Freeport Bit By Grasberg Pit Low-Down Copper Ore Blues

Freeport McMoran Copperis facing quality concerns. The company recently announced that it expects a 17% decline in copper output from its Grasberg mine in Indonesia due to lower quality of the copper ore being mined. [1] Unfortunately, there is not much the company can do in this regard. Freeport competes with other miners such as the Southern Copper, Codelco and Newmont Mining.

Freeport is involved in the mining, smelting and refining of copper, gold and molybdenum. The company runs its mining and smelting operations in North and South America, Indonesia and Africa.

Our $63.42 base price estimate for Freeport’s stock is at a roughly 15% premium to market price.

Freeport’s Indonesian Mine Is Its Crown Jewel

The Grasberg mine located at Papua, Indonesia, is the world’s largest copper and gold mine in terms of reserves. The company’s annual report for the year 2010 states that, as of December 31, 2010, the mine had about 33 billion pounds of recoverable copper reserves and roughly 34 million ounces of recoverable gold reserves.

The mine currently has a production capacity of 80,000 metric tons of ore per day, and could reach 90,000 metric tons per day by 2012 and 240,000 metric tons by 2016.

Jewel Might Have Lost Some Shine

Freeport’s mining during 2011 will take place primarily at a lower-grade section of the mine, which is why estimated sales for the year are around 1 billion pounds of copper. In comparison, the mine sold 1.4 billion pounds of copper in 2009 and 1.2 billion pounds of copper in 2010.

Freeport’s Stock Value Could Take a Hit as a Result

All major copper mining companies are currently ramping up production to cash-in on rising copper prices. This is evident from the quarterly increase in quantity of copper sold. [2] The reduction in copper sales for Freeport at such an inopportune time will likely weigh on the company.

The exact impact on the company’s stock price can be inferred by dragging the trend line in our modifiable forecast chart for Freeport’s quantity of copper sold from the Indonesian mine.

We currently forecast that annual copper sales from the Indonesian mine will increase gradually towards 1.3 billion pounds by the end of our forecast period. But if Freeport does not ramp up production quick enough to compensate for the lower quality of copper ore, it may end up producing only 1 billion pounds of copper each year during this period. This scenario would imply 5% downside to our $63.42 price estimate for Freeport stock, leaving our number just above $60.