December 6, 2012 Freeport-McMoRan (FCX), the world's largest producer of molybdenum and second greatest producer of copper announced it would acquire Plains Exploration & Production (PXP) and McMoRan Exploration (MMR) which it had spun off in 1998 and 2002. For seven months, through completion of the acquisitions in June 2013, FCX was frequently in the news and a target of criticism and uncertainty. The collapse of a training tunnel near its mammoth Grasberg Minerals District in West Papua, New Guinea interrupted ore shipments for six weeks and added to negative sentiment and depressed share price. Long used as a proxy for owning copper and the health of world economies which depend on the metal, FCX was changing its profile as well as encumbering its balance sheet, previously quite clean, with debt as great as its $18 billion cash flow. Despite good relations with the Indonesian government, the whiff of dangerous jurisdictions was in the air.
Early in June the acquisitions went through, the mining operations at Grasberg were inspected and resumed, regular and special dividends were paid and the share price has risen. The air has cleared for FCX.
The big news this quarter is that it is retiring short term obligations at 11.87% after only six months, having used the notes to facilitate the M & A. The quick redemption of the 2014 notes will net FCX $8 million and help it re-direct cash flow to growing its enormous reserves, especially its new oil and gas holdings in the U.S. Clearing the $299 million notes should please share holders and further lift share prices which took a heavy hit last December and whose effects lingered to July before sustained accretion occurred. Shares now sell above $36.
With the acquisitions of PXP and MMR, about 60% of FCX's capex for 2H 2013 will go toward developing its oil and gas holdings in California, Texas, Louisiana and offshore in the Gulf.
FCX is the world's second largest producer of copper, about 8% of world output, and largest producer of molybdenum. It also has extensive gold reserves, 32 million oz. at its Grasberg minerals district on the peninsula of West Papua New Guinea at which it additionally has 335 million oz. silver reserves. It has massive copper and cobalt sites at Tenke Fungurume in Katanga, the semi-autonomous southernmost province of the Democratic Republic of the Congo.
While many investors and "the Street" were displeased, at least at first, with FCX's recent initiatives, they were consistent with the company's history of growth, acquisitions and transformation toward a more diversified resource and customer base. The recent move into American oil and gas extended this century-long process by moving FCX into safer jurisdictions and the more vital, potent and (compared to gold, molybdenum and copper) stable markets.
FCX began as Freeport Sulfur in 1912 when it founded the company town of Freeport, Texas. Half a century later, in 1960, Freeport Sulfur confirmed a Dutch discovery of copper and gold resources in Ertsberg, Indonesia and in 1967 followed through by forming Freeport Indonesia, the subsidiary that runs Grasberg (discovered in 1988) to this day. In 1969, Ken McWilliams (Mc), Jim Bob Moffett (MO) and Mack Rankin (Ran) formed McMoRan Exploration which was merged with minerals and oil and gas Co's only to be re-acquired last June. In 1981, McMoRan Exploration merged Freeport Minerals with McMoRan Oil & Gas to form Freeport McMoRan which began trading as FCX on the NYSE in 1988 with the discovery of the massive resources at Grasberg Minerals District in wild, mountainous West Papua. In 2007, having avoided a takeover by Barrick Gold (ABX), FCX acquired Phelps Dodge, the large integrated producer of copper, molybdenum and cobalt with properties in North and South America and in Katanga at Tenke Fungurume.
For 18 years, especially the past 10 years FCX has rewarded shareholders with fairly regular and generous payer of dividends. From January 1995 to October 1998 they paid quarterly and then ceased till April 2003. The dividend has been quarterly with frequent supplemental cash dividends particularly in the period December 2004 - December 2006. This past July, FCX paid a handsome $1 / share supplemental dividend attendant on completing its acquisitions of PXP and MMR. While the extension of its operations has smudged a previously stellar balance sheet, its enormous cash flow and returns from oil and gas capex next year should sustain the payments. November 1, FCX paid its regularly quarterly dividend of $.3125 / share. Cash flow projects to $5.5 - $6 billion for 2013. The 3Q 2013 net cash flow was $1.9 billion with net income of $821 million.
Consolidated sales for the first 9 months of 2013 indicate the industry strength of FCX. Projecting through year's end, copper sales are expected to be 4.1 billion lbs., 92 million lbs of molybdenum and 1.1 million oz. gold. As oil & gas begins producing subsequent to the acquisitions, FCX expects 2013 production of 37.5 mm b.o.e. (barrel of oil equivalent, see previous link).
FCX recently prepared for 2014 growth in copper export, sales and income by signing new deals with Jiangxi Copper of China on copper refining and treatment ($92 / ton) and export of process concentrate ($.092 / lb). While Reuters' headline and bullet points stressed the increase in smelting price, said it would pressure costs at BHP Billiton (BHP) and made it sound as if FCX was overpaying, the text explained that the new contracts were below the prices Jiangxi wanted ($100 / ton and .10 / lb of concentrate) and even further below the c. $114 / ton and .114 / lb smelters on the Chinese mainland currently ask. Many headlines give a sensationalist or problematic twist to events. In any case, the deal with Jiangxi green lights the transfer of FCX resources to refiners and thence to markets.
Another positive for FCX also involves Chinese investment in Indonesia. October 3, Chinese PM Xi Jiping and Indonesian Industry Minister Mohamad Hidayat jointly announced $28 billion in Chinese investment in mineral development, infrastructure and power. This will facilitate the ability of FCX and other mining companies to process and refine ore concentrate in-country per Indonesian law. Minister Hidayat in April, July and August this year emphasized that he is flexible on increases in this area but expects work to be underway by year's end. Upgraded railway and electricity infrastructure from Chinese investment will benefit all parties involved in developing Indonesia's vast mineral and commodity reserves. At the same time, Indonesia is eager to encourage and increase foreign investment given the 18% plunge of its currency, the rupiah YTD, large account-deficits and structural ills. The need for investment, development and revenues is good for FCX.
FCX has positioned itself for long-term sustained growth. The extent of this growth depends on the world economy which remains sluggish, burdened by Sovereign debt, micro-managing business and extracting revenue from it. FCX like most companies, especially those involved in export and global industry finds itself competing with the drive of governments to increase power by regulation and deficit-spending that creates a growing class of dependents. Still, its prospects are varying degrees of good to excellent. See my focus articles on FCX here.
The latest in a long series of acquisitions by FCX has given it staying power. Since absorbing PXP and MMR, it share price has steadied and steadily risen. Barring a major global downturn or protracted period of crises, by 2014 it should again be trading at $38 -42, its range before plans for its diversification annoyed investors. Its large cash flow from vital resources should allow it to pay down last year's debt and maintain its dividend.
FCX is a good long term holding. Sixteen major analysts at Nasdaq.com rate it strong buy with a consensus target price of $40. Ratings from 22 analysts at marketwatch are similar: an overweight rating and target of $39.37. FCX closed November 18, a rough day for the mining sector at $36.49 in light trading and rose after-hours.