIO), has been slowed by disputes between the company and the government.

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