Freeport-McMoRan: A Solid Income Stock In 2012

| About: Freeport-McMoRan Inc. (FCX)

Late last week, the Chinese government announced that there are no plans to relax that country's restriction on the export of molybdenum. Freeport-McMoRan (FCX) should benefit from the news based on its ownership of Climax Molybdenum, holding one of the world's largest reserves. China, which is the considered the third largest source of molybdenum with around 90,000 metric tons in reserve, began placing restrictions on the amount of the metal that could be exported in any given year. The quota system, which limits exports to 25,000 tons per year, includes a 15% export tax and is designed to retain a significant reserve for China.

Freeport's Climax mine is located in Colorado and is one of the largest mines of its kind in North America. While the mine has been out of operation since 1995, it is expected to go back online later this year and produce as much as 30 million pounds of molybdenum per annum. When added to the company's 2.48 billion pounds held in reserve, the company will be the pre-eminent player in the market. With Chinese producers being effectively excluded from the market, Freeport will be able to capitalize. This should act as a significant catalyst for the stock heading into the second quarter. The timing of the announcement of continued restrictions, made on March 26 at the Eighth Annual Chinese Molybdenum Conference in Xian City, when coupled with the planned production from the U.S. mine, positions Freeport to reap the benefits during the 2012 calendar year.

While Freeport is not the only player in the space, the company's diversification across copper, gold, silver and molybdenum position it to perform. Beyond Freeport, Thompson Creek Metals (TC) is also making a major push to expand production in 2012. The company owns 75% of the Endako mine in British Columbia, with the other 25% being held by Sojitz Corporation. The mine is adding a new mill that will take daily production capacity from 31,000 tons per day to 55,000 tons day, according to a recent press release by the company. The new mill is expected to come online during the second quarter and have an immediate impact. These two companies are difficult to compare directly because with a market capitalization of over $36 billion, Freeport eclipses Thompson Creek's $1.14 billion. Freeport's price-to-earnings ratio of 7.96 is not as attractive as the 3.9 for Thompson Creek, but with an operating margin of 43.8% relative to 22.3% for Thompson Creek, Freeport is well positioned. Achieving such an operating margin for a company of Freeport's size is particularly impressive. Using this as a catalyst, the company is in an excellent position to perform throughout the remainder of the year.

Other Considerations

In addition to the catalyst discussed above, Freeport is particularly attractive as an income play. In a report released by Bloomberg on March 31st, Freeport ranks third in the materials sector based on the dividend yield of all of the companies in the Standard & Poor's 500. The company came in behind Cliffs Natural Resources (CLF) and Nucor (NUE), which were reported as having dividends yields of 3.61% and 3.4%, respectively. Freeport's 3.29%, which places it third in the sector, has demonstrated a fair amount of volatility over the past several quarters. With the stock trading in the lower portion of its range, the positive catalysts may lead to a significant price jump.

When considering Cliffs, the company appears attractive with a price-to-earnings ratio of 6 and an operating margin of 36.2%, but this does not reveal the full picture. The company has a price-to-earnings over growth (PEG) ratio of 13. Typically, a PEG ratio is considered attractive when it is below 1.0. This metric is used to measure how much an investor must pay for every dollar of earnings relative to the expected growth in the company. At 13, Cliffs is extremely expensive relative to the amount of expected growth. The company is solid on most levels, but significant growth expectations are clearly built into the price of the stock. Nucor has a price-to-earnings ratio of 17.6 and an operating margin of 7.1%. Even with this higher P/E ratio, the company has a PEG ratio of 1.75. This means that the stock is more fairly priced than Cliffs in terms of its growth. Where Nucor falls short of Freeport in terms of its overall attractiveness is in its operating margin. Nucor is an extremely well-run company, but it cannot compete with the efficiency of that Freeport delivers.

Before simply accepting Freeport, however, one should consider the relative importance of dividend yield in the current investment climate. While there are a few industry commentators that believe that the economy is on the verge of a significant recovery, there are several signs to the contrary. The European debt crisis has not been resolved, the economic future of the U.S. will remain questionable until after the Presidential election and the Federal Reserve has publicly stated its intention to keep rates low for the foreseeable future. Given the difficulty of finding yield in the current market environment, a dividend yield over 3% is very attractive. Given the positive outlook for the stock based on the catalyst discussed above and the relative strength of the company relative to its peers, the company is well positioned for strong performance, and should be added to anyone's portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.