Saturday, November 7, 2009

Congo Holds Key To Freeport Project

The massive copper and cobalt mine Tenke Fungurume is more than 9,000 miles from Arizona, but key decisions about the new operation's future in central Africa are being made in Phoenix.

Tenke is operated and majority-owned by Freeport-McMoRan Copper & Gold Inc., which runs its $17.8 billion-a-year global enterprise from its headquarters in a downtown office high-rise at 1 N. Central Ave.

The mine is located in the economically unstable Democratic Republic of Congo, making it a risky venture for the world's largest publicly traded copper company.
The country is rife with political and social unrest, and transportation routes for hauling equipment and minerals to and from the $2 billion project are scarce. A review of mining contracts by the African government also threatens Freeport's ownership stake.

But the potential payoffs are huge.

Freeport executives and mining analysts say Tenke possesses the largest copper-ore reserve in the world.

While the global economic crisis temporarily squelched demand for copper and drove down the price of the metal last year, demand is expected to explode as countries such as China and India expand and worldwide supply remains constrained.

"Tenke Fungurume is one of the most attractive new copper projects in the world over the last two decades," Peter Ward, a stock analyst with Barclays Capital in New York, wrote in an October report on Freeport.

Ward, who recently toured the mine, estimates future demand for the metal will be strong enough to support 35 additional copper mines the size of Tenke.

Freeport began shipping copper cathode in March. The mine has produced 90 million pounds of copper and is expected to yield 250 million pounds of copper and 18 million pounds of cobalt annually at full production.

Freeport is well-versed in doing business in unstable regions of the world.

For more than 30 years, it has operated the Grasberg copper and gold mine in Indonesia. The area surrounding Grasberg in the remote, mountainous area of Indonesia's Papua province has been the site of a several violent attacks by political separatists in recent months.

Some experts say Congolese officials' contract review of the Tenke mine could hinder the value of the project.

The DRC, which is financially dependent on mineral exports, launched the review of several mining contracts in 2007 to determine whether they were negotiated fairly. It has completed most of its reviews except for a few, including Freeport's.

Freeport President Richard Adkerson was not available for comment.

In an Oct. 21 conference call with analysts, Adkerson said the company was "working very cooperatively" to address the government's concerns. He said the firm made offers to the government but declined to specify.

Adkerson called the company's current contract, in place since 2005, "very favorable" to the government.

Freeport owns about a 58 percent stake in Tenke. Canadian mining firm Lundin Mining Corp. owns about 25 percent. The DRC owns about 18 percent and is entitled to 2 percent of the royalties and 30 percent of the taxes.

It reportedly is asking to increase its ownership stake to 45 percent, Ward's report said.

It is possible the government could ask Freeport to make a larger social investment in the country, Ward said.

Freeport and Lundin have invested $1.9 billion in the project thus far, including about $180 million in taxes to the government; $30 million for housing, education and other community-development programs; and $20 million for national highway improvements.

Significant contract revisions or a cancellation could scare away investors, hurting the financially burdened country, said Olufemi Babarinde, associate professor of global studies at Thunderbird School of Global Management in Glendale. He studies African business issues.

Gerry Keim, a management professor at Arizona State University's W.P. Carey School of Business in Tempe, agreed, adding that the DRC runs the risk of deterring future business investments there.

But he doubts whether that would prevent the government from taking a bigger stake in the project.

"There may be short-term benefits to the government in power if they are able to renegotiate a contract like this and get a bigger slice of the pie," Keim said. "The long-term costs are usually going to be borne by people who are not in power right now."

Freeport said it has no timeline on when a decision will be made.

But news agencies reported that the government gave Freeport several deadlines to reach an agreement. Those deadlines, including two in October, have passed without action.

Source: Arizona Republic

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