Freeport-McMoRan Copper & Gold's (NYSE:FCX) first-quarter results felt the heat of declining copper and gold prices. Although its revenue increased marginally, its profit dipped considerably year over year. In addition, Freeport issued a weak outlook for copper and gold for the current fiscal year due hiccups in its operations in Indonesia. Despite all these issues, Freeport's stock trades at 52-week highs, and it has gained solid momentum over the last three months, with gains of 16%. But, will Freeport be able to sustain its stock price momentum going forward in difficult times? Let's find out.
Indonesia could get better
Freeport is facing tough times on account of its copper and gold business in Indonesia. Its copper production fell 3.3% during the first quarter, along with a marginal decline in prices. Similarly, its gold production also fell 1.7%, accompanied by a decline in its prices. The company is taking various initiatives to tackle this situation, such as resizing its workforce at the Grasberg mine in Indonesia.
Freeport had to face a major setback due to a new government policy enforced in Indonesia, which restricted the export of unprocessed minerals from the country. This violates the agreement Freeport had with the government. Although the company is in talks with the authorities, it has not found any relief until now. However, on a positive note, Freeport is the developer of Indonesia's only copper smelter, and expects the situation to get back to normal. As I had written in my previous article:
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.
Once the Indonesian operations get back to normal, Freeport's performance can be expected to improve. The company is seeing robust improvements in its mining operations in America, Europe, and Africa. In addition, Freeport reported solid margins in its mining and oil and gas businesses, and looking forward, it expects the commodities market to improve. Moreover, the company believes that it has the opportunity to grow volumes through its production profile.
Demand to pick up
According to Freeport, in Asian markets such as China, fundamental demand is strong, which is supported by consumer and infrastructure investment. Moreover, the Chinese government has talked about providing incentives in areas where copper is consumed. Moreover, the lower price of copper has reduced the availability of scrap, and this has created more demand for copper cathodes.
The company is highly optimistic about its prospects going forward, and with various projects under its sleeve, it expects to reap solid returns in the future. Its Deepwater Gulf of Mexico project, Brownfield development projects, etc. are progressing well. According to management, Freeport has immense copper potential and with its ongoing projects, it will have control over five of the largest mines in the world.
Crude oil to get better
Freeport is also positive about its crude oil business, except for a slight pressure it experienced due to Light Louisiana Sweet [LLS] crude oil pricing. Management believes that this was a one-time event due to the opening of the southern leg at Keystone. In addition, Freeport also saw some downward pressure on the margins due to tremendous crude oil inventories, which will ultimately affect the margins of all upstream businesses.
However, Freeport believes that the resilience and positioning of its assets, along with the good quality of the oil it produces, will help it deliver long-term growth in this segment. Freeport produces a significant amount of Heavy Louisiana Sweet [HLS] crude oil in the Gulf of Mexico, which basically trades at a premium to Light Louisiana Sweet [LLS] crude oil.
Cutting the debt
Considering these factors, the company seems to be in a solid position to sell its oil at robust pricing. Moreover, with a strong crude oil margin, it will continue to expand further. Additionally, Freeport is moving fast to cut its huge debt, which stands at almost $21 billion. It is divesting non-core assets in order to optimize its portfolio and cut down the debt load. For example, according to the Wall Street Journal, the company is looking to sell its assets in Chile. As reported by Reuters:
Freeport-McMoRan Copper & Gold Inc's Chilean copper mine Candelaria has attracted the interest of Magris Resources, the private equity firm founded by former Barrick Gold Corp chief executive Aaron Regent, the Wall Street Journal reported on Thursday, citing unnamed sources.
It is an open secret that Freeport is running a sale process for Candelaria and the mine has been on the market for some time, a source who has been involved in the process told Reuters.
The company, which hopes to significantly reduce its debt by the end of 2016, agreed in May to sell $3.1 billion worth of oil assets to Encana Corp (NYSE:ECA).
Another attractive point about Freeport is its robust valuation and bright growth projections. Currently, the company has a trailing P/E of 16, and its forward P/E is even more attractive at 13. The company's PEG ratio is also impressive at just 0.57. In addition, analysts expect the company's earnings to grow at a robust CAGR of 28% for the next five years. Hence, even though Freeport is facing some short-term issues, its long-term prospects look intact and it should be able to sustain its momentum in the future.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.