The Motley Fool Previous Page

3 Things to Watch With Freeport-McMoRan Copper & Gold

Sean Williams
September 11, 2012

Freeport-McMoRan Copper & Gold (NYSE: FCX  ) is a global explorer and miner of mineral resources including copper, gold, molybdenum, silver, and various other metals. According to its website, Freeport currently possesses 102 billion pounds of copper, 40 million ounces of gold, 2.48 billion pounds of molybdenum, 266.6 million ounces of silver, and 700 million pounds of cobalt.

Today, let's look at three things investors should be watching regarding Freeport-McMoRan, as they will provide us with better insight into the company.

1. China, China, China!
I'm well aware that this headline is getting nauseatingly old, but the simple fact of the matter is that as one of the single-largest providers of copper in the world and with China using far more copper than any other country, the health of China will determine the stability of the copper market and Freeport's bottom line.

Details about copper's health have been relatively mixed in recent months. On one hand, China's GDP growth has been steadily reversing and is at multiyear lows -- although 7.5% growth is still pretty darn good if you ask me! Last week, however, we received positive news from China that it was planning to implement a $156 billion infrastructure project to stimulate its economy which, in turn, should call for a rise in imports of multiple metals from Freeport-McMoRan, including copper -- which is a commonly used metal in construction. This news has lit a temporary fire under both Freeport and Southern Copper (Nasdaq: SCCO  ) , which holds the largest supply of copper reserves at 146 billion pounds. It's therefore imperative that Freeport investors keep a close eye on China.

2. Operating costs and efficiencies
One factor affecting miners of all sizes is the rising cost of building, expanding, and maintaining a mine. In Freeport's second quarter, its net unit cash cost of copper (which includes the positive benefits from by-product sales) rose an undesirably high 60% to $1.49 per pound from the year-ago quarter. That spike in costs comes from a multitude of factors including, a $500 million increase in capital expenditures through the first six months of 2012, the rising cost of fuel and labor, and the falling price of its by-products, including molybdenum.

Freeport shareholders shouldn't feel too bad, as they aren't alone. The cost to build Thompson Creek Metals' (NYSE: TC  ) copper and gold mine, Mt. Milligan, has doubled since it purchased Terrane Metals. Thompson Creek has needed to divest part of its gold assets in Mt. Milligan to Royal Gold (Nasdaq: RGLD  ) twice now to generate cash for the project.

With that being said, operational efficiency and cost-saving initiatives are musts for the mining sector. Freeport handles its costs by internalizing as much as it can and utilizing the hourglass approach to work with its suppliers to eliminate waste on both it and its sup