Saturday, June 12, 2010

Freeport McMoRan's (NYSE:FCX) Low-Cost Strategy

There are several mining companies taking a different route to generate earnings, and one of them is Freeport McMoRan (NYSE:FCX), which has decided to cut costs out of the production side of the business.

While this all looks obvious as a strategy, the reasoning behind it is much more important than just generating better margins and earnings.

What is does is prepare for what is a cyclical business in order to generate profits in the up as well as down times.

Strong interest has come back to the mining companies, and those that respond by acting like an easy to understand business will outperform rivals who allow themselves to be taken on the winds of the market place, with little or no control of their destiny.

Those miners like Freeport, who in the case of copper, for example, have driven down production costs from $1.04 a pound to 62 cents a pound, are positioning themselves to thrive in any economic climate.

Probably even more important, it frees up capital to take advantage of the cyclical nature of their business, giving them opportunties to buy competitors who may be struggling because they aren't prepared as well.

I think those mining companies, no matter what the particular raw material they're mining, who will be the most profitable in the future will be those tackling the cost of doing business and who have room for pricing moves which won't hurt them that their competitors don't have.

Freeport has that, and going forward they should do well for those investing in the company.

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