I have a discriminating eye for commodities stocks, given that the underlying companies have difficulty creating strong brand names or differentiated products. Thus, commodities players compete on price. Lowest cost basis wins. This article identifies and analyzes the low-cost players in the precious metals market from which investors can profit.
Freeport McMoRan (NYSE:FCX) trades around $46, has a year high of $58.75 and a year low of $28.85. The price earnings ratio is 9:57. The earnings per share are $4.78. The dividend yield is 2.20%. Total cash is $4.82 billion and total debt is $3.54 billion. The current ratio is 3:42 and book value per share is $16.50. The company is a mining industry leader with geographically diverse assets and significant proven and probable reserves of copper, gold and molybdenum. It operates seven open pit copper mines in North America in Arizona, and New Mexico. Some of the North American copper mines also produce molybdenum concentrates. The company operates four copper and gold mines in Peru and Brazil. It operates the world's largest copper and gold mine in terms of reserves at its Grasberg operations in Papua Indonesia. Freeport holds a 57.5% interest and operates a copper and cobalt mining concession in the Democratic Republic of Congo.
After a contraction in operations in North America because weak market conditions in 2008, in 2010 Freeport initiated plans to increase production at its North American copper mines. Positive results from exploration indicate the potential for additional sulphide development in North America.
Fourth-quarter results for 2011 recorded net income of $0.67 per share in the quarter as opposed to $1.63 per share for the same period in 2010. Net income for fiscal 2011 was $4.78 per share compared with $.4.57 per share for the year ended 2010. Sales from mines in the fourth quarter of 2011 totaled 823 million pounds of copper, 133 thousand ounces of gold and 19 million pounds of molybdenum compared with 941 million pounds of copper, 590 thousand ounces of gold and 17 million pounds of molybdenum for the fourth quarter 2010. Consolidated sales for the full year 2011 were 3.7 billion pounds of copper, 1.4 million ounces of gold and 79 million pounds of molybdenum, compared with 3.9 billion pounds of copper, 1.9 million ounces of gold and 67 million pounds of molybdenum for 2010. Net cash costs averaged $1.57 per pound of copper for fourth quarter 2011 compared with $0.52 per pound for fourth quarter of 2010. Copper costs for the year were $1.01 per pound compared with $0.79 per pound in 2010. Based on current sales volume and cost estimates, assuming an average price of $3.50 per pound for copper costs are estimated to average $1.38 per pound for the year 2012. Capital expenditures totaled $2.5 billion for the year 2011 compared with $1.4 billion for the year 2010. Capital expenditures are expected to approximate $4 billion for the year 2012 including $2.4 billion for major projects and $1.6 billion for sustaining capital. At December 31, 2011, Freeport's preliminary estimate of recoverable proven and probable reserves totaled 119.7 billion pounds of copper, 33.9 million ounces of gold and 3.42 billion pounds of molybdenum.
Operating performance in the fourth quarter was strong in the Americas and Africa. Labour disruptions at the Grasberg mine negatively impacted year-end results. Despite the disruptions, Freeport achieved record financial results in 2011. The company was able to reach an agreement with the union at the Indonesian mine in December and is continuing to take steps to restore full operations. Freeport continues to advance growth projects, which are expected to result in increases to copper and molybdenum production in future periods. The company expects that sales from mines for the first quarter of 2012 to approximate 3.8 billion pounds of copper, 1.2 million ounces of gold and 80 million pounds of molybdenum. Freeport continues exploration activities to identify ways to boost its commodity reserves in all geographic areas.
Newmont Mining Corp. (NYSE:NEM) trades around $61 has a year high of $72.42 and a year low of $50.05. The company has total cash of $2.23 billion and total debt of $4.24 billion. The current ratio is 1:42 and the book value per share is $28.01. The dividend yield is 2.30%. Earnings per share are $4.39. Price earnings ratio is 13:86. Newmont operates gold and copper mines in North and South America.
Fourth-quarter results indicate gold production of 5.2 million ounces in the quarter and 5.2 million ounces for the year 2011. Copper production was 48 million pounds for the quarter and 206 million pounds for the year 2011. The company realized average gold prices of $1,670 per ounce for the quarter and $1,563 per ounce for the year. Realized copper prices were $3.41 per pound in the quarter and $3.54 for the year. Yearly cost of production for gold was $592 per ounce and $1.26 per pound for copper. The company undertook $2 billion in capital expenditures in 2011. The company anticipates 2012 gold and copper production of approximately 5 million to 5.2 million ounces and 150 to 170 million pounds respectively. Expected costs of production in 2012 are approximately $625 to $675 per ounce of gold and $1.80 to $2.20 per pound, for copper. In 2012 the company expects to have capital expenditures of $3 to $3.3 billion. Approximately 60% of capital expenditures are allocated to growth project initiatives, including further development of projects in Ghana and Peru with the remaining 40% to be spent on sustaining capital.
