Freeport-McMoRan (NYSE:FCX) is an international mining company with headquarters in Phoenix, Arizona. The company operates large, long-lived, geographically diverse assets with significant reserves of copper, gold, molybdenum, cobalt, oil and gas. Over the last three months the company's stock has been doing well with an 11.44% increase, outperforming the S&P which has fallen by 0.88% and has gained 7.85% during the respective period. Further, Freeport-McMoRan's stock is trading above its 200-day moving average of $31.55.
How Will the Indonesian Ban on Or Exports Affect the Industry?
The proposed ban on ore exports by the Indonesian government can have deep affects on the global supply of metals, and it can also completely change the dynamics of the industry. In the long term, companies like Freeport McMoran might benefit substantially from this ban; however, in the short term, the production from Freeport-McMoran's Grasberg mine is likely to fall to 30% from 40% as only a small portion of copper concentrates can be processed in the local smelters.
Looking at the bigger picture, as this ban becomes effective next month, there will be a shortage of metals, which will increase the price of all these commodities. In fact, the prices have already started to move up as the manufacturers start to secure their supplies, keeping in mind the short-term shortage of the metals. A prime example is nickel, which has started to move up. Also, we are seeing an increase in the copper future contracts.
In the short term, Freeport might enjoy the benefits of rising prices; however, the profit margin will not show significant improvement as the production will fall substantially. So this will have a balancing result on Freeport-McMoran's profitability. However, having strong financial power, the company can complete building bigger facilities in lesser time than others and subsequently, enjoy selling bigger volumes on higher prices.
In the long run, Freeport-McMoran will likely be a winner as the smaller miners will have a tough time selling their product. As a result, those miners may have to sell their products at a discount to bigger miners, which should result in an increase in the profit margin for the company. However, let's not put all the focus on the Indonesian ban. The event will have an impact on Freeport-McMoran, but it will not shape the fortunes of the company. Global economic conditions are getting better, and over the next two years, we should see substantial recovery - as a result, demand for metals will increase substantially. The stock has made considerable leap over the past five months, and I believe the long-term prospects of the company are intact and the price will continue to rise.
A Solid Long-Term Investment
One of the biggest indicators of the rise in stock price is sometimes the buying by insiders. Especially when the management is putting their own hard-earned cash then there is likely to be an upward movement in the stock price. James R. Moffett, chairman of the board at Freeport-McMoran bought one million shares in July at $28.53, investing $28.53 million of his own money. The current price shows that it was a shrewd decision as the stock is trading much higher than the price in July. However, it should be kept in mind that stock price might not show a substantial rise in the short-term as the company operates in a relatively low-growth industry and it has already seen a substantial rise during the current year. However, the long-term prospects make it a very solid investment. In addition, the stock yields a healthy 3.5%, which should be a good cushion while the investors wait for the stock price to go up.
The fortunes of the mining companies are largely dependent on two factors: overall economic conditions and manufacturing industry, and the second factor is the government regulations. The first factor is in favor of Freeport-McMoran at the moment, as the recovery in global economic conditions is likely to increase the demand for its products in the near future. we cannot say anything with certainty about the second factor as the governments sometimes tend to change regulations without prior notice. However, currently the second factor also looks in favor of the company. As I mentioned above, the company will likely benefit from the Indonesian ban. While situation in other regions also looks stable, which fares well for the company. As a result, I believe Freeport-McMoran is a solid long-term investment.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.