The following taken from another Board:
February 11, 2020
Sent Via Email
FREEPORT-MCMORAN INC.
333 NORTH CENTRAL AVENUE
PHOENIX, ARIZONA 85004 UNITED STATES
Attention:
Mr. Richard Adkerson, Vice Chairman of the Board, President & CEO
Mr. Douglas Currault, Deputy General Counsel & Corporate Secretary
Executives & Board of Directors
Subject: Freeport-McMoRan - Acquisition target or a growth copper company?
Dear Mr. Adkerson, Mr. Currault, Executives, and Board of Directors,
We want to congratulate management and the board in their efforts in de-leveraging Freeport-McMoRan over the past few years. The market has rewarded company efforts with shares being up over 200% from where we initiated coverage back in early 2016. We commend the Freeport team during a time of market and sentiment lows over the broad natural resource sector. While volatile, the trend has been upward for key metals like gold and copper.
We write this letter in response to recent media articles including management comments regarding acquisitions and recent comments from Barrick CEO Mark Bristow regarding Freeport. We hold Mr. Adkerson, Mr. Bristow and their respective teams in high regard for their accomplishments. Both of these leaders know that there is much yet to be done in these early stages of copper and gold price appreciation.
We turn your attention to the work being done at Freeport and recent comments that the company is not looking for accretive acquisitions at this time in the market cycle as it continues to optimize itself from a debt standpoint while focusing primarily on the Grasberg expansion and commissioning at Lone Star. While we understand the Grasberg expansion is substantial for the company and that there is concern regarding having plenty of backup capital available to support efforts there, we are concerned with the dismissal of accretive acquisitions during these lower market stages. If no consideration is being given during Grasberg expansion, it could be construed that Freeport won't be participating in picking up assets near the bottom of this cycle especially if expansion efforts at Grasberg will take another ~3 years to being fully ramped. As we believe you'll agree with us, but your experience is much more meaningful than ours, the cyclical bottom for copper prices for this new uptrend was in fact late 2015 early 2016. Since, prices have moved steadily higher in light of trade debacles, growth concerns, and other potential short term demand altering events. We understand the broad credit cycle may yet have a role to play going forward as the broad market runs out of upside. However, we see copper prices moving beyond past highs of ~$4.50/lb within this decade, if not likely in the first half. We want Freeport in the best possible position to capitalize in preparation for the inevitable tough times that will eventually follow.
This leads us to the understanding that management should not place timing barriers before them by stating that they have no intention to perform accretive acquisitions during the Grasberg expansions, all while the copper market equities continue to struggle along resulting in potential low cost acquisitions. We understand management is not in the most ideal condition with regards to current capital needs at Grasberg while debt servicing is not fully amenable to considerable further leverage. However, we'd point out that substantial de-leveraging has been done by management over the past few years and capacity has been notably restored. When the market offers bargains and opportunity to capitalize, a true contrarian management that has the means should deploy that capital when the risk/reward cost of that capital is substantially stacked in the favor of management. As we've stated before, those opportunistic times are still here for now. Even with Grasberg operation agreements that could extend into the 2040's, we aren't sure that future regimes in Indonesia will not want to re-cut their share of the pie. This is why management needs to be focused, in parallel to Grasberg work, at obtaining a new pipeline of key assets that provide needle moving potential both on the future production profile front, but also on the jurisdictional diversification front. That means acquisitions and/or substantial organic growth.
In the meantime, it is quite clear that Barrick has interest in Grasberg and under the leadership of Mr. Bristow, the company has been able to navigate government relations in a fashion that is positively valued. They've demonstrated that ability in particularly difficult jurisdictions. If indeed the company is considering sale of Grasberg, then a replacement pipeline is crucial to sustaining the company going forward. This brings us back to the question: Acquisition target or a growth copper company?
We don't see how being acquired at this market stage is a valued exit for shareholders and management. In fact, the company remains to be in a enviable position when looking from the prospective of peer companies and aspiring mid-tiers. Our view is that Freeport should be a growth copper company and that it should use a low corporate cost of capital to align itself with pipeline growth while development asset valuations are on sale, near bottom. Because of company access to inexpensive capital, it makes sense to position long term debt beyond 10 years at existing low rates while using some new debt/offtake financing to obtain and selectively advance a key pipeline of sound copper assets. In our view, this route will result in a small portion of capital being used to secure assets that will easily be re-rated 3-4x higher, if not even more, in the coming few years ahead of us.
