December Landslide Forces Freeport-McMoRan Unit To Scale Back Production

Indonesian Miner Cuts Outlook - December Landslide Forces Freeport-McMoRan Unit To Scale Back Production

By John McBeth, The Wall Street Journal

January 26, 2004

Jakarta, Indonesia - PT Freeport Indonesia has cut its 2004 sales forecasts by nearly one-third after a second landslide in three months forced it to reconfigure the slopes of its giant Grasberg mine in Indonesia's Papua province.

The copper and gold mining company has cut its Indonesian production forecasts for the next five months by more than one-half. Some mining industry analysts estimate the production cut could keep as much as 200,000 metric tons of copper -- contained in concentrated form -- out of an already tight market in the first quarter of 2004, leading to world-wide shortages for smelters and copper rod manufacturers.

Richard Adkerson, president and chief executive of Freeport-McMoRan Copper & Gold Inc., the Louisiana parent of the Indonesian company, lowered its 2004 forecast for copper sales to one billion pounds (450 million kilograms) from 1.4 billion pounds. He also reduced projected gold sales for the year to 1.5 million ounces from 2.2 million ounces. Mr. Adkerson disclosed the revisions in a conference call last week with metal industry analysts.

"We're in part of the cycle where manufacturing companies throughout the supply chain have been replenishing their inventories at a time when prices of all commodities has been rising," one metals analyst in London said Sunday. "Grasberg's problems are really the straw that broke the camel's back."

The world price for copper cathode has risen to $2,445 a metric ton from $1,600 in March and is expected to strengthen further during the next 12 months, with analysts estimating a 750,000-ton shortfall in world supplies this year.

That is the good news for Freeport, whose share price has remained at near record highs despite its crop of misfortunes at Grasberg. Freeport executives say they expect a strong cash flow in the second half of the year and into 2005, once engineers get the Indonesian mine back into full production.

Freeport McMoRan's stock, which trades on the New York Stock Exchange, rocketed to a high of $46 last year from about $16 at the beginning of 2003. Although the price has dropped back in recent weeks, Freeport stock was still trading at close to $40 last week after Mr. Adkerson and company Chairman James R. Moffett disclosed the company's longer-term outlook.

Grasberg is widely regarded as the world's most profitable mine, with rich gold deposits helping to keep the cost of mining copper down to 10 cents a pound, compared with more than 50 cents a pound for most other copper producers.

Freeport's problems in Indonesia began Oct. 9, when a massive landslide in the south wall of the Grasberg pit killed eight workers and buried most of the mine's high-grade ore deposits. Then, in early December, only days after the company received Indonesian government approval to resume full-scale operations, a second slide occurred in the same section of the mine.

This is the first time since the Grasberg mine opened 15 years ago that Freeport has had trouble with the slopes of the pit, which is at an altitude of about 3,600 meters in Papua's central highlands. With engineers now drilling rubble out of the south wall, total ore production has dropped to 100,000 metric tons a day from 230,000 tons, with half of that coming from Freeport's underground operations.

Write to John McBeth at john.mcbeth@wsj.com