A Win/Win For The Mining Industry And Investors…
A month ago, I wrote about the huge new copper discovery in Serbia, by Freeport-McMoRan Copper & Gold (FCX: NYSE). There’s more to tell you, and it’s all very good.
Things went well in the exploration patch. Last month, Freeport and the Canadian firm announced a stunning discovery. They pulled up a drill core over 750 feet long, filled with copper ore that grades over 6%. In today’s copper biz — where ore grades are usually measured in fractions of 1% — this is superb.
Last week, we learned more. In fact, the Serbia discovery just got much bigger. This past Tuesday, Freeport and its Canadian partner announced news of another drill core over 550 feet long with over 10% copper grade. Plus, assays indicate 4 million ounces of gold.
It Doesn’t Get Any Better…
In the world of copper-gold exploration, this is fabulous. It’s a point-to-the-upper-bleachers, hit-it-out-of-the-ballpark smack. Really, it doesn’t get any better than this.
Freeport’s discovery is near the copper-mining center of Bor, Serbia. This historic region was, in its day, home to the largest copper mine in Europe. Now we know, for a drillable fact, that there’s more where it all came from. It’s all right down the main road from the old mine — in a very “digable” spot.
Here’s what 10% copper ore looks like:
Think back to that first drill core, with over 750 feet of 6% copper ore. Now we have the second drill core, stepped out 650 feet — a bit over the length of two football fields. And we’ve got even better copper grades (over 550 feet, at over 10% grade), also in skyscraperlike quantities.
The mineralogy is predominantly covellite and bornite — in large volumes. It’s lab-specimen quality, extending for hundreds of yards in every direction. The copper mining industry hasn’t seen this kind of ore in something like 100 years. All in mining-friendly Bor, Serbia, where they have an underutilized copper smelter literally right down the road.
Then there’s the precious metals icing on the cake. Gold assays are coming in at over 5 grams per tonne (metric ton). My back-of-the-envelope calculation is that the prospect could hold nearly 4 million ounces of gold. So with just this one site, we’ve got a world-class gold play on top of a world-class copper play – I guess that’s why the company’s name is Freeport Copper and Gold!
At a time when resource markets are tight, if not gloomy — when even big guys like BHP Billiton are cutting back on capital expenditures — Freeport has committed to continuing work on the Serbia play. So far, the Serbian success is big-league, even for a mining giant like Freeport. Some discoveries are company builders, and this is one of ‘em.
Now consider the leverage that got Freeport to this enviable point. About four years ago, Freeport and the Canadian company agreed to work together on an exploration program around Bor. To date, Freeport has spent about $5 million on drilling and associated business expenses in Serbia. $5 million? It’s peanuts in the world of big miners.
Now with the new discovery, Freeport is sitting atop literally hundreds of feet of copper ore grading 6-10% or more, plus related precious metal that appears to tip the scale at around 4 million ounces of gold. Hold that thought.
By comparison, what did another mining giant, Barrick Gold (ABX: NYSE) pay last year for a copper-gold play in Africa (Zambia, to be exact) called Equinox Minerals? Barrick paid $7.7 billion.
So for $5 million, Freeport partnered up with the Canadian company and found a world-class copper-gold play in Serbia — right next to excellent infrastructure, literally two miles from a world-class smelter, in a mining-friendly jurisdiction.
Then there was Barrick, which paid $7.7 billion for a copper-gold play in Zambia. (Barrick recently fired its CEO, by the way.) It relates to that discussion of “capital discipline” I sent out a few weeks ago.
Of course, there are many differences between what Freeport has been doing in Serbia over the past couple of years versus what Barrick was trying to accomplish with a buyout of a far more developed project in 2011. Each company has its own way of doing things.
Each partner in these two respective deals — the Canadian company in Serbia or Equinox in Zambia — has its particular assets, management, host-nation presence and everything else that it brings to the table.
Still, there’s quite a difference between Freeport spending $5 million to get to where things are versus Barrick spending $7.7 billion. If you do the math, it’s a factor of 1,540.
Freeport’s Long-Term Value to Investors
There’s gigantic, wealth-building leverage on display here. Just to be clear, title to the Serbian copper acreage is controlled by the Canadian company. But Freeport has a deal with the junior firm that lets the big guy “earn in.” In other words, Freeport is slipping into the smaller guy’s “boots on the ground” effort.
The bottom line in this case — figuratively and literally — is that, after plenty of risk taking by all concerned, Freeport scored big with exploration and discovery.
If you own Freeport shares, you’re the beneficiary of this exploration success. That is, Freeport engineers are working to define the Serbia resource. It’ll eventually fold into the book value of the company. The value of Serbian copper and gold will be part of your Freeport share value for many years to come.
Speaking of that, what about the stock market and Freeport shares? Do you see this new Serbia discovery moving the Freeport share price? Actually, it’s not apparent in the day-to-day trading over the past few weeks. Why not?
Basically, Freeport shares move up and down with the broad market, generally within the realm of big resource players. In other words, Freeport shares represent the valuation of trends in the resource markets, based on macroeconomic fundamentals. Freeport shares are, in a sense, proxies for higher or lower copper and gold prices, as moderated by higher or lower energy prices.
In all, Freeport is a great company with a strong future. It’s got ore in the ground and a very lucrative business to mine it and process the material into salable end-products.
At the investor level, the 3% dividend looks secure. There’s relatively low risk of share price downside, except if there’s another market crash like in 2008. Even if there’s another crash and Freeport’s share value declines, it’ll likely be among the ones to rebound soonest and strongest.
Thanks for reading.
-- Byron W. KingSource: Daily Resoruce Hunter