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There's little question that Freeport-McMoRan, the world's largest publicly owned copper producer, has become the victim of as many strikes as my suddenly hapless Boston Red Sox.
You may recall that, among its bevy of copper, gold, molybdenum, and cobalt operations on four continents, Freeport-McMoRan Copper & Gold's (NYSE: FCX ) Grasberg facility at Papua, Indonesia, is the most significant, in that it contains the world's largest reserves of copper and gold. On that basis alone, it's more than slightly significant that the facility has been the subject of intermittent strikes since July of this year.
Honey, I got a huge raise
Since that time, about 8,000 of the approximately 10,000 workers who typically toil at Grasberg have taken to the sidelines. Their contention is that their hourly pay scale, which currently ranges from $1.50 to $3.50, should be boosted to -- I hope you're seated -- between $17.50 and $43. If you're like me, it's hard to tell whether you're more flabbergasted by the minuscule amount at which the employees have been serving the company or the percentage increases now being demanded.
While the lion's share of the Grasberg crew is bearing down on the first week of work stoppage in the latest iteration of its 60-day off-again, on-again strikes, perhaps 1,500 workers have returned to the facility to conduct maintenance activities and to turn out a smidgen of the giant mine's normal production. Nevertheless, according to a union official, "We are maintaining our position and continue with the strike as planned."
According to an estimate by the Indonesian government, Grasberg's strikes may chop production by about 230,000 tons of ore, worth about $19 million per day. Obviously, given its tax implications, the government is facilitating talks between the company subsidiary, PT Freeport Indonesia, and the disenchanted workers.
But Grasberg isn't the only location where Freeport has its hands full with an employee insurrection. As part of what might be termed the mining equivalent of the Arab Spring, miners in Peru, Chile, and Bolivia have joined their Indonesian colleagues in leaving their posts as part of a series of industry strikes. For instance, Freeport's workers at its Peruvian Sociedad Minera Cerro Verde SAA copper mine, which produces about 2% of the world's output of the red metal, have just returned to work, following a four-day strike that was halted during the weekend when the country's government called it illegal. However, the facility's contingent may head out once again, absent a wage-increase agreement.
Major problems for another mining group
At the same time, Newmont Mining (NYSE: NEM ) has also contended of late with a disruption at its Newmont Nusa Tenggara's Batu Hijau copper and gold mine, Indonesia's second-largest facility. Nevertheless, the company's production has been unaffected, although about a quarter of the mine's 4,000 employees were unable to reach the mine in the face of a demonstration that erupted when, of 5,500 applications to work at Batu Hijau, only about 230 were accepted.
But since there aren't many haute cuisine restaurants, Wall Street law firms, or technology outfits providing employment opportunities in Papua, it doesn't take a rocket scientist to conclude that, while Freeport's Grasberg employees may -- and should -- receive pay raises, their strike is unlikely to linger. On that basis, the longer-term key to copper prices (and consequently to the attractiveness of Freeport's shares) reverts to good old supply-and-demand considerations.
Copper's roller-coaster prices
This brings about a couple of considerations that relate to recent copper-price declines: First, while concerns about the possibility of hidden stocks of copper -- especially in China -- have been making the rounds, it appears that the global market is essentially balanced. Indeed, the real bearish factor may be a wavering confidence in the staying power of the Chinese appetite for the metal. Conversely, however, there remains a notion that demand led by China probably will result in a worldwide supply shortage approaching 500,000 metric tons this year, up from less than half that amount in 2010. Obviously, interruptions at Grasberg and other operations will only exacerbate the expected imbalance.
If you've been keeping tabs on Freeport-McMoRan, you'll recall that the company operates seven open-pit copper mines in Arizona and New Mexico, four copper mines in South America, the projects that comprise Grasberg, and a 57.75% interest in the Tenke Fungurume copper and cobalt mining concessions in the Democratic Republic of Congo. It's also the world's largest molybdenum miner -- followed in the U.S. by Colorado-based Thompson Creek Metals (NYSE: TC ) -- producing the hardening agent for steel from its Henderson underground mine in Colorado and as a byproduct of copper mining in the Americas.
The Foolish bottom line
How should we treat Freeport's stock amid the confusion unleashed by its workers' unrest and dwindling copper prices? I suggest we start by looking at the company's significant strengths, including long-lived reserves spread among geographically diverse locations. Those key elements won't disappear despite worker obstreperousness and up-and-down prices for multi-use copper in the face of economic confusion around much of the globe.
Beyond that, from observing the company especially closely before and since its 2007 acquisition of far larger Phelps Dodge, I'd add Freeport's management strength, a hard-to-measure quality that obviously is vital to any company's success. In this context, it's noteworthy that, as their names imply, Freeport shares something of a management overlap with also highly regarded Gulf of Mexico oil and gas producer McMoRan Exploration (NYSE: MMR ) .
For comparison's sake, it's also important to note that, while Freeport shares have slid by about 35% from their 52-week high earlier in the year. Conversely, Southern Copper (NYSE: SCCO ) , which has managed to avoid worker walkouts, has seen its shares slide by 39% from its winter high point. In addition, Freeport is trading at less than a 7 times expected earnings for next year, while Southern Copper's forward P/E is closer to 9%. And if you're an aficionado of PEG ratios, both companies sport powerful numbers, with Freeport at a five-year expectation of 0.48, while Southern is close behind at 0.53.
Our next earnings season is about to be led off -- as is typically the case -- on Oct. 11 by another U.S.-based metals producer, Alcoa (NYSE: AA ) , with Freeport-McMoRan set to take center stage precisely two weeks later. (Australia's giant miner BHP Billiton (NYSE: BHP ) turned in admirable results in late August.) I'd urge all Fools to mark Freeport's Oct. 25th release date and to follow the company closely by adding its name to your individual version of Motley's My Watchlist.
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