Metals such as copper and aluminum continue to struggle and even investment commodities like gold are not doing too well. Digging stuff up from the earth was a far better business a decade ago than it is now. However, keep in mind that 2013 is far better than 2009 was.
Consider how the market has been making new highs the last few years and then look at some of the top mining companies like Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) or Alcoa Inc (NYSE:AA) and see how disappointing they have been. Freeport is down almost 10% over the last three years. I expected raw materials to start bouncing back, but it seems that it will take some time.
Freeport hatred
There are plenty of people unhappy with Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX)’s entry into the oil and gas market with its massive acquisition. I do not see the diversity as a bad thing. Oil and gas are currently doing better than metals. The last earnings call was prior to the acquisition closing. The deal is done now, but there has not been an earnings release subsequent to the acquisition.
There are a few things that I see as beneficial to the whole company from the acquisition. I don’t think the geographic diversity is something that should be discounted. Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) and Indonesia fall in the same sentence nonstop, but the oil and gas assets are in the United States. Freeport is a foreign company in Indonesia and there are complex issues stemming from the indigenous population and environmental issues.
General commodity diversity is a good thing for the company, too. The recent Grasberg tunnel collapse frames this really well. It is Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX)’s key copper mine, and the closing of the mine along with a force majeure invocation has turned a plentiful of copper supply into a tight supply situation. Constrained supply might bump prices that could benefit some other copper producers, but since it is Freeport’s mine that is shut down, the volume of copper sold will shrink for the company. The probe into the causes of the tunnel collapse could take months, and each day Freeport is not mining 3 million pounds of copper.
The addition of oil and gas to the solid copper business, with a side of gold, makes me like Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) better than Barrick Gold Corporation (USA) (NYSE:ABX). When I was looking into the gold mining term “all-in sustaining cash cost,” I discovered that the companies got to capitalize half the cost of developing a project in creating that number. That masks a lot of the cash costs for companies extracting gold, making the profit per ounce seem greater than it is. A developed project is not something I would really call much of an asset.
For a company like Barrick, there is no selling the mine to some other concern. Barrick would be the kind of company buying those mines and infusing cash to a smaller company. Barrick’s stock return speaks for itself, down over 50% in three years, but if you look at its cost per ounce and the current price of gold, you might think it is still a good deal.
Low hanging fruit is gone when it comes to gold. All these projects cost a lot to develop, and Barrick Gold Corporation (USA) (NYSE:ABX) has to spend a lot of money to extract the ounces of gold. In those terms, its costs do not end up looking that great. If gold heads any lower, it could be extremely bad for the company, and I do not like the risk-reward for gold miners anymore. Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) is about copper with gold as a byproduct.
