Company finished the first quarter with $0.68 EPS (company data sourced from its first-quarter news release). At current prices, the company is trading at a P/E lower than 9. In my view, that's a bargain. FCX has lost more than 12% since the beginning of April. Commodities were under severe pressure worldwide. Miners' stocks were significantly influenced by this decline. Copper lost 7% since the start of the month. The drop strengthened during the last few days. In my view, it turned into a panic selling.
Freeport-McMoRan lowered its operating cash flow guidance to $5.5 bln. Company assumes average prices of $3.25 per pound of copper and $1400 per ounce of gold for the rest of the year. I think that these are conservative estimates. Both copper and gold suffered a massive sell-off in the last few days. Gold is now trading near $1400, while copper is below $3.20. In my view, gold would average higher prices in 2013. Average price of $3.25 per pound of copper also seems a very conservative estimate to me. Copper was trading below $3.30 for just a few days. These were the days of fear and panic in commodities markets.
The company estimates there would be a change of $270 mln in operating cash flows for each $0.10 change in the price of copper. Operating cash flows would change $50 mln for each $50 change in the price of gold. Prices of copper and gold are very volatile now. I believe the volatility would continue for the next quarter. Therefore, there would be volatility in earnings estimates, which would translate into the volatility of FCX. If you are searching for a very safe and calm investment, FCX is not for you.
The acquisition of Plains Exploration & Production (PXP) and McMoRan Exploration (MMR) is expected to close in the second quarter. FCX completed $10.5 bln in debt financing associated with these acquisitions. The weighted-average interest rate of this financing approximates 3.1%. I think that Freeport-McMoRan got a fair price for financing. Current environment could be seen as problematic for resource companies. The ability to take debt with a low rate is a healthy sign. Total debt is $10.1 bln as of March 31.
Freeport McMoRan pays a $1.25 per share dividend. At current prices, the yield is 4.5%. I consider this fact to be attractive for long-term buyers.
We have seen a lot of short-term focus in the market right now. Falling copper and gold prices make investors nervous. This fear is reflected in the FCX price. Could it go lower in the short term? I think, yes. I see that fundamentals are put aside in today's environment. Market participants liquidate their commodity-related positions because of falling commodity prices. This could present a buying opportunity.
I think you should consider adding FCX to your portfolio. With a P/E of less than 9, it offers value. A 4.5% dividend yield is attractive to income investors. The acquisition of PXP and MMR makes a company diversified and, in my opinion, presents more opportunities.
What about the timing of such a purchase? Look for the copper prices to stabilize. Copper sales contribute more than 3/4 of Freeport-McMoRan's revenue. This is why copper prices influence the stock more than gold prices. With the reaction we've seen so far, if the commodity prices continue their fall, miners would fall too. I believe that when copper prices trade a little above $3.20, you could be searching for an entry point in FCX.