We aren't advocates of mid-late cycle acquisition purchasing as it usually ends up being value destructive rather than substantial value multiplying like what you get when buying out of favor assets near market bottoms. We want the company positioned to be selling non-core assets during the top stages of this cycle and only buying needle moving assets for pennies on the dollar during market cycle lows. These types of actions help to smooth out the company specific boom/bust events that typically play out with many natural resource businesses.
Now, the company has a track record of excellence in U.S. copper operator expertise. The company copper success in the western hemisphere is notable. We believe management can leverage those regulatory and community relationships to build a stronger presence in the Americas, from north to central to south. As a result, it probably makes the most since at this point to grow in this region rather than elsewhere.
As management likely agrees, there is no reason to seek out an Ivanhoe Mines for copper in the DRC when it is clear that Chinese groups have a strong foothold on the Ivanhoe suite of metal deposits. We've seen Freeport divest interest in assets like Nevsun's Timok (now owned by Zijin Mining) in non-core jurisdictions. So once again we revert back to the Americas. The most notable project of scale for Freeport is the Pebble project in Alaska. As management is likely aware, a significant milestone for this project will be reached in 2020 with a federal permit decision from the U.S. Army Corps of Engineers by October, if not earlier. If the project receives a positive permit decision, we suspect some majors will be much more amenable to seeking an arrangement quickly regarding the development of the project. The Pebble project is a very good fit for Freeport if it wants to remain as a key leader in the copper market with notable gold exposure. We see that copper and gold prices will support development of the Pebble project and still even if a marginal copper price increase takes place in the coming decade, which it is hard to imagine a supply / demand profile where copper prices decrease or even stay the same over the long term. So the Pebble project is the most viable once permitting is de-risked. The economic feasibility will take care of itself at current or higher prices for copper-gold. A large capable extensively experienced operator like Freeport will be best suited for the future of that project and for the local jurisdiction.
Looking to South America, there are a few notable assets that have needle moving capabilities on a smaller scale for Freeport. Those include development staged assets Los Helados copper-gold project in Chile, Josemaria copper-gold project in Argentina, and the Alpala/Cascabel copper-gold project in Ecuador which already has majors BHP and Newcrest on the share roster. While each of these projects has specific challenges, there is nothing here outside of the Freeport scope. On the producer side, there aren't many notable mid-tier copper companies. If Freeport is looking to the mid-tiers, we prefer companies that have a pipeline of development projects to accompany their producing assets. Furthermore, they need to move the needle for Freeport. In our view, the leading company on the mid-tier side is Taseko Mines. Taseko has a much better value proposition along with the best development pipeline as compared to peer companies. Taseko would be a sound fit for asset expansion in North America, adding a new jurisdiction, British Columbia, and the good old steady, Arizona, U.S. Looking to South America again, specifically Brazil, Ero Copper has a single jurisdiction pipeline of development and production assets. If exploration is desirable for the company, Luminex Resources and Aurania Resources have substantial land packages in Ecuador and are both joint venture amenable. As management probably knows, First Quantum, Anglo American, and BHP are active in the regional exploration areas of Ecuador.
Serious consideration of acquisition and even partnering targets should be progressed now in parallel with Grasberg and Lone Star work. Do not disregard market opportunity solely on the basis that timing doesn't line up with our expansion goals with existing assets. In our view, careful evaluation of the market conditions and assets are a priority right now, together, with existing work. The company is in a much better position today as compared to a few years ago and therefore it has the ability to make progress on this front. Management has extensive experience in these market cycles and we believe that management agrees with our views that a small window of opportunity remains to capitalize on these conditions. These actions now will be realized later as a highly rewarding move for the company as it transitions for the next leg of growth to continue the Freeport-McMoRan legacy for the remainder of this century.
We appreciate the value creating actions of management over these past few years and more importantly, onward ahead. Thanks for taking the time, consideration, and prudent action to keep the company focused on all fronts in a sustainable value improving fashion. To the team at Freeport, good luck as we move forward.
Respectfully,
Andrew Weekly
Founder & Lead Research
