ANALYSIS-Wall St wary over Freeport's Congo mine woes
by Reuters News on 19 August 2009, 21:45 PM
communities.thomsonreuters.com
By Steve James
NEW YORK, Aug 19 (Reuters) - Freeport-McMoRan Copper & Gold Inc just mined its first metal in Democratic Congo, but Wall Street is wary about short-term prospects for the copper/cobalt project as Kinshasa reviews the mine contract and three employees are being held on suspicion of embezzlement.
"It's troublesome at times," Brian Hicks, co-manager of U.S. Global Investors' resources fund, said on Wednesday. "It's issues like this that keep copper production constrained."
Goldman Sachs, meanwhile, said in a research note, "We would not be surprised to see delays in development as Freeport sorts out the political, environmental and social hurdles."
Freeport got its 57.75 percent share of the Tenke Fungurume project when it acquired Phelps Dodge in 2007. The remaining interests are held by Canada's Lundin Mining Corp (24.75 percent) and state-owned Gecamines (17.5 percent).
The Kinshasa government launched a review of all foreign mining contracts in 2007 to boost revenues from the central African country's once-lucrative mining sector.
Four remaining contracts were approved on Aug. 6, but Tenke Fungurume -- believed to be the richest copper deposit in the world -- was given two months to agree to reviewed terms.
In another twist, Freeport said it agreed to pay $16 million in fees and penalties in a settlement related to procedures for getting visas and work permits in Congo.
Congolese authorities have held three Tenke Fungurume Mining Corp (TFM) employees on suspicion of embezzling millions of dollars in the visa and work permit dispute.
"The government has not presented TFM with credible evidence of wrongdoing by TFM's employees and TFM believes there is no legal basis for the arrest of its employees," Freeport said in a recent statement.
In the meantime, Wall Street, while expecting a new contract to be agreed, watches and waits for Freeport's more than $1 billion investment to start delivering on its promises as copper prices begin rise again.
"WORLD-CLASS ASSET"
Goldman, which set a target price of $90 on Freeport stock, said copper demand is poised to surge after the economic downturn and, coupled with constrained supply, will lead to a sharp rise in prices.
U.S. Global's Hicks said any political and legal risk is offset by the fact Tenke Fungurume is "a world-class asset.
"It will generate returns that are very attractive and there are not many companies that can deliver like that. Freeport is a bellwether of the copper industry," he said.
"There is some risk there, probably because of the contract negotiations," he said. "But the company would not have invested so much if it did not feel comfortable about the negotiations."
He noted Tenke production is ramping up now, so it was a relatively small portion of overall production.
Freeport, which produces about 4 billion pounds of copper a year from mines in North and South America, Indonesia and Africa, said construction at Tenke Fungurume is essentially complete, with 26 million pounds sold in the second quarter.
Average annual production at Tenke is expected to be about 250 million pounds of copper and 18 million pounds of cobalt when it is operating at full capacity.
"The DRC (Congo) needs revenue, but it also wants the project to go through," said Hicks. "The Chinese would covet such a project and they are knocking at the door."
Analyst Charles Bradford, of Affiliated Research Group said Freeport's situation was typical of companies looking for more scarce resources in politically risky parts of the world.
"Peru used to be the bad guy, expropriating a couple of iron ore ventures," he said. "But the problem with minerals is you can't chose where you operate. Freeport should have walked away before."
Freeport stock rose $1.62, or 2.68 percent, to close at $62.09 on the New York Stock Exchange on Wednesday. (Reporting by Steve James, editing by Leslie Gevirtz) |