Southern Copper Corp. (NYSE:SCCO) trades around $35. The year high is $48.06 and year low is $22.58. The dividend is 2.20%. The company has total cash of $1.78 billion and total debt of $2.75 billion. The current ratio is 4:18 and the book value per share is $4.89. The price earnings ratio is 12:93. Earnings per share are $2.70. Southern Copper a large producer of copper, molybdenum, zinc, lead, coal and silver. All mining and smelting is conducted in Peru and Mexico and it conducts explorations in Peru, Mexico, and Chile. The company has good long-term copper and molybdenum fundamentals.
Third-quarter results (pdf) for 2011 showed production underperformed badly due to labour unrest in Peru, adverse weather in Mexico, and ore grade declines. The company expects these events to continue in the fourth quarter of 2011 and into 2012. The company currently estimates a market deficit of copper of 300,000 tons for 2012. Copper has historically represented 77% of production for the company. Copper production in the third quarter of 2011 increased by 24.4% to 155,689 tons compared with 125,192 tons in the third quarter of 2010. This increase was mainly the result of 44,876 tons of higher production in Mexico mine, which was restored to full capacity in the third quarter. Comparing the third quarter with the second quarter of 2011, there was an increase in production of 9,448 tons or 6.5%. Silver, which represented 8% of sales in the third quarter of 2011 averaged $38.76 per ounce and was the same level as in the second quarter of the year. Silver production increased 3% in the third quarter from the same period in 2010 to 3.3 million ounces and by 1.7% from the 3.2 million ounces in the second quarter of 2011. The increases were the result of higher production at the in Mexico mine, partially offset by lower production in Peru. Molybdenum production increased by 6.3% to 4, 787 tons in the third quarter of 2011 compared to 4,503 tons in the second quarter. Molybdenum represented 7% of company sales in the third quarter of 2011. The average market price decreased from $16.50 per ton in the second quarter 2011 to $14.44 in the third quarter, a 12.5% decrease in price.
Sales were $1.7 billion in the third quarter 38% higher than the $1.3 billion in the third quarter of 2010. The increase was attributed to higher metal prices as well as higher copper sales volumes which increased 19%. The third quarter had cost reductions of 2% or $19 million compared the second quarter of 2010. Increased productivity allowed the offset of some cost inflation through the quarter. Fuel cost inflation, power and labour increased by $2.7 million. Purchased concentrates costs increased by $5.8 million.
Mine owners and operators are vulnerable to macro-economic events that weaken the demand for metals and investments in metals. Currently, macro factors are: the continued weakness of the U.S. economic recovery; high unemployment; stock market volatility; and, the European debt crisis. Europe represents 28% of the world economy. In addition the impact of credit tightening in emerging economies, such as China has weakened demand for metals. China is responsible for 36% of the world's copper demand.
Commodity reports (pdf) indicate that that gold will be given a boost in 2012 as economic conditions will likely keep rates at low levels into 2014. This report also indicates that copper will pick up in 2012 as China purchased copper opportunistically last October taking advantage of low prices. Much of that copper will be used as collateral for bank financing in China given the credit tightening that region is experiencing. China has only moderately eased its monetary policy to date and hedge funds are beginning to anticipate a return to pro-growth policies and are now more inclined to see a "soft landing". The demand for molybdenum has been affected by lower than expected stainless steel demand in the U.S. and China as well as a weak recovery in Japan's car production. Silver prices might experience strong support in the next 12 months because of its industrial uses as well it is perceived as a value shelter for economic concerns.
Freeport McMoRan is a well run, well financed and respected giant in the mining industry. All companies in this sector are subject to the vagaries of world economies, capital and commodities markets. Labour unrest is a constant theme in all mining operators. Freeport was able to meet the demands of its workers in Indonesia and will continue to operate the world's largest copper and gold mine at a profitable level, should commodity prices remain at current levels or increase. Appropriation of assets by governments seeking to nationalise resources are always a concern in every country in which the aforementioned companies operate. Freeport has managed to maintain its operations, foster relationships with governments and workers and produces its main commodities at a low cost. It employs hedging programs to ensure profitability. Like many companies in the space, it saw some declines as a result of soft copper prices in the second and quarters of 2011. It will continue to be affected by any contraction of growth in emerging markets such as China and India. Its stock price reflects some of the challenges that it faced in 2011. It represents good value at its current price, better value when it trades in the $30s and the dividend is in no danger of being decreased in the near term. When dealing with a metals stock, investors have to be prepared for volatility as the value of the company is tied to commodity prices and the reserves the company holds.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.