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Is Future Growth Driving the Divergence between Freeport and SCCO?


Dec. 4 2020, Updated 10:53 a.m. ET


Southern Copper (SCCO) is aggressively expanding its copper mining operations while Freeport-McMoRan (FCX) is selling its crown copper assets to repay some of its debt. There’s a divergence between these two companies’ strategies, which is also reflecting in their valuation multiples as we’ll see later in this series.

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Divergence in strategies

Southern Copper is investing in the development of the Tia Maria mine and the expansion of its Buenavista mine. The company expects to produce 1.2 million metric tons of copper in 2020, which is 31% higher that what it’s expected to produce this year.

During its 1Q16 earnings call, Freeport-McMoRan said that it expects to produce 5 billion pounds of copper in fiscal 2016 and 4.7 billion pounds in fiscal 2017. The company has downwardly revised its guidance by 100 million pounds for both years to reflect the production loss from the Morenci stake sale. This guidance doesn’t account for the stake sale in Tenke Fungurume. Last year, Freeport-McMoRan’s (FCX) share from the Tenke Fungurume mine was 449 million pounds. If the sales transaction is completed later this year, we could see its impact on Freeport’s fiscal 2017 copper production.

Freeport’s copper production could fall

Looking at Freeport’s current guidance, the company might now only produce ~4.3 billion pounds of copper next year. The production could drop even further, as Freeport is looking to sell stakes in some of its other copper mines.

However, Freeport faced the question of sacrificing its long-term growth for short-term survival. Its asset sales program seems to have struck the right chord with investors, as the deal multiples were significantly higher than Freeport’s prevailing valuation. Other miners including Glencore (GLNCY) and Teck Resources (TCK) have also gained this year as markets (DIA) welcomed their asset sales.

In the next part, we’ll see how asset sales are a near-term positive but a long-term negative for Freeport-McMoRan.


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