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Summary

  • The resolution of the Indonesian situation is a shot in the arm for Freeport-McMoRan, and should allow it to increase production capacity.
  • Freeport will benefit from investments in growth projects, and positive copper market dynamics.
  • Freeport's fundamentals are strong, with the stock being cheaper than the industry average, and estimated earnings growth is also strong.

Freeport-McMoRan (NYSE:FCX) received a shot in the arm when the Indonesian government announced that it will allow it to resume exports from the world's third-largest copper mine last month. After a six month embargo that was weighing heavy in the minds of Freeport investors, this news will come as a relief. Now, the company can fully focus on its operations to cut the debt and focus on growth opportunities in copper and crude oil.

Freeport-McMoRan is already on a roll despite the Indonesia concerns. The company had reported net revenue of $5.5 billion for the second quarter, up from $4.29 billion in the prior year period. Looking ahead, the company should be able to sustain its strong revenue growth due to robust operations in Africa and the Americas, coupled with its oil and gas businesses.

Growth-oriented projects

Freeport is aggressively focusing on its growth projects. It has initiated the commissioning of its new mill launched in May, and is ramping up development. The crucial construction project at Cerro Verde is also on track and is expected to start operations at the beginning of 2016. Freeport believes that Cerro Verde, which will become the largest concentrator milling operation in the world, will have a production capacity of 360,000 tons day.

In addition, to make its business more efficient, Freeport has sold the Eagle Ford asset. At the same time, it has acquired deepwater operations in the Gulf of Mexico for $900 million. Management believes that these moves will allow it to grow its oil and gas businesses going forward. Freeport also plans to sell its onshore assets worth $4 billion-$5 billion to decrease debt and increase efficiency.

Freeport has made investments in the copper markets of Indonesia and Papua during risky periods. However, such moves have allowed it to benefit from rising copper and gold prices over the last 10 years. As a result of its initiatives, Freeport has built a huge reserve base of copper. In fact, Freeport's copper smelter capacity is greater than the national copper consumption of Indonesia, and the company has made considerable investments worth $15 billion to expand its underground resources.

Freeport also plans to invest $7.1 billion in the Grasberg mine if the Indonesian government extends its contract by 20 years. This is apart from Freeport's plan of spending $9.8 billion as capital expenses between till 2021. Hence, Freeport is aggressively looking to invest in copper capacity going forward, and since the market is expected to improve, this is a smart move by the company.

Positive copper market dynamics

For instance, Freeport sees strong opportunity in China, with the economy there expected to grow at a solid pace. Copper demand in China is expected to improve going forward. According to Business Insider:

China's grid companies invested 40 billion yuan (about $6.4 billion) in the first two months of the year, up 22% year-over-year. This comes "despite a high base; in January-February 2013, [when] investment rose 44% from a soft 2012."

While some cable providers reported "sharp slowdowns" in the Jan-Feb period, Cheng attributes this to "the temporary mismatch in investment and orders. ...As orders are executed, however, copper demand could begin to improve sequentially.

Now, since copper is used in other applications as well apart from energy grids, and the Chinese GDP still expected to grow at least 7% a year till the end of the decade, copper application should remain strong.

In addition, Freeport is also witnessing improvements in its European business, along with the broad economic recovery across the globe. Moreover, copper pricing levels are also expected to get better. As reported by MarketWatch:

Copper prices are lingering around $3.05 a pound, a level not seen in seven months. Some strategists say the line in the sand is $3 a pound - cross that and it's all downhill.

But is there light at the end of the tunnel? Barclays analysts seem to think so. In a note on Tuesday, Sijin Cheng and other analysts say physical buyers have stepped into the selling abyss of the past two trading sessions - "an indication of interest at lower prices" - and the worst is likely over or at least close to it. They see demand gradually pick up in the peak season for the second quarter.

In addition, Freeport cites an unusually low level of exchange inventories, along with low scrap availability, a decline in consumer stocks, and the consistent inability of the copper industry players to sustain production levels. Hence, the demand-supply dynamics in copper appear positive, and Freeport could benefit from both higher pricing and better demand going forward.

Robust fundamentals

Moreover, Freeport also has an impressive valuation. Its trailing P/E and forward P/E ratios of 15.21 and 13.02, respectively, indicate that Freeport's bottom line is expected to get better. Also, the company's earnings multiple is lower than the industry's average P/E of 23.07. Its PEG ratio of 0.41 is another impressive point, indicating undervaluation and Freeport's growth prospects.

Finally, the improvement in the company's end markets has led analysts to expect robust annual growth of 37.76% in its earnings for the next five years, way above the industry's average of 16.76%. Thus, Freeport's long-term prospects look impressive, and the resolution in Indonesia will allow it to bolster its position further in the market.

Source: Freeport-McMoRan Can Still Deliver More Upside