Freeport McMoRan: Coming (Back) to America

Freeport McMoRan, sensing a rebound in the U.S., has quietly moved to hike production at a slew of its scaled-back mines in Arizona and Colorado.
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NEW YORK (TheStreet) -- Freeport McMoRan (FCX) - Get Report has seen enough.

With signs of economic recovery taking hold in the U.S., the mining giant has been preparing the ground -- literally so -- to take advantage.

"We're beginning to see improved demand for our products in the developed world," Freeport McMoRan boss Richard Adkerson said during a conference call to discuss first-quarter earnings Wednesday. "That's leading us to change our strategy."

Freeport has been moving ahead with plans to increase production at mines in the U.S. that it had either shut down or vastly curtailed to account for plummeting domestic demand amid the recession. The company is also re-evaluating several big expansion projects it had moth-balled because of the downturn.

Such plans would mark a sharp turnaround for the company, the biggest mining concern based in the U.S. Deflating copper prices in late 2008 and early 2009 made Freeport's six mines in the States financially unfeasible to operate at full capacity -- or at all. In the U.S., labor costs and, mining executives say, environmental rules make mineral extraction a much more expensive endeavor than it is in places like Indonesia, where Freeport McMoRan has long operated Grasberg, one of the biggest copper mines in the world, and still Freeport's most crucial asset.

Since the financial crisis and the onset of the recession two years ago, Freeport has largely lived on China's breakneck buying of copper, which has driven the price of the commodity up by more than 100% compared with a year ago.

The latest evidence of that dependency arrived on Wednesday, when

Freeport unveiled a first-quarter profit that beat expectations

and surpassed its year-ago bottom line by several orders of magnitude.

And yet investors sold off shares of Freeport in Wednesday trading -- the stock was recently down 3.4% after early falling as much as 5% -- likely on worries that Chinese demand for Freeport's core metal would soon slacken.

Banking authorities in the People's Republic, fearing a bubble, have once again made moves to tamp down real-estate development lending, which would have a direct impact on Freeport's business, since copper is a crucial building material (think electrical wires.) Copper prices on the London Metals Exchange and the New York Mercantile Exchange fell again on Wednesday, to around $3.50 a pound.

Adkerson addressed the issue in the Wednesday morning conference call. Although Chinese imports "have been strong," he said, there has been speculation that copper stockpiles have been accumulating in warehouses in China, an inventory build that could dampen demand "later in the year," he said.

But not enough, apparently, to alter Freeport's view that global copper prices will remain elevated. According to Adkerson, the outlook for North America, and to a lesser degree Europe, will continue to improve enough to support copper prices, even if Chinese demand slips. The same goes for molybdenum.

Specifically, Freeport has seen "pockets" of economic strength, Adkerson said. He noted the electrical copper side of the company's customer base, both in the U.S. and Europe, as well as increased metals demand from the auto industry.

The construction business, historically crucial to Freeport's success, "is still weak but has bottomed out," the CEO said. "Our downstream customers have very low inventories. So when they have pieces of their business that are generating opportunities, we see immediate demand for copper."

To meet that rising demand on the home front, then, Freeport will "restore high-cost production and invest in future growth," Adkerson said.

Case in point: At its Morenci copper mine in Arizona, where the cost of mining the metal had approached $2 per pound, Freeport cut capacity by half in late 2008. In March, however, the company reopened a mill and has plans this year to conduct a "staged ramp up" of production, increasing its mining rate to 635,000 metric tons of ore per day from 450,000. That will mean added output of 125 million pounds of copper a year, starting in 2011.

Likewise, Freeport said in late 2009 that it planned to restart copper production in the Miami mining district of Arizona, a site it had shuttered completely. By 2011, the company expects Miami to produce 100 million pounds of copper a year.

Elsewhere in the U.S., the company has hiked production at its Henderson molybdenum mine in Colorado. The site is now running at 90% capacity, up from 60% in 2009.

Also in Colorado, near the appropriately named town of Leadville, Freeport is proceeding with plans to reopen another molybdenum mine, called Climax, which it had acquired with the Phelps Dodge deal in 2003.

The mine hasn't operated since 1995, despite several attempts to restart production over the years. Said Adkerson Wednesday, "It's just a matter of when we pull the trigger."

To be sure, Freeport's long-term prospects for growth rest squarely overseas, especially at Grasberg, where the company is spending billions to construct a series of underground mines. Decades of surface mining at Grasberg, perhaps the world's most infamous open pit, visible from space, has all but exhausted the best ore grades in the crater itself.

Freeport also has huge projects underway in Chile and, especially, the Democratic Republic of Congo, where the Tenke Fungurume mine still awaits a contract with the government to begin full-on production. Tenke has been called the most substantial undeveloped copper find on earth, promising yields of up to 250 million pounds of copper per year.

The push in the U.S. is part of a more comprehensive scheme to find growth at a mining concern that many investors have come to consider "mature."

The company has said it expects to spend $1.7 billion in capital outlays in 2010 in an effort to increase production. And during the conference call Wednesday, Adkerson didn't overrule the possibility of an acquisition, noting the company's improved balance sheet and cash flows.

-- Written by Scott Eden in New York

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Scott Eden has covered business -- both large and small -- for more than a decade. Prior to joining TheStreet.com, he worked as a features reporter for Dealmaker and Trader Monthly magazines. Before that, he wrote for the Chicago Reader, that city's weekly paper. Early in his career, he was a staff reporter at the Dow Jones News Service. His reporting has appeared in The Wall Street Journal, Men's Journal, the St. Petersburg (Fla.) Times, and the Believer magazine, among other publications. He's also the author of Touchdown Jesus (Simon & Schuster, 2005), a nonfiction book about Notre Dame football fans and the business and politics of big-time college sports. He has degrees from Notre Dame and Washington University in St. Louis.