Freeport-McMoRan (FCX) is the world's largest publicly traded copper company, selling around 4 billion pounds of copper every year. It mines reserves of copper, gold and molybdenum with mining operations in North America, South America, Africa and Indonesia. This company's market capital is near $36 billion. It has gained a good rank in the top 25% of the coverage universe. The company has a history of returning cash to its shareholders through dividends. The dividend amount depends on the company's financial outcome, cash requirements and future prospects.
I believe Freeport-McMoