Although news has undoubtedly been mixed of late for the mining sector, two of the industry giants made headlines for relatively positive developments this morning. As Freeport shares saw strong inflows despite the company adjusting its production, spending, and employment outlooks lower, Goldcorp acquired the operations of a pair of other gold miners to consolidate ownership of its El Morro mining project in Chile.
In what appears to be a mutually beneficial deal for all three of the firms involved, Goldcorp (NYSE:GG; TSX:G) has agreed to acquire the stakes of both Teck Resources Ltd. (NYSE:TCK; TSX:TCK.A, TCK.B) and New Gold (NYSE, TSX:NGD) in a Chilean mining project that has proven and provable reserves of nearly 9 million ounces of gold, or over 277 metric tonnes. Both companies are simultaneously involved in other joint ventures with the larger Goldcorp.
New Gold previously held 30% ownership of the mine, selling that stake to Goldcorp (who already held the rights to an even larger portion of the equity in the operation) in exchange for $90 million in cash, a writedown of $93 in debt, and 4% of the gold subsequently produced by the El Morro mine. Other stipulations in the agreement entitle New Gold to $400 per troy ounce of gold extracted up to 217,000 deliverable ounces (which may be adjusted by 1% annually), but Goldcorp gets the benefit of wholly taking over the operation.
The separate, though related, agreement between Goldcorp and Teck Resources not only allows the former to absorb the latter’s ownership slice of the El Morro project, but also converts the nearby Relincho mining project (also located in Chile) into a joint venture between the two firms split directly down the middle. This gives Goldcorp 100% ownership over El Morro and makes operations more cost-effective at both sites by gaining efficiencies and economies of scale—encapsulated by the blanket term “syngergies” by Goldcorp president and CEO Chuck Jeannes—related to the actual work of extracting the gold from the ground and distributing it.
Dimmer Prospects = Better Value?
Freeport-McMoRan (NYSE:FCX) shares jumped on Thursday afternoon, gaining nearly 25% by noon EST. The surge comes on the heels of the company’s stock hitting a one-year low below $8 per share yesterday, capping losses of about 18% on the week and a precipitous decline from its 52-week high above $36.50/share.
Analysts rightly called a massive inflow of funds into Freeport partly on the basis of it being a value buy at such depressed share prices. Industry projections for the company’s near-term target share price—the level to which analysts believe the stock will rise—range from about $19/share to as high as $29/share, representing a significant recovery from its current price point.
The rosier sentiment regarding Freeport, which has had to suspend operations at one of the world’s largest mines in Indonesia over long-standing licensing disputes with the Indonesian government, is almost certainly fueled by the market’s conviction that the bottom is in for the global copper and gold miner. This must be the case because the most recent news from the company has been only a curbing of expectations for future production, as well as an announced cut in expenditures and the number of workers at its mines. Projected spending for 2016 was slashed by 29% from last month’s forward guidance, the outlook for copper production over the next two years was cut by 300 million pounds (136,077 tonnes), and plans were made to reduce the company’s workforce by 10%.