International miner Freeport-McMoRan Copper and Gold (FCX) completed a rollercoaster 2011 with up and down and up earnings tied around work stoppages in its massive Graspau mine in Indonesia. With copper and gold prices near historical highs, is now the time to buy? Here are the numbers.
Freeport-McMoRan has a recent share price around $46, in the higher end of a $28.85-$58.75 trading range. The company's market capitalization is at $43.5 billion. The earnings per share are $4.77 for the trailing twelve months for a price earnings ratio of a conservative 9.6. It pays out a quarterly dividend of $0.25 for a yield of 2.17%.
The news from Freeport-McMoRan for 2011 revolved around the violence surrounding the Grasberg plant in Papua, Indonesia. The violence left hundreds injured and large parts of their plant damaged, leading to a declaration of force majeure as the company was unable to meet several of its contractual deliveries. The lost business lead to sharply decreased numbers for the fourth quarter. Net income for the quarter was down 59% while revenues fell 26% to $4.16 billion. The shocker in all of this was that despite December's miserable showing year-over-year Freeport-McMoRan actually increased revenues by a healthy $300 million.
Now Grasberg's labor situation is settled and production has returned to near normal, while its other plants are firing away and increasing production. This is wonderful timing, as copper prices have increased from around $3.00 to $3.80 a pound and looks likely to head higher as demand for copper is outstripping supply. Growing economies in China and India is driving the market, while numerous mines around the world are aging and coming toward the end of their productive cycle. Freeport-McMoRan is the copper industry's largest supplier while also leading the pack in expanding its production.
In fact, Freeport-McMoRan stands at the end game of a program for increasing its production by a number of large expansion projects in Asian and South American mines. Due to this expansion and the Graberg troubles, overall production was cut from approximately 3.8 billion pounds in 2010 to just 3.7 billion in 2011, but should expand to around 4 billion pounds for 2012. While competitors are also working to ramp up production it is a time and money intensive process in the copper industry, so it should be late 2012 and more likely into 2013 before meaningful competitive production capacity can impact the market. That puts Freeport-McMoRan in an ideal position to ride the copper market higher.
The production negative is in gold, where Freeport-McMoRan's work to increase production is not as advanced. In fact production at Grasberg and other mines will decrease in the first six months of 2012 as expansion plans get to critical stages. Gold sales will likely jump around third quarter 2012 if the production expansion goes as planned.
With all of this infrastructure work it is a good idea to analyze the company's cash flow and financial structure. In fact, investment increased from approximately $1.8 billion to $2.5 billion from 2010 to 2011, while operational expenses from production changeovers and labor unrest popped from just under $10 billion to over $11.8 billion in the same time period. Cash did decrease slightly during fourth quarter 2011 to just over $4.8 billion with a quick ratio of just over a comfortable 2.0. With merely $4 million in long term debt, the company's finances look solid.
The net effect should be that overall earnings should expand at a healthy clip for the first two quarters of 2012 and then jump significantly the third quarter. The stock still seems to have an investor hangover from the labor disputes of 2011 and has not given the company credit for being in a good position to take advantage of favorable 2012 market conditions. Freeport-McMoRan should be a strong player at least through the first three quarters of 2012.
The company is a strong investment for conservative buyers looking for strong returns over the next six to nine months. I have a target price of $65 by October 2012 which should be a relatively safe return. Results for the company after that will depend greatly on how the economy and copper prices play out, so those looking for longer term safety should look elsewhere.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
