The tunnel collapse that killed 28 people at the Papua, Indonesia unit of Freeport-McMoRan Copper & Gold Inc (FCX) has caused the suspension of operations since May 15, and the company is losing about $15 million a day in terms of production. However, around one-third of the workers have returned to carry out maintenance activities and this is a possible indication that the company is considering resumption of operations. Several investigations are under way and the company insists that production will only resume after they are all complete. The Grasberg complex contains the largest gold reserves in the world. It is possible that the closure would be prolonged and lead to the deterioration of the already unstable relationship between the company and its trade unions.
The latest on merger activity
Late in 2012, Freeport-McMoRan entered into definitive agreements to acquire oil and gas company Plains Exploration & Production Company (PXP) and exploration and production company McMoRan Exploration Co. (MMR) for approximately $9 billion. The move is in pursuance of a strategy to diversify away from copper and gold mining and production. The two transactions are worth around $20 billion if the debt that Freeport-McMoRan will assume is taken into account. The merger is expected to transform the merged company into a natural resource powerhouse by combining Freeport-McMoRan's mineral assets with the oil and gas resources of the other two companies. Moreover, Plains has proven oil production assets while McMoRan Exploration has proven capabilities in drilling for natural gas.
First-quarter 2013 results
Highlights of the results of the first quarter were as follows:
Net income attributable to common stock for the first quarter of fiscal 2013 was $648 million (EPS of $0.68 per share) compared with net income of $764 million (EPS of $0.80 per share) for the corresponding quarter of the previous year. Consolidated sales from mines for the quarter were 954 million pounds of copper, 214,000 ounces of gold and 25 million pounds of molybdenum, compared with 827 million pounds of copper, 288,000 ounces of gold and 21 million pounds of molybdenum year on year. Consolidated sales for the year 2013 are expected to be approximately 4.3 billion pounds of copper, 1.4 million ounces of gold and 92 million pounds of molybdenum.
Cash flows generated from operations were $831 million (net of $430 million in working capital uses) for the quarter compared with $801 million (net of $720 million in working capital uses) for the same quarter of the previous year. Excluding acquisitions pending completion, Cash flows generated from operations for the full year 2013 are expected to be approximately $5.5 billion (including $0.4 billion in net working capital sources). Capital expenditures were $805 million for the quarter compared with $707 million for the same quarter of the previous year. Excluding amounts required for the pending acquisitions, capital expenditures for 2013 are expected to be roughly $4.4 billion, including $2.6 billion of expenditures on major projects and $1.8 billion for sustaining capital.
The company has strengthened its financial position by arranging $10.5 billion in debt financing at a weighted average cost of 3.1% to be used for the acquisition of Plains Exploration & Production Company and McMoRan Exploration Co. $4 billion will be provided in bank loans and the funding will be available on closing and $6.5 billion will be by way of senior notes. As at March 31, 2013, Cash and cash equivalents were $9.6 billion while total debt was $10.1 billion.
The future outlook
The government of the Democratic Republic of the Congo continues its posturing and its latest demand is that copper mining companies operating in the country should process their concentrates within its borders. It is unlikely that there would be any further action since the two major companies, Freeport-McMoRan and Glencore (OTC:GLCNF), already process much of their concentrates within the Congo and there is presently no electricity to spare for further processing. There is no likelihood of any problems arising in the production and export of copper from the huge Tenke Fungurume mine in Katanga. The mergers should also go through smoothly providing additional revenues from oil and gas.
The bottom line
Analysts have been bullish about Freeport-McMoRan, which is currently trading at around $30.70. Nomura has recently upgraded the stock from Neutral to Buy with a target price of $38 while Morgan Stanley has upgraded the stock to Overweight with a price target of $45. UBS has a target price of $40. In addition to the considerable upside for the price, the stock also offers an attractive dividend yield in excess of 4%.