MAC/20: Mines and Communities

Freeport-McMoRan Down 5%; Prudential Equity Group Cites Indonesia Risks

Published by MAC on 2003-12-22

Freeport-McMoRan Down 5%; Prudential Equity Group Cites Indonesia Risks

By Tiffany Kary , Dow Jones Newswires

December 22, 2003

New York - Freeport-McMoran Copper & Gold (FCX) shares fell 7% Monday, as a Wall Street firm said the company's Indonesian mining operation faces significant political and geological risks.

Prudential Equity Group started investment coverage of the New Orleans mining company's stock with an underweight rating earlier. That means Freeport McMoRan's shares are expected to have a lower total return than the average of other mining issues in the next year and a half.

Prudential analyst John Tumazos set a price target of $27 a share, well below Freeport McMoRan's 52-week high of $46.74 set on Dec.9. Tumazos raised concerns over the maturation of a major pit in Indonesia on the heels of troubling landslides there.

Friday, Freeport McMoRan said a second, minor rock slide had occurred on Dec. 12 at the pit, where an Oct. 9 slide had caused fatalities. The company said the latest incident - a 150,000-tonne pebble slide - blocked access to the higher grade ore areas of the mine, and will delay some metal sales from 2004 to 2005.

Tumazos said the company will probably see 10% less ore at a 10% lower grade, and predicted earnings of 9 cents a share in the fourth quarter, $1.12 a share in 2003, and $1.81 a share in 2004 - 0.below Wall Street's views of 12 cents a share, $1.28 a share and $1.90 a share, respectively.

Freeport-McMoran wasn't immediately available for comment.

Tumazos noted that while analysis of pit slope is difficult given the heavy equatorial rainfall at the Indonesian mine, and varying rock mechanics, it appears there is a 50% chance that there will be more slides and setbacks there.

As for political risks, Tumazos cited concerns over the Indonesian central government and a local tribal council. Freeport McMoRan shares traded recently at $39.00, off 6% on volume of 5.35 million shares. Average daily volume is 2.52 million shares. Freeport McMoRan's stock has gained 192% since hitting a 52-week low hit last March. Prudential's action follows Morgan Stanley's downgrade Thursday on stock-price concerns. Monday's losses come on the heels of 3% and 5.1% declines Thursday and Friday.

"A weak Indonesian central government, breakup of the country, changes in taxes or discrimination against the (Freeport McMoRan U.S.-U.K. mining consortium) concern us," Prudential's Tumazos said. "Global environmental treaties or Indonesian rules may change, and we are uncomfortable with the disposal of up to 250,000 tonnes per day of ground rock tailings down a creek into a river delta near the sea.

"A Kyoto Accord-type legislation banning global disposal of solid waste to waterways is conceivable, and this analyst would applaud such a ban applied to the U.S., state or local government on the Eastern U.S. shores," he said. Prudential's Tumazos doesn't own Freeport-McMoran shares, and Prudential doesn't have investment banking business with the company Prudential also raised valuation worries, and noted that the recent fever for gold shares may give the stock a higher valuation than it would normally receive.

"We stopped short of applying a lower price target only because of a plentiful supply of gold bug investors willing to pay premiums," said Tumazos, who said his $27 price target is based on 9.5 times estimated earnings, the same price/earnings measure he uses with competitor Phelps Dodge Corp. (PD).

Tiffany Kary, Dow Jones Newswires; 201-938-5285; Tiffany.Kary@dowjones.com

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