19 April 2012, 1:30 p.m.
By Allen Sykora
Of Kitco News
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(Kitco News) - Freeport-McMoRan Copper & Gold Inc. (NYSE: FCX) is making good headway in restoring operations at its giant Grasberg mine in Indonesia, and officials expressed optimism Thursday that negotiations with the government over contract extensions to keep operating in Indonesia will eventually be satisfactorily resolved.
The company also said it observed good U.S. copper demand during the first quarter and characterized the global market as tight.
Richard C. Adkerson, president and chief executive officer of Freeport, addressed these and other issues during a Webcast in conjunction with the release of Freeports first-quarter earnings report (see related story).
During the first quarter, the company was still dealing with fallout from a strike at Indonesian operations last year, even though a new two-year contract was reached in December between workers and Freeports 90.64%-owned subsidiary PT Freeport Indonesia.
Tensions among workers and security issues led Freeport to undertake a temporary shutdown on Feb. 23. The company resumed mobilization of its workforce on March 12. Freeport estimated that the impact of the work interruption was approximately 80 million pounds of copper and 125,000 ounces of gold.
We are seeing progress in returning to normal operations
.Today, our mill is operating at over 200,000 tons (of ore) per day after being limited to 115,000 tons per day in the first quarter, Adkerson said.
The company is on pace to return to full operations during the second quarter, he said. If so, Freeport could be in for a period of labor peace for a while, anyway.
Freeport last year also reached new labor agreements at its Cerero Verde and El Abra mines in South America. The only negotiations on the horizon are at Tenke Fungurume in the Democratic Republic of the Congo later this year, plus Candelaria in Chile, said Kathleen Quirk, chief financial officer. In the case of the latter, the current contract does not actually expire until next year, but Freeport aims for talks on a new agreement yet this year, Quirk added.
Meanwhile, Freeport is looking to gain extensions to its contract with the Indonesian government at a time when the government is making changes to mining laws and reviewing and renegotiating all contracts with mining companies operating in the country.
Freeport is seeking contract extensions as it prepares to invest some $15 billion to develop underground resources as Grasberg is shifted from an open-pit mine, which is nearing depletion in a few years, to an underground one.
Substantive contract talks are taking place and the company is willing to cooperate with the government, Adkerson said, but declining to go into the details.
The discussions are going well and we feel were making great progress, Adkerson said. He later added, there is a sense of urgency on the part of both the government and company.
Freeport signed a 30-year contract in 1991, which includes provisions allowing the company to apply for two extensions that would go through 2041. The extensions require government approval, but the contract provides that approval cannot be withheld unreasonably, Adkerson said.
Adkerson detailed the existing contract and the benefits to Indonesia, including income taxes, royalties, taxes on dividend payments from PT Freeport Indonesia to FCX. In total, including the nine-plus-percent equity interest that the government has, the government gets more than 50% of the benefits of the cash flow that is generated by Grasberg,
Adkerson said. Freeport has contributed over $60 billion to national gross domestic product since 1992, he said.
The CEO said both Freeport and the Indonesia government have always complied with two contracts going back to 1972. He said the company would be responsive to issues raised by the government during the contract review but will also be looking to protect its assets.
at the end of the day, the government will be happy and our shareholders will be happy, Adkerson said.
The company, which also has operations in North America, South America and Africa, is looking to increase total annual copper sales by 25% over the next three to four years.
Freeport is the worlds largest publicly traded copper company.
Proven and probable reserves, at an average copper price of $2 a pound, are 120 billion pounds, Adkerson said. Freeport has another 115 pounds in mineralized material. Of the total 235 billion pounds, 54% is in North America, 17% is in Indonesia, 12% in Africa and 17% in South America.
The companys resources mean potential for growth without having to make acquisitions, Adkeson said. Were spending capital prudently on projects that make sense from an economic standpoint, he said. We have a greenfield exploration program. But were not dependent on greenfield exploration for growth.
CEO: The Copper Market Is Very Positive
Copper prices are obviously important to Freeports earnings, and a graphic shown during the companys Webcast said each 10-cent-per-pound move in the price of copper has an impact of $280 million on operating cash flow. Adkerson was upbeat on the copper market.
We saw a stronger-than-expected start for our business for the first quarter in the United States, he said. Manufacturing, in particular improved auto sales, have underpinned U.S. demand. European demand is weak, but it is not as weak as some feared, Adkerson said.
In the U.S. and Europe, we see very low inventory stocks, the CEO said. Thats been managed to be low because of the economic uncertainties.
China remains critical to the copper market as the worlds largest consumer of the metal. Despite concerns about slower economic growth in China, the country continues to spend money on infrastructure projects, Adkerson said.
Meanwhile, the industry continues to face supply constraints ranging from interruptions to existing operations and challenges in bringing new production on line due to factors such as technical, cost and environmental issues.
Overall, the copper market is very positive, given the uncertainties of the world that weve been living with, Adkerson said, citing expectations for another supply deficit in 2012.
By Allen Sykora of Kitco News; firstname.lastname@example.org