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Freeport-McMoRan free cash flow dramatically improves

By Barry Sergeant, Mineweb.com

Most times, attempts to interpret reasons for daily moves in a stock price prove to be as difficult as explaining teats on a boar, but the NYSE knock that Freeport-McMoRan took on Wednesday, upon release of published first quarter results, was truly surprising; perhaps it was a matter of "buy on rumour, sell on fact", without anyone remembering what the rumour was.

The numbers show that Freeport, the world's biggest publicly traded copper miner, No 1 in global molybdenum, and a Tier I global gold miner, is no more and no less than a mean machine. Free cash flow for the first quarter - operating cash flow less capital expenditure - was USD 1.6bn, a huge turnaround from the negative USD 771m posted for the first quarter of 2009.

Further news was that Freeport would double its annual dividend to USD 1.20 a share. Net income for the first quarter increased to USD 2.00/share, from USD 0.11/share in the first quarter of 2009. For the record, sales for first-quarter 2010 were 960m pounds of copper, 478,000 ounces of gold and 17m pounds of molybdenum.

Latest copper and gold sales, compared to the first quarter 2009, were down mainly on the sequencing method of mining at Grasberg in Indonesia, which ranks as a very big copper mine, and the No 1 gold mine in the world.

The overall sales outlook for 2010 is 3.8bn pounds of copper (2011: 3.9bn), 1.8m ounces of gold (1.9m), and 62m pounds of molybdenum (65m). Operating cash flow for 2010 is anticipated at USD 6bn, and capital expenditure at USD 1.7bn, putting free cash flow at USD 4.3bn, back to levels seen in 2007, which prepared the way for a payment of a dividend of nearly USD 1bn in 2008.

One possible mystery associated with Freeport is the way that it demonstrably ignores acquisition of gold companies, despite the massive cash flows that it is capable of generating. Freeport's latest notable acquisition was in 2007, when it paid USD 26bn for Phelps Dodge - mainly for copper.

While Freeport managed to produce USD 2.8bn worth of free cash flow for 2009, Barrick, the world's biggest gold miner, was able to produce a more modest USD 548m, and Newmont, the No 2 gold miner by production, a more impressive USD 1.2bn.

Specialised gold miners are having a tough time of it, and are moving increasingly towards mining base metals, where relevant deposits also contain gold. The favourite is copper porphyries, which tend to be big, and can be mined on a massive scale. Both Barrick and Newmont, among other gold miners, already produce material amounts of copper, with more to come.

Goldcorp, which is building up to full production at its zinc-lead-gold-silver Peñasquito mine in Mexico, is in a battle with Barrick over Chile's El Morro, which, in the hands of London-listed Xstrata, was classified as a copper-gold deposit.

In October 2009, Barrick announced that it had bought 70% of the El Morro project for USD 465m in cash; in January 2010, Canada-listed New Gold, holding 30% of El Morro, said that it had exercised a right of first refusal on El Morro, and Goldcorp said it had acquired the 70% stake in El Morro that Barrick had bought. The matter is in the courts.

Given the ongoing move - and even a fight - by gold majors into copper mining, seen also at Australia's Newcrest, and no doubt at Harmony, which today announced a huge copper-gold resource at Golpu, PNG, held 50:50 by Harmony and Newcrest, the possible fear for gold bugs lies in a potential downgrading of stock market ratings.

Grasberg rates as the No 2 gold deposit in the world, but Freeport is not rated anything like a gold stock. Its rating is seemingly hardly enhanced by its potent status in copper, the world's most profitable industrial metal (for miners), and also not by its leading status in molybdenum, an essential ingredient in steelmaking, which continues to boom in China, as seen in recent iron ore price hikes.

At a generator of cash, Freeport is fearsome. Over the past three calendar years, ten of the world's major gold miners have generated a negative USD 13.5bn in free cash flows, compared to positive USD 7.9bn from Freeport. Yet the combined market value of the ten gold miners is USD 163.8bn, compared to Freeport's USD 33.8bn.