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Summary

  • The expansion in the production capacity from North and South America will make up for the decline from Indonesia.
  • Energy investments and the recovery in the copper prices will support future growth.
  • Indonesian ban will halt the supply which will result in improved copper prices.

Freeport-McMoRan (NYSE:FCX) has been going through some troubles due to the unfavorable prices of copper as well as some political issues in Indonesia - I discussed the Indonesian matter in my previous article. Since a huge chunk of copper comes from the company's operations in Grasberg, Indonesia, it is clear that the company will face considerable supply issue if the Indonesian issues are not resolved. However, the situation may not be as bad as it looks. This article focuses on the resources of the company besides Grasberg should we face the worst case scenario.

Freeport-McMoRan without Grasberg

As of 2013, copper output from Indonesia accounted for 22% of the total production while North America, South America and Africa contributed 35%, 32% and 11%, respectively. The proven recoverable copper reserves in Indonesia are only 27% compared to 33% in each of North America and South America, and 7% in Africa. If things did not work out and taxes were to be imposed, the company will have to pay the added tax only on the Indonesian exports until it builds the additional smelting capacity in Indonesia. However, the company is still trying to get the best outcome from the Indonesian ore exports ban - the company has been allowed to export copper concentrate. The government, however, imposed heavy export duties which will result in higher taxes - Freeport-McMoRan believe the taxes are against the earlier agreement and the company is still negotiating with the government.

Let us suppose that the company were to completely hold its operations in Indonesia until it builds the required smelting capacity. While going through the 10-k filing, I was able to get a hint of the company's strategy in this scenario. In North America, where the company presently holds most of its resources, it is expanding its capacity. This would allow the company to produce 225 million pounds of additional copper in 2014 which accounts for 40% of the total copper production in 2013. The production from this mine was 50,000 metric tons per day in 2013, which is expected to become 115,000 metric tons a day. Furthermore, the company expects to take its production capacity to 1 billion pounds of copper ore in 2015 as compared to 564 million pounds in 2013. The capital budget for this project is $1.6 billion, of which, $1 billion has been spent on the project. The construction progress is over 60% and the company expects to complete this project in the first half of this year.

In addition, the company is also expanding its capacity in various mines in South America. Engineering is more than 90% complete and construction progress is on schedule. At the completion of these expansions, the company will have the capacity of an additional 600 million pounds of copper and 15 million pounds of molybdenum annually. The total capital budget for these expansions is about $4.6 billion, of which, $1.5 billion has already been spent on these expansions and further $3.1 billion will be spent.

Trend in the Copper Prices and Other Segments

Prices of copper are under pressure due to the weak demand from China, which consumes about 40% of the worldwide copper production. The Indonesian ore ban will help the copper prices as the supply will be affected - the prices for Nickel have already hit nine month highs; however, copper is down about 4.5%. However, as the stockpiles start to deteriorate, the copper prices will start to strengthen. Freeport-McMoRan expects robust demand from China over the next decade, and the company expects the economic activity to increase.

In addition, the company also has a profitable oil and gas business to balance its profits. The company acquired the business in the second half of 2013 and at seven month ended, the cash flow generated from the business was $1.8 billion which exceeded the amount of capital expenditures of $1.45 billion.

Moreover, the company has huge interest in Eagle Ford and has the opportunity to capitalize on the NGL power play. The prices of NGL have been rising due to its rising demand worldwide, mainly in Asia. This has resulted in huge amounts of export of NGLs in the last few months. The prospects of the energy segment are certainly bright - however, it is not yet clear when the company will start to benefit fully from the energy investments. Freeport-McMoRan has been a little slow in unlocking the value in its energy segment.

Conclusion

The Indonesian ban is a risk and it continues to cloud the outlook for the company. As a result, the stock is down about 17% year-to-date. Furthermore, the weak pricing environment in the copper market has also negatively affected the stock. However, it should be kept in mind that these risks are near-term, and the long-term prospects of the company are bright. The company is customizing its product mix and the addition of its energy assets will certainly add substantial value in the long-term. Furthermore, the prices for copper are also expected to rise over the medium-long term, which should further support the long-term outlook of the company.

Source: Freeport-McMoRan: Long-Term Prospects Are Bright For This Miner