Freeport-McMoRan (NYSE: FCX) explores the globe in search of natural resource mining opportunities. With over 50,000 employees and contractors, it's one of the leading producers of gold, the single biggest producer of molybdenum (a rare element used in fabricating steel alloys), and the world's largest publicly traded copper producer. The company also has a long history of doing business and bringing online operational mines in foreign countries such as Indonesia.
Freeport's stock has languished in recent years, amid a bear market in key commodities like oil and copper. Read on for a history of Freeport-McMoRan and to learn what its past can tell current investors about what the future might hold for the company.
A history of expansion
What we know today as Freeport-McMoRan was founded in 1912 as Freeport Sulphur, in the city of Freeport, Texas, the location of its original sulfur mine. In 1967, Freeport confirmed a Dutch discovery of the Ertsberg copper deposit in Indonesia, which shaped the company's fortunes forever. The company remains a major player in Indonesia to this day. In fact, in a remote part of the country in 1988, it discovered one of the largest copper and gold deposits in history, at the Grasberg Mine.
In 1969, and a world away, McMoRan Exploration was formed. Its name derived from the names of founders Ken McWilliams ("Mc"), Jim Bob Moffett ("Mo"), and Mack Rankin ("Ran"). McMoRan Oil & Gas merged with Freeport in 1981, and Freeport McMoRan, a mining powerhouse with interests in oil and gas, sulfur, gold, and copper, was born
Freeport-McMoRan's structure and asset base continued to change in the ensuing decades, including its $20 billion ill-fated reentry into the oil business through the 2012 acquisitions of both McMoRan Exploration and Plains Exploration & Production and the 2007 acquisition of Phelps Dodge, which brought with it significant copper and molybdenum assets.
What investors need to know
There are two fundamental facts about Freeport-McMoRan that all interested investors should know.
First is that the Grasberg mine is both an enormous asset and, in some ways, a liability. The main pit at Grasberg is more than 13,000 feet above sea level in a remote part of Indonesia. If that makes mining there sound like a difficult undertaking, you don't know the half of it. While the mine does yield a quarter of Freeport's entire copper production, it has demanded a great deal of effort, requiring the construction of an airport, a shipping port, thousands of miles of roads, and even a hospital. The company has spent billions, and on top of that, it's been the subject of a dispute with the government over its ownership of the mine.
But Freeport can't just walk away from one of the world's largest copper and gold mines, especially one that, after the initial investment, offers low-cost and high-volume production. Last year, the mine yielded 1.063 billion recoverable pounds of copper, a quarter of the company's entire production of the metal. The Indonesian government knows this, and in recent years has increasingly viewed mines like Grasberg with a more nationalistic bent. The current dispute was born out of new laws that require miners to adopt a special license, pay increased taxes and royalties, offer up 51% ownership to the country itself, and even give up arbitration rights in the event of future disputes.
The situation has become heated at times. Indonesia halted exports from the mine in January 2017. On Aug. 29, an agreement emerged in which Indonesia will take the 51% stake it had sought in Grasberg, and Freeport-McMoRan will operate the mine until 2041. Indonesia will also pay Freeport "fair market value" for its partially ceded stake.
The deal calls for around $20 billion of future capital investments, including a smelting facility. But the government's actions cast a dark cloud. Even with this agreement, shareholders are going to have to accept that the storm blowing in from the capital of Jakarta is unlikely to abate.
The second key thing to know about Freeport is its sizable debt load. The company's balance sheet carried $13 billion of debt as of June 30, the legacy of Freeport's ill-fated reentry into the oil business. Having since cut its losses, the company has worked to reduce what was a $20.4 billion long-term debt balance on Dec. 31, 2013. Progress has been laudable, as long-term debt stood around $19.5 billion as recently as year-end 2015.
Debt isn't always a bad thing, but shareholders should be wary. The company is expected to spend at least $1 billion annually for the next five years on the Grasberg mine alone. That commitment, plus the company's other properties, means Freeport's management has many masters it must serve. It's little wonder Freeport's dividend was eliminated completely in 2015.
Should you own Freeport?
It's clear from Freeport-McMoRan's history that investors should expect continued uncertainty from its Indonesian operations and billions of dollars in capital expenditures in the years ahead. Despite the fact that the company is one of the largest and most experienced global mining operations, its past points to too much future uncertainty for its stock to be a compelling buy. The Grasberg mining dispute may reach a fruitful conclusion (but still requires Indonesia's government and Freeport to agree upon a fair price for the 40% of the mine that Freeport is turning over), and key commodities for Freeport such as copper may rally, thus benefiting the stock. But these events are far from a lock, so investors should be cautious.
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