Freeport-McMoRan Is A Long-Term Buy

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 |  About: Freeport-McMoRan Inc. (FCX)
by: Anup Singh

Summary

Freeport's solid first-quarter report indicates the company's resilience in a tough market.

Freeport is focusing on cost reduction and expects its business in Indonesia to get back on track soon.

Freeport's projects have advanced impressively and they should result in long-term growth.

Freeport-McMoRan Copper & Gold (NYSE:FCX) had started the year on a sour note, but the company's shares are now making a comeback. Freeport is up close to 7% in the last three months, and the company's recently released first-quarter results have provided it with some momentum. Though Freeport's profit took a beating and dropped to $510 million from $648 million last year, its revenue rose from $4.58 billion in the prior year period to $4.98 billion in the first quarter.

Improvement in the cards

But given the cost reduction moves that Freeport is making, I believe that the company can get its bottom line back on track. Freeport is seeing strong margins in both its mining and oil and gas businesses, and this is resulting in good cash flows. An intelligent execution of its plans can enable Freeport to benefit from its assets. The company witnessed a solid performance in its mining operations in the Americas and Africa, and also benefited from a very meaningful contribution from the oil and gas business.

Going forward, the oil and gas business should continue performing well after displaying a strong operating and financial performance during the first quarter. Moreover, Freeport is advancing its growth projects at a good pace. The Morenci expansion is expected to start commissioning in the current quarter, while the Cerro Verde construction is in progress and is expected to be commissioned in 2016.

The Lucius development Deepwater Gulf of Mexico project is expected to produce its first oil in the second half of this year. In addition, Freeport has seen positive exploratory results at its Highlander prospect in offshore in South Louisiana.

Focus on Indonesia

Freeport has managed to deliver a strong operating performance in terms of volumes produced and cost incurred. It has adjusted its production of concentrate to align the volumes that are produced with the requirements that can be processed at PT Smelting in Indonesia.

Also, Freeport is mining lower grade material, and focusing on stripping in the Grasberg open pit. It's also doing maintenance activities to prepare for return to full operations when the government regulatory situation is resolved in Indonesia. In the next two to three years, Freeport plans a transition from the open pit mine at Grasberg to mining underground at the Grasberg Block Cave beneath the pit in a bid to enhance quality and productivity.

Further, Freeport is on a spree to cost cutting by laying off employees or deferring projects, but it is focusing on key areas to drive growth in the long run. It was the developer of Indonesia's only copper smelter. Freeport produces more copper than Indonesia consumes, and has invested to date over $10 billion in the country. Moreover, it has a business plan that provides for additional investments of over $15 billion.

Demand expected to improve

Moreover, Freeport cites healthy fundamental demand in China, supported by consumer and infrastructure investment. Also, the Chinese government is providing incentives, which are relatively modest but important, in areas where copper is consumed. The lower price has reduced the availability of scrap, and that has created more demand for copper cathodes.

There's an improving demand for copper in the U.S. as well, where Freeport provides over 40% of copper wires. Its downstream customers are doing well and consumer confidence is growing. Automobile and construction have been positive. Also, it has a smelter in Europe, and is seeing an uptick in the region. However, on a global basis, the copper cathode markets are tight. Since scrap availability is tight, and premiums for copper cathode are strengthening globally, there might be a slight concern for Freeport in the short run.

Projects under focus

However, going forward, Freeport is encouraged by the basic fundamentals of copper. So, it is focusing on more projects that are expected to deliver long-term value. The company's Brownfield development projects are proceeding well. Cerro Verde is the big story here. This project started construction a little over a year ago, and is on target to be completed in 2014. This project will add $600 million pounds of copper per year to Freeport's portfolio.

Also, Cerro Verde will be the world's largest single site concentrating milling facility, where the groundwork is being completed and the physical destruction has been started. This is a site where construction can be undertaken on a relatively low risk basis because it's at an existing site where Freeport has already operated earlier.

Major projects in mining operations for the year 2014 primarily include the expansions at Cerro Verde in Peru and Morenci in New Mexico, and underground development activities at Grasberg in Indonesia. Capital expenditures for oil and gas operations will majorly be incurred at the Deepwater Gulf of Mexico and Eagle Ford operations.

Freeport expects consolidated sales for 2014 of approximately 4.3 billion pounds of copper, 1.6 million ounces of gold, 97 million pounds of molybdenum, and 64.2 million barrels of oil equivalents. The revised shipment figures assume that Freeport will be able to resume normal operations in Indonesia by this month. If this does not happen, it would result in a deferral of approximately 50 million pounds of copper and 80 thousand ounces of gold shipments per month. However, management appears optimistic about resumption of normal operations in Indonesia by May.

Fundamentals and conclusion

The trailing P/E and forward P/E ratios of 14 and 11, respectively, indicate earnings growth going forward. This is not surprising since Freeport is focusing on cost reduction efforts. The PEG ratio is also quite impressive at 0.47, depicting undervaluation and a robust expected growth rate. Finally, Freeport has an impressive earnings CAGR of 27.90% for the next 5 years.

The company has gained some momentum after its recent results and taking a look at the various moves and strategies that it is undertaking, it looks poised for greater gains going forward. So, investors should definitely consider an investment in Freeport for the long run.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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.