By Matt Doiron
Freeport-McMoRan Copper & Gold Inc. (FCX) rose 5% on January 22nd as the company reported 78 cents per share of earnings, beating the consensus forecast of 70 cents. The fourth quarter results were also better than a year earlier (when Freeport earned 67 cents per share) or the EPS of 68 cents from Q3. Earnings for 2012 were still well down from 2011, as commodity prices hurt the miner of copper (generally considered a barometer for global macro activity, and Chinese macro in particular) and gold. The rise in earnings per share was primarily due to higher revenues, which were up 8% from a year earlier.
The stock price is still down 14% from the beginning of December, shortly before Freeport-McMoRan Copper & Gold Inc. announced plans to purchase Plains Exploration & Production Company (PXP) and Mcmoran Exploration Co (MMR), two oil companies focused on the offshore Gulf of Mexico. Plains, which owns a large stake in Mcmoran, had purchased Gulf assets from BP earlier in 2012. Its current market valuation places it at 13 times what analysts would expect it to otherwise earn in 2013. Mcmoran is up over 80% since the beginning of December as Freeport offered a very generous premium for the company (the two had previously been part of the same business). It is unprofitable, with significantly negative operating margins, and 20% of the outstanding shares are held short even with the likely acquisition. With its most recent results in, Freeport trades at 11 times trailing earnings. Because of its tight connection to the global economy, the stock price is very responsive to market conditions and so its beta is 2.3.
While a number of shareholders criticized the Plains deal, and certainly the market did not like it, billionaire Leon Cooperman has claimed that his Omega Advisors has been buying shares thinking that it will turn out to actually create value for Freeport shareholders. Freeport-McMoRan Copper & Gold Inc. shareholders at the end of September included Point State Capital, which had moved heavily into the stock during the third quarter and reported a position of 2.9 million shares (interestingly, the fund had also initiated a position in Plains) and billionaire David Shaw's D.E. Shaw.
Freeport's peers include Southern Copper Corp (SCCO) and Vale SA (VALE). Because of their similar businesses, these companies reported declines of over 20% in net income between Q3 2011 and Q3 2012 (as Freeport had, before improving in the fourth quarter). Betas of these two stocks are close to 2 as well. Southern Copper actually receives a strong valuation in the market, with trailing and 2013 P/E multiples of 18 and 16 respectively, though it has made some high- albeit apparently exceptional- dividend payments in the recent past. Vale, which is a more general basic materials company with a focus on Brazil (and therefore more connected to that country's economy rather than directly to global macro), trades at 9 times earnings with a yield of just above 3% (Freeport's yield is closer to 4% at current prices). Vale and Southern Copper, of course, lack the integration risk that Freeport has as a result of the Plains deal. Major oil companies, which could be compared to the properties Freeport is acquiring, tend to have earnings multiples of 10 or lower as well.
We have been wary of the Plains deal- it represents unnecessary diversification for Freeport, and we think that the company may be overpaying for the assets. Even with the resulting decline in the stock price, we don't think that its valuation is attractive relative to comparable companies. Investors who are interested in the company might be better served by looking at other basic materials companies or even alternative "macro plays" such as Caterpillar and supplementing those with oil majors if they also want the exposure to that factor.