An American miner unusually cheaper than its London rivals

Last week, BHP (BHP) predicted that the global copper market would remain in surplus for 2024 and 2025, but said this would "only provide scant coverage against anticipated deficits in the latter half of this decade”. 

The latter half of the decade is fast approaching and copper miners are highly rated as a result. 

London’s largest copper play, Antofagasta (ANTO), has been bid up significantly. Its EV/Ebitda ratio exceeded eight times in April and May, compared to a five-year average of roughly 6 times. Its valuation has fallen in the months since but, without iron ore dragging them down, copper stocks have proved more robust than the diversified miners. Earnings have also been boosted by the higher copper price. 

Antofagasta is clear on what it offers to investors: it is a high capital business that will keep exploiting its existing deposits for decades. 

For investors happy to look further afield, however, Freeport-McMoRan (US:FCX) is a long-term option that will only grow in importance in the years to come. The US copper giant's EV/Ebitda ratio is in the same ballpark as Antofagasta's, but it currently lags its five-year average while Antofagasta is ahead. 

An Indonesian discovery

But first, a quick look at the Freeport story. The $60bn company is international in terms of its assets but has strong American roots.

The definitive figure in its transition from a sulphur miner (where the Freeport name comes from) and oil explorer (the McMoRan element) is Jim Bob Moffett. He pushed for exploration near an existing mine in the mountains of Papua, Indonesia, in the 1980s. This site was running low on copper at the time, but drilling nearby revealed what would become one of the world’s largest copper mines: Grasberg.

Grasberg now sits at the heart of the company and helpfully happens to be the world’s biggest gold mine too, yielding 1.7mn ounces in 2023. 

The mine is both highly controversial and a marvel of engineering, given its position near a glacier more than 4,000 metres above sea level. Accusations of violence against locals have plagued the development, while activists have pointed to Freeport’s backing of Jakarta over local self-rule as a factor in keeping the region within Indonesia.

The company hasn’t always had a close relationship with the government, however. In fact, tensions have put a cap on Freeport’s share price at times in the past decade.  

Freeport suspended output in 2017 after Indonesia brought in a rule requiring copper to be smelted in the country, meaning it could not export copper concentrate. Exports eventually resumed and a full deal came together in 2018, when Freeport handed the state mining company a 51 per cent stake in its local operating company, up from 9 per cent. Freeport also agreed to build a smelter, which cost $1.7bn in 2023 and is expected to cost $1bn this year. 

Freeport’s lower stake still translates into serious profit margins. In the first half of 2024, Grasberg was responsible for three-quarters of the group’s operating profit and achieved a margin of 60 per cent.

Speculators arrive

The run on copper in the first half of the year was driven by speculators as much as real shortages. Demand is largely determined by China, and the real estate market there has not offered much to be hopeful about. May's record high of $10,857 a tonne was partly due to bidders entering the market, therefore, as supply was shuddering. Strikes and operational issues in Chile and Peru added to the fever. The price decline in the months since was foretold by market experts, who argued the new entrants were bidding up copper above what industrial players would sustain. 

From here, the short and medium-term outlook depends on who you ask. Tom Price from Panmure Liberum has an average price forecast of $7,150 a tonne for 2026, compared with over $9,000 for this year. Bernstein is significantly more bullish, forecasting $9,800 a tonne for 2026 and $10,600 for 2028. Panmure Liberum’s more pessimistic take relates to a suspicion that demand growth will fall.

The long-term picture remains generally positive, however. By 2040, Bernstein reckons the deficit of supply will be as large as 15mn tonnes a year, compared with a current total market size of around 28mn tonnes a year. 

Such a significant deficit is unlikely to materialise, but it certainly points to more project development and a greater reliance on recycling. Judging by the slower pace of development and discoveries, however, a huge increase in supply looks unlikely, so price rises are probably on the way. 

Freeport is the world's biggest producer of copper, according to Bernstein, pulling ahead of the National Copper Corporation of Chile and BHP in 2022.

Organic brownfield growth could unlock even more value. “The current resource disclosure may only reveal a glimpse of the full Grasberg potential as exploration hasn't been fully [incentivised] due to the licensing uncertainty,” said Bernstein analyst Bob Brackett last year. 

The upsides elsewhere include both traditional exploration and research into new processing techniques that could increase recovery from more difficult-to-mine ores. Freeport cutely calls this “leach to the last drop”, where leaching is the process in which a catalyst is used to separate copper from crushed ore. 

The company wants to hit an annual run rate of 180,000 tonnes from the leaching programme within a few years. “This is the size of a major new mine, with low capital investment required and low incremental operating costs, which will greatly enhance the value and competitive position of our Americas production,” said chief executive Kathleen Quirk last month. 

The cost curve 

The uncertainty of the next few years makes mining costs a critical factor. A quirk of mining accounting is that sales of secondary metals are often taken off the cost line in the income statement rather than added to revenue. At Freeport, where gold is the secondary metal, this makes production at Grasberg cost neutral. Meanwhile, the group net unit cost hovers around $3,300 a tonne, compared with Antofagasta’s $4,277 a tonne in the first half. 

The cost outlook is particularly positive as spending slows on the government-mandated smelter.

There is always a level of risk when companies rely on one operation for a large chunk of earnings, and this is dialled up given the previous issues between Freeport and the Indonesian government. But Brackett at Bernstein sees the situation as stable, stressing that both parties want to "unlock the long-term value of the Grasberg mine”.

The next catalyst is whether Freeport can extend its mining permit beyond 2041. Brackett says the government may take a further stake in the local holding company, but only after 2041. The extension of the licence expiry from 2041 to 2061 would grow the asset’s net present value from $17bn to $25bn post-tax under the current ownership structure, he said. 

In any case, there is clearly value in this mine for many, many years to come. With the shares near a 12-month low, this is a good time to get in.