Freeport-McMoRan Copper & Gold Inc (FCX) is one of the largest copper and gold miners in the world. The prices of these metals have been rising almost all year, until the gold price hit an all-time high of around $1920 an ounce in early September.
Since then, the gold price has retreated by 15%. Some see this as the end of the bull run for gold, while others see it as a necessary correction to allow the gold price to move still higher. Copper has seen an even larger decline in its price over the past few months, moving down from just shy of $4.50 per pound to its current level of $3.45. This has been in large part due to the slowing world economy and forecast impact on demand.
Freeport-McMoRan is currently trading around $36.75, and the mean 12-month price target from analysts researching the stock is $54.69 (48.8% upside potential). The 52-week trading range of its shares is $28.85 to $61.35. This stock is trading lower than its 50-day exponential moving average of $39.77 and its 200-day exponential moving average of $46.22. This divergence has been caused largely by reaction to the ongoing strike at its Indonesian mine at Grasburg.
The share price has bounced well from its recent low of $28.85, and is now moving back toward the 50- and 200-day moving averages. Earnings per share for the last year were $5.87, and the latest guidance on earnings moving forward are an expectation for a decrease to $5.54 in its next fiscal year (ending Dec 2012) as they are impacted by the ongoing strike. These numbers place the shares on a current price-to-earnings ratio of 6.27 and a forward multiple of 6.63.
For investors looking at dividend-paying stocks, FCX’s payment of a dividend of $1.00 last year gives the stock a yield of 2.70%, and is covered more than 5.5 times by its earnings.
This is a higher yield than competitor Newmont Mining (NEM) at 1.80%, though far from Southern Copper Corporation’s (SCCO) 8.8%. However, Southern Copper’s earnings did not cover its dividend last year, and if analysts’ earnings estimates come through on target, the dividend will only be scantly covered next year. I expect FCX to maintain, or even increase, its dividend through the next 24 months.
Current operating margin is 50.67%, with a return on assets of 24.95% and a return on equity of 48.20%. The current revenue from its income statement is $22.28 billion, and last quarter’s revenue showed year on year growth of 50.50%. Some of this rise, of course, is attributable to the positive impact of rising metals’ prices. FCX has cash of $4.38 billion, and a total of $3.54 billion in debt.
The company’s debt-to-equity ratio is 20.71, slightly lower than Newmont’s 25, and very favorable when compared to Southern Copper’s 68.
Looking at the graph below, FCX has under-performed both the S&P 500 and Newmont since the news of the miner’s strike in Indonesia started to break. This under-performance has been exacerbated by the falling gold price, too. With gold prices stabilizing, and indeed beginning to rise again, this under-performance could well reverse in the coming months, and see FCX shares continue their bounce toward par with the S&P.
The only cloud on the horizon is the strike that is taking place at the Grasburg facility, the second-largest copper mine in the world and the one with the largest gold reserves. The company had been using non-union workers to continue production, but with recent shootings and the cutting of a copper concentrate pipe (presumably by strikers), the company has been forced to cease production.
The company, however, has calculated that it is responsible for over $3.5 billion of money flowing into the local economy – by way of wages, procurement, taxes, etc – and is using such numbers to put pressure on Indonesia’s government in its fight against the higher wage demands of the unions. My expectation is that the strike will be resolved, possibly as local workers – union and non-union – start to feel the pinch of a cessation in overtime and related wages, and the local economy starts to suffer. Resolution may coincide with firmer metal prices.
Based on company fundamentals, and reaction of the share price in the face of falling metals’ prices and the union action at Grasburg, I see the recent fall as being overdone. This presents an ideal opportunity for investors to buy shares in a company that is well run and financially very sound, and a decent investment in the fortunes of gold and copper. With the latest news of a halt in production at Grasburg, the negative news flow may have hit a nadir. Any positive news will be met with a sizable upward movement in the share price.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.