Many people have prospered through investing in mining and exploration. Mining stocks have earned a reputation as speculative. However, they have the ability to combine solid growth with attractive dividends. For that reason, I will look at Freeport-McMoRan (NYSE:FCX) to see if this multi-metal conglomerate offers a better investment than competitors like gold specialist Newmont Mining (NYSE:NEM) and a copper producer like Southern Copper (NYSE:SCCO).
Freeport-McMoRan is a perfect example of the risks and rewards that engulf the mining industry in many parts of the world. With large operations (like its Grasberg mine in Indonesia) found in some of the more unstable countries in the world and the relentless danger of cave-ins, this is not a business without risks.
That said, Freeport-McMoRan is managing its risks and posting some big earnings. While the stock dropped almost 19% over the past 12 months, the company's 2011 earnings were up over 9% year-to-year on a gross profit of $10 billion. This strong showing came even as the $37 billion company saw its fourth quarter earnings tumble nearly 60%.
Looking ahead, 2012 has the makings of a very good year for Freeport-McMoRan. With some experts predicting price increases in the copper market, which is Freeport's largest production metal, It's very reasonable to envision profits increasing for the company. The stock, which was down last year, has a healthy estimated target price increase of 38%. It appears to be undervalued, with a price to earnings ratio of just over 8. In spite of the unrest and logistical dangers in Indonesia (where an estimated 45% of the company's income is derived), Freeport-McMoRan's forecast share price gain and its 2.5% dividend yield make this an extremely attractive investment.
Freeport rival Newmont Mining is on a downswing over the last few weeks, but don't expect it to stay down. Focused primarily on gold mining and exploration, the $28 billion company is another major player in Indonesia, although that relationship could prove to be difficult if the country goes through with plans to reduce foreign interest in new mining projects. The news could have an impact on the high expectations for Newmont's share price, which is forecast to climb 35% during the next 12 months.
Even with the uncertain news coming out of Jakarta, Newmont looks like it could be ready for another solid year. The company recently sold $2.5 billion in mining notes. The move is expected to offset some older debt that is maturing, helping the company to maintain its nearly $2 billion in total cash for running the business and funding new exploration. With a low debt to equity ratio of 27, a solid forecast for share price gains and a $1.40 annual dividend that works out to 2.4%, Newmont Mining Corp is another M&E company that looks poised to strike it rich again in 2012.
Another big copper producer, Southern Copper, focuses mainly on projects in Latin America, allowing it to avoid the political unrest in Indonesia. The $26 billion company saw its share price decline 20.5% in 2011, although it realized a gain in quarterly revenue (up 11.4%) and earnings (a 9% gain). Although 72% of its revenue comes from copper mining, the company is diversified, mining gold, silver and zinc as well.
Southern Copper has some very good fundamentals, with low debts and plenty of cash. Of the three companies, Southern was the only one to record quarterly revenue (at 11.4%) as well as earnings (recording a 9.1% gain). The company has a debt to equity ratio of 68, and its $1.3 billion in total cash gives it a cushion for funding projects and paying its dividend. Southern's payout is a point of contention after a recent dividend cut took the company's $2.04 annual amount (for a hefty 6.7% yield) and dropped it to a much less generous $0.76 (for a yield of 2.4%).
While all three companies preformed pretty well in 2011, each has negative marks as well. Freeport struggled with its dropping share price, in part causing it to lose in both revenue and earnings. Newmont struggled with its earnings per share, recording a nasty 77 as indicators suggest it was overvalued. The company was also saddled with a 137% payout ratio, indicating that a dividend cut could be in the offing. Finally, Southern was burdened with a hefty payout ratio of 89% while a large portion of its available float (nearly 6%) was held in short shares. With insiders and institutions holding nearly 92% of the stock, this suggests concern among those who know the company best.
It's important for investors to do their own research before making decisions on stock holdings, but we can draw an initial conclusion based what we have seen. Although it struggled mightily in 2011, Freeport is a very good holding going forward. Southern was the best in 2011, but its big payout ratio, unpleasant dividend cut and its high short float suggest that the company could be having money problems. Newmont, while its target numbers are just as good as Freeport's, appears to be carrying a dividend that it can't support. A cut would help the bottom line, but it could hurt growth going forward if it appears to be a sign of weakness.
In order to stay ahead of the game, Freeport needs to be careful of developments in Indonesia, because a change there could hit both it and Newmont. That said, Freeport appears poised for a very good year, and I would recommend buying before it makes a run.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.