On March 27th, Freeport McMoRan Copper and Gold Inc. (FCX) declared a cash dividend of $0.3125 continuing its run of consistent and strong dividends. FCX operates in the international mining industry generating a substantial proportion of its revenues, approximately 80%, from copper. The company is one of the largest publicly traded copper mining companies. The major competitors of the company include Southern Copper Corp. (SCCO) and Newmont Mining Corp. (NEM).
Expectations about the Global Copper Demand
The industry is expected to absorb its output as China, the highest copper consumer with 40% of world demand, is likely to increase its consumption. This makes the copper industry highly sensitive to fluctuations in the Asian copper market. According to Credit Suisse Group AG estimates reported by Bloomberg, mined copper output is likely to increase by 11% in 2013 but the growth in China's copper usage is finally starting to pick up after several months of slow performance. Also, the increased output has restricted the increase in copper prices but forecasts for 2013 suggest otherwise. This is assisted essentially by the increased global copper demand. According to Morgan Stanley estimates, global demand for 2013 is expected to exceed supply by 17000 tons.
Diversity in Portfolio and Attractive Income Investment
In order to reduce sensitivity to a few commodities, FCX has also taken steps to introduce a significant amount of diversity to its product portfolio in the near future. By indulging in oil and gas production, and announcing the acquisition of Cobalt Chemical Refinery, the company has adapted a strategy of simultaneous growth and diversity.
Other than strategic advantage of operating in a growing industry, FCX holds the advantage of being a consistent dividend paying company. Despite the slow performance of mining industry stocks, FCX is offering a sizable dividend yield of 3.94% with a 5 year dividend growth of 12.7%. On the other hand, the industry seems to limit its dividend yield to an average of 1.97%.
The industry as a whole submits to seasonal fluctuations but the company has been able to maintain quarterly profit margins of more than 16% in the last four quarters. The payout ratio for the third quarter has improved from 22.72% in FY11 to 36.34% in FY12. The strong profit margins, increasing copper output and sustenance of high dividends make FCX an attractive stock for investors.
Possibly the best characteristic of FCX is its robust dividend yield without compromising on growth. The company has produced a 5 year capital spending growth rate of 14.76% as compared to 9.47% of the industry. On a nine month basis, cash outflow from investing activities have increased by 47.1% in FY12 with a strong emphasis on African projects. The fact that the company has shown serious intentions of exploring emerging markets like Africa and Indonesia shows the considerable attention to growth strategy.
According to company's internal estimates, reported in FCX nine month 2012 results, operating cash flows for full year are projected to be $4 billion assuming average copper price of $3.7 per pound and gold price of $1700 per ounce. The company is operating at a current ratio of 3.08 demonstrating strong liquidity position as compared to the industry's current ratio of 0.75. This current ratio of the company has improved from less than 2 in FY09. The cash ratio for the company has also improved to 1.108 as compared to less than 0.5 in FY09. This clearly suggests that the company has been operating efficiently in terms of management of its short term liabilities.
Despite the fact that the S&P 500 index has outperformed the stock since September 2011, FCX remains an attractive opportunity. It is currently undervalued with a P/E ratio of 9.94 as compared to the industry P/E of 29.17. With Dow Jones index and S&P 500 indices hitting all time high towards the end of March, the expectations associated with the performance of US based equities is improving. If this trend continues, FCX will demonstrate substantial gains as it operates with a beta slightly below 2, representing the stock's high sensitivity to market performance.
The sales of US copper mining companies can also substantially benefit from the tightening of air pollution policies in China. The forecasted excess demand for copper, strength of business model and improvement in economic performance is encouraging for the company. Furthermore, strategic pursuance of growth opportunities, extensively supported by commendable operational efficiency and pay-out consistency make FCX an attractive stock for investors.