Freeport-McMoRan Goes for the Gold (and Copper) Again

After a near-two month delay, copper and gold miner Freeport-McMoRan (NYSE: FCX  ) has begun running copper shipments again out of its Grasberg mine in Indonesia, though full capacity production is still at least a month away.

The open-pit mine was closed in May following a tunnel collapse that killed 28 miners. When work resumed a week later, a truck driver was killed in a separate incident and the government ordered operations halted while it completed its investigation. But weeks without work had miners rioting and attacking the site because their families were starving, and the government relented, allowing some work to restart.

The open-pit operations have been going full bore since July 4, but the force majeure Freeport declared to extricate itself from having to deliver on some of its contracts to customers remains in effect. Though that will eventually lift, the copper and gold miner says its output this year is going to be slashed by 20% from what it originally predicted.

Grasberg is the world's largest gold mine and is the third-largest copper mine. Freeport had expected it would produce some 500,000 tonnes of copper in 2013, along with 1.25 million ounces of gold. As a result of the stoppage, however, concentrates of gold, copper, and silver will take a hit, and instead of the 220,000 ounces of copper ore it had been producing before the accidents, Grasberg is now producing 160,000 to 170,000 tonnes a day.

As I've noted before, Freeport isn't the only miner experiencing trouble at its mines. Barrick Gold (NYSE: ABX  ) finds itself caught in a particularly harsh position, as it expects to write down some $5.5 billion in assets related to its Pascua Lama project in Chile, where it's waging a battle with the government. The asset writedown coupled with the pushing out of its production schedule to 2016 is jeopardizing its credit standing, especially if gold prices continue to sag.

A fall much further from its current level around $1,250 an ounce could cause additional asset impairments that risk causing Barrick to breach loan covenants. Gold is already down around 25% this year, and continued softness would have lenders looking more closely at its "consolidated tangible net worth" that is required to be at least $3 billion. Analysts note at Barrick's last filing in March that it stood around $12.5 billion, but the Pascua Lama impairment will knock off 40% alone. 

While Rio Tinto (NYSE: RIO  ) isn't in danger of violating its debt covenants, the wall collapse it suffered at its Bingham Canyon mine in Utah have halted operations there till at least next year. Australia's Newcrest Mining is also writing down large swaths of its asset portfolio, reducing its value by almost a quarter.

I've thought Freeport was a better-balanced operation after its acquisition of oil and gas driller Plains Exploration and McMoRan Exploration, and with Grasberg back online, it should be able to weather the downturn in the mining sector better than many of its peers.

Trading below eight times expected earnings and at a fraction of its anticipated growth rate, Freeport-McMoRan offers a better risk profile than does Southern Copper at more than 12 times estimates, just about where Goldcorp sits. While Yamana Gold might present a similar valuation as the copper and gold miner, Freeport's return to its energy sector roots gives it more diversification that makes it the better bet in my book.

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