The second quarter was a transition for Freeport-McMoRan Inc. (NYSE:FCX) that recently stripped Copper & Gold out of its name. Even with the issues in Indonesia holding back the sale of copper and gold during the quarter, the company produced a solidly profitable quarter.
Despite curtailed production in Indonesia, Freeport-McMoRan continues to generate solid profits and revenues that exceeded analyst estimates. With a market cap of only $37.5 billion, it possesses assets and growth potential that rival energy focused companies that trade at similar values with only one commodity stream. As an example Continental Resources (NYSE:CLR) has a similar production level and capital spending profile of the Oil and Gas division of Freeport-McMoRan and is worth $28 billion alone. Similarly, much smaller copper producer Southern Copper Corp. (NYSE:SCCO) is worth $27.5 billion. While these are somewhat high-level examples, it does provide a perspective of the value of Freeport-McMoRan.
With all the noise during the quarter, investors need to understand the potential of the company remains on track due to the following numbers: earnings, Indonesia production return and capital spending.
For Q214, Freeport-McMoRan produced earnings of $0.58 that easily exceeded analyst estimates of $0.52 according to Capital IQ. Revenues even jumped to $5.52 billion, outpacing the $5.31 billion expected by analysts. The earnings vastly exceeded the $0.22 earned last year.
The prior year quarter didn't include a full-year of oil and gas production, but the biggest reason for the solid quarter was that Indonesia wasn't a big impact. The company sold 117 million pounds of copper and 135,000 ounces of gold during the Q214. The numbers are close to the production last year of 158 million pounds and 151,000 ounces of gold. Due to ore sequencing issues, the numbers last year were down from normal levels. Considering the export restrictions, Freeport-McMoRan deferred sales of approximately 150 million pounds of copper and 240,000 ounces of gold for the quarter. Undoubtedly, the Indonesia issues hurt the numbers, but it didn't hit the comparative numbers to a great extent.
While Southern Copper does generate higher margins due to some advantageous pricing in the Mexico mines, the miner only expects to reach production of 670,000 tons of copper in 2014 following the implementation of a new facility in Peru. In total, it produces quarterly revenue of $1.5 billion, only 25% of the total by Freeport-McMoRan.
Building For The Future
The level of capital expenditures is significant at $2.0 billion during the second quarter and $3.6 billion for the first half of the year. While copper production is more of a known quantity, the new energy division is probably overlooked by the market where Freeport-McMoRan has spent $1.5 billion in the first half on oil and gas operations.
The level of capital spending is in the same ballpark of Continental Resources that spent nearly $1.1 billion during the last quarter. The Bakken oil producer averaged production of 167,953 Boe/d for the second quarter. Freeport-McMoRan produced a slightly higher 176,000 Boe/d during the recent quarter. The numbers will swing wildly in the coming quarter with the sale of the Eagle Ford assets that produced 44,000 Boe/d offset by a ramp up in Gulf of Mexico production that included a recently added well at initial production of 3,600 Boe/d.
All of the recent noise surrounding Indonesia export issues that are now mostly resolved and a China slowdown hasn't stopped Freeport-McMoRan from generating solid earnings in the last quarter. With a restart of copper exports in Indonesia and significant progress made in expanding copper production in Arizona and oil production in the GOM, Freeport-McMoRan is a cheap stock trading at 12.6x 2015 earnings estimates. The comparative stocks trade at higher multiples of 15x to 16x 2015 earnings estimates. With the stock valuation comparing favorably to some examples of stand-alone companies in the main two divisions of copper mining and oil exploration, Freeport-McMoRan remains a cheap stock with upside potential.
The best part is that investors get a 3.6% dividend yield while waiting.
Disclosure: The author is long FCX. 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.
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