When I think about ways to play the growth in China, approached from some kind of sane valuation in relation to assets, I always seem to end up coming back to one theme consistently. FCX and AAUK. If one were to look at the chart of FCX, one might conclude its expensive or overextended. Overextended short term, I couldn't tell you, but expensive it is not.
bigcharts.marketwatch.com
Tonight I was thumbing thru some old musings on FCX and got a sense of nostalgia. Here's something I wrote in January of 2001. Unfortunate that I never held thru all those years as one investment, but rather tried to time the dips and rallies. Missed out on alot. But I certainly wouldn't be afraid to buy it here. It's just too darn cheap.
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Freeport Copper and Gold (NYSE ticker FCX) is one of those companies investors love to hate. The Co. owns and operates the world's largest gold mine in Iryian Jaya Indonesia. The Grasberg mine discovered by FCX is also the 3rd largest copper reserve in the world. Estimates of proven and probable reserves have gone up every year for the last 10 years. That fact alone makes it difficult to say exactly how rich in resources the Company really is. They have about a 3 million acre contract area of work over there and they keep finding more mineral wealth in areas adjacent to the Grasberg. The 1998 annual report pegged proven recoverable assets at 87 million ounces of gold, 151 million ounces of silver, and 66.5 billion pounds of copper. Suffice it to say that Grasberg is one of the largest world-class assets ever discovered.
Freeport has been mining and milling around over in Indonesia for the last 40 years, but it is the only in the last 15 years or so that FCX has stepped up its activities dramatically. Capital outlays totaled over $20 billion raised thru financing and redeployment of revenue. The Co. is Indonesia's single largest employer and taxpayer. The infrastructure is now complete and can handle 300 million metric tons of ore per day. When you think about the daunting size of the project, it transcends reality. Grasberg is actually the largest hole on the face of the earth. Can you imagine a complex and an infrastructure the size of several cities? Today, over 250 million tons of earth every day is dug, crushed, milled, moved, refined and processed. That's an awful lot of earth, and they have permission no to get up to 300 million tons a day.
With the crushers, milling complexes, concentrator mills, transportation systems, smelters, power plants, incinerators, housing, ports, airports, and equipment all in place, all FCX has to do is dig and process. The economies of scale can do the rest. FCX is positioned now to mass- produce copper and gold at a production cost lower than any mining operation in the world.
I think investors have largely steered clear of Freeport for several reasons. One is the fact that publicity has Indonesia as one of those unstable political and economic regions of the world. There exists a fear that the mine may be nationalized. Actually, nothing could be further from the truth. Freeport’s relations with the Indonesian Government are quite good. The Co. has done much for Indonesia over the years, building and supporting hospitals, schools, as well as having built the first underground water distribution system and sewage collection plants in the country. They opened up public health centers and created the Malaria Control Dept. The Co. also sponsors disease control and prevention programs extended into 47 villages. Freeport actually built a city so that employees of the mine can bring family from the remote highlands to live adjacent to the mine. The city of Kuala Kencana has 3 schools, swimming, tennis, badminton, volleyball, basketball courts, soccer fields, and baseball fields. There are cinema theatres, travel agencies, restaurants, discos, banks, a post office, stores, bakeries, bowling alleys, you name it. The operation does have environmental concerns, but all mines in the world have the same problems. The company's Timika Environmental Laboratory, provides key analytical support for the long term Environmental Monitoring program. Freeport's contribution to environmental programs is expected to total over $2 billion through mine closure. The Co. also owns the Maurujaya Reclamation Research Center. The Indonesian people have partnered with Freeport researchers and have planted all sorts of fruits, bananas, pineapples and mangoes on beds of solid tailings.
Evidence indicates the political concern about the location of the mine is overblown. Then you have the last 10 year bear market in gold which has impacted the stock prices of all mining companies, not only Freeport. Such was accompanied by a general trend to lower inflation. Usually bear markets end on a whimper with all hope lost by investors. I see lots of that today as gold unsuccessfully attempted its bear market rallies which all failed up to now. Negative sentiment towards the stocks is a key requisite for any reversal. I don't think there is a group of stocks on Wall Street, which has seen the negative sentiment that metals and mining stocks have seen over the past 10 years.
Freeport has been buying back its stock and has repurchased over 66.5 million shares in the open market since July 1995 on an averaging down type program. In the third quarter of 2000, they bought 4.4 million shares at an average cost of $8.67. They believe their assets are world class and worth much more than is reflected in the stock price. I'd say they have the richest assets of any mining company in the world.
Given predictions on 4th quarter output and cash costs per unit of ore, FCX looks good going forward. The intense capital outlays of the past are behind them and they can soon start realizing some of the economies of scale from this massive investment. At current gold prices and exchange rates, FCX expects that average production cost of copper (after gold and silver credits) to approximate 25 cents per pound for the year 2000 and get down to 11 cents per pound in the 4th quarter ended Dec 31, 2000. Should gold and copper prices advance, the leverage here is tremendous. I would say that for a patient investor FCX is probably one of the finest ways to participate in gold, copper, and silver mining. I believe the stock is near an all time multi year bottom. Just when investors should be loading up, they are giving up. ( 1/3/01) |
