Very often, an overhang of political uncertainty on a company is a red flag for investors. Indonesia's sudden regulatory ban on concentrates this past January helped pull shares of Freeport-McMoRan (NYSE:FCX) lower. The shares peaked at $37.40 before bottoming at close to $30. Despite ongoing risks in this region, along with lower copper prices in the previous quarter, uncertainty is lifting. In effect, Freeport-McMoRan gives investors exposure to the growing oil and gas market. Combined with a healthy dividend of $1.25 per share (which yields 3.69 percent), Freeport-McMoRan is a stock to buy now.
Strong sales in energy
Sales of oil and natural gas were higher than originally forecast. Freeport-McMoRan sold 16.1 million BOE (Barrels of Oil Equivalence) in the first quarter. This helped contribute to the $1.2 billion in operating cash flow.
Weak metal prices
The average realized copper price was $3.14 per pound, compared to $3.51 last year. Realized gold prices were also 19 percent lower than last year, at $1300 per ounce. Restrictions in Indonesia reduced copper output by around 525 million pounds. The company reduced gold export volumes by 140,000 ounces.
Freeport is unlikely to resolve restrictions imposed by Indonesia in the near-term, but it is possible. This event would immediately lift the stock. The firm is optimistic that operations could resume in May. With elections in the region looming in July, an agreement between Indonesia and Freeport might come this quarter.
Mine development continues to offer tremendous growth for the miner. The El Abra mine in Chile and the Tenke Fungurume mine in Africa safeguard strong copper production for current and future quarters.
In the energy segment, Freeport is taking steps to meet ambitious production targets. It completed deepwater drilling in the Gulf of Mexico last fall for the first time. There as many as 10 projects scheduled annually. This will help Freeport meet a 40,000-50,000 BOE per day production goal for the next six years. With oil prices staying strong, profit margins will be much richer in future quarters. Freeport's cash operating margin was $58.71:
Source: Freeport-McMoRan Press Release
Europe's economy is improving. In Q1, Freeport noticed fundamentals improving in Spain and Italy. Supply was also tight, which steadied customer demand.
Freeport forecasts sales of 4.3 billion pounds of copper in 2014, 1.6 million ounces of gold, and 97 million pounds of molybdenum. Conservative investors should assume copper prices will fluctuate in the $3 range. If global growth accelerates, any higher copper price will mean billions more in revenue for Freeport.
The miner had $20.9 billion in consolidated debt at March 31, 2014, but aims to cut this to $12 billion by the end of 2016. With $3 copper, $1300 gold, and $10 molybdenum, the company could lower its net debt to $14 billion. To address debt concerns from investors, Freeport still has the flexibility to sell down assets if metal prices worsen over the next two years.
If the Indonesian ban is not resolved over the long-term, Freeport will need to reduce staff and cut capital expenditures. It has 30,000 staff, and is a significant contributor to GNP in Indonesia. It would be beneficial for Indonesia's ruling party if it reached an agreement with Freeport in the near-term.
Copper prices could dip again due to lower demand, driven by excess inventory in China. Since unit cash costs for the company were $1.54 per pound last quarter, Freeport could sustain negative fluctuations in the metal.
It is unlikely that Freeport will fall below $30 as detailed in the last analysis. The company is a solid energy and metal mining play and is committed to a healthy quarterly dividend. Its shares could even rally in the current quarter if Indonesia softens its position against the company. Combined with a steady growth in the global economies, investors should consider accumulating a position in Freeport-McMoRan at current levels.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in FCX over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.