Freeport-McMoRan Inc. (NYSE: FCX) and Barrick Gold (NYSE: ABX) both mine for gold and copper. There's been a lot of good news in the precious and industrial metals industries lately, with both copper and gold rallying off of their lows last year. Investors still seem pretty excited about the outlook for the metals, too. If you are comparing this pair of miners, however, you need to look past the forecast for copper and gold and focus on risk. And on that score, Barrick is the better choice right now.
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Getting past one problem to find another
You can't have a conversation about Freeport-McMoRan without mentioning the company's ill-timed investment in the oil and gas industry in 2013. It paid $11 billion for McMoRan Exploration Co. and Plains Exploration, pushing its long-term debt up from a reasonable $3.5 billion to $20 billion in a single year. It also issued 50 million shares, upping its share count to one billion. When oil prices cratered in mid-2014 this investment turned into an expensive albatross.
Image source: Barrick Gold
To be fair, Freeport has been working hard to get out from under this weight. And it's finally gained some traction. For example, it trimmed debt by roughly $5 billion in 2016 to just under $15 billion by selling non-core assets, notably in the oil space. At the start of 2017 long-term debt still made up a heady 70% (or so) of the capital structure. But the miner stated it sees a clear path toward continued debt reduction without the need to sell more assets. Although there's still work to do, the worst may be over in oil.
And then Indonesia changed some rules at the start of the year that have thrown a huge wrench into the operations of the Grasberg mine complex. It's fairly complex and political, but to put it simply, the mine could shut down if something doesn't change very soon. If this were a small mine it wouldn't matter. However, Grasberg accounts for roughly 30% of Freeport's copper reserves and about 95% of its gold reserves. Freeport-McMoRan is just getting out of one jam only to find itself mired in another. And it's at a negotiating disadvantage since the mine is so important to the company's operations.
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A quick primer on what's going on at Grasberg... Image source: Freeport-McMoRan Inc
Steady and stable
Barrick Gold isn't facing anything like these issues today. That's not to suggest that it hasn't made bad calls of its own. For example, it's still trying to get its Pasqua-Lama mine up and running after facing major social, environmental, and political headwinds. That mine got the original "green light" back in 2009 and could be an important asset, but Barrick isn't laboring to get out from under it like Freeport has been with its oil bet. On the whole, Barrick's business is operating fairly well today, has a lower debt load, and it isn't facing massive risks at one of its largest operating assets.
To put some numbers on that, Barrick is looking to pay down debt too, but long-term debt was only around 50% of its capital structure at the end of the third quarter. That's still notable for a company in a highly cyclical industry like mining, but a lot better than the situation at Freeport. And the vast majority of its mines are in the America's in politically stable regions. For example, its two largest mines, Cortez and Gold Strike (representing about 40% of 2016 gold production), are in Nevada.
Barrick Gold's global portfolio. Image source: Barrick Gold.
Of the three operating mines outside of the Americas, one accounted for just 4% of Barrick's gold production in 2016. That's not particularly meaningful. The other two made up a little more than 70% of the company's copper production, which is notable. However neither is in Indonesia and there doesn't appear to be any issues with their operations, located in Saudi Arabia and Zambia, at this time. That's not to say that something couldn't go wrong, but Barrick is clearly in a better position than Freeport today when it comes to keeping its mines up and running.
More than metal
When it comes down to it, the price of the commodities that miners like Barrick and Freeport-McMoRan pull out of the ground have a huge impact on their stock prices. However there's more to running a successful mining business than just commodity prices. For example, debt matters, the scale and scope of investment decisions are important, and so is operating in politically stable regions.
At this point, Freeport-McMoRan is still working its way back from an ill-timed investment in oil and is struggling through politically tinged negotiations at one of its most important mines. Although Barrick has made its own mistakes over the years, its risk profile is better than Freeport's today, easily giving it the edge in this head to head comparison.
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