Operator Series: Freeport's Cerro Verde tapping into copper rally

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Monday, March 19, 2018

Freeport-McMoRan is the world's second largest copper producer behind Chile's Codelco. Its main activities involve mining copper, in addition to producing gold, silver and molybdenum.

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Freeport is a private-sector, publicly traded company, headquartered in Phoenix, Arizona and has operations in Peru, Chile, the US and Indonesia. The company is listed on the New York stock exchange.

The company posted US$1.82n in net income for full-year 2017 compared with a US$4.15bn loss in 2016 as revenue rose to US$16.4bn from US$14.8bn in the same period.

It cut its cash costs to US$1.20/lb in 2017 from US$1.26/lb the previous year. Capex was US$1.41bn last year, including US$900mn in mining projects, compared with US$2.81bn in 2016.

The company estimated 2018 capex at US$2.1bn, including US$1.2bn for mining projects. Exploration spending is expected to total US$65mn this year.

OUTPUT

Freeport's copper output totaled 3.74Blb in 2017, down from 4.22Blb the previous year, while gold output rose to 1.58Moz from 1.09Moz and molybdenum climbed to 92Mlb from 80Mlb.

The firm set its 2018 copper sales guidance at 3.9Blb, with estimated gold sales at 2.4Moz and molybdenum at 91Mlb. Cash costs are expected to average US$0.97/lb copper this year.

OPERATIONS

Cerro Verde

Freeport, which completed a US$4.6bn expansion at its Cerro Verde mine in Arequipa region in southern Peru in late 2015, produced 1.06Blb copper and 27Mlb molybdenum last year, compared with 1.33Blb copper and 21Mlb molybdenum in 2016.

The mine, whose plant was operating at 374,200t/y in Q4, had to contend with a strike and declining ore grades from oxidized stockpiles last year. Freeport expected 2018 copper sales from its South American operations to be little changed this year at 1.2Blb, while cash costs were estimated at US$1.63/lb, down slightly from US$1.64/lb in 2017.

Capex at Cerro Verde totaled US$153mn last year, compared with US$422mn in 2016.

The mine is controlled by Freeport (53.56%), Sumitomo (21%), Buenaventura (19.58%) and minor shareholders (5.86%).

El Abra

The El Abra mine in Chile produced 173Mlb copper last year, down from 227Mlb in 2016. The company, which cut back operations at the mine during the copper price slump in 2015, is "building those back up," CEO Richard Adkerson said on a January conference call.

El Abra is controlled by Freeport (51%) and Chile's Codelco (49%).

PROJECTS

Freeport last year extended the term for a US$1.8bn senior loan by three years to 2022 and took on another US$225mn in debt.

Cerro Verde expansion

The company, which is renegotiating terms with the Indonesian government for its troubled Grasberg mine, is studying a possible 20% expansion of the Cerro concentrator plant, according to a filing on the Peruvian energy and mines ministry (MEM) website.

The project, which involves adding a nitrogen plant, plus upgrades to pumping installations, relocation of tailings facilities and a lime plant, could boost nameplate capacity from 360,000t/d to 408,000t/d. The upgrade would have a minor impact on surface and groundwater, according to the revised environmental impact study.

Cerro Verde is already benefitting from higher margins thanks to surging metals prices, according to the company. Copper jumped to US$3.21/lb in Q4 from US$2.48/lb a year earlier, while molybdenum was up to US$9.79/lb from US$8.27/lb.

Cerro Verde, however, faces "challenging" renegotiation of labor contracts this year, Adkerson said on the call. "We're advancing these studies looking for future growth," he said.

El Abra expansion

While Freeport is in "no rush" to expand facilities at El Abra, the company is moving ahead with a prefeasibility study and permitting planning, while Codelco is working with landowners in the region, according to Adkerson, who added that the partners "haven't committed to spending capital on it."

El Abra has estimated resources of 2Blb of 0.45% copper. The US$5bn project would involve a 240,000t/d concentrator, similar in size to Cerro Verde. Production would be 750Mlb over a 68-year life of mine period, which includes up to four years in studies and permitting, plus another four in construction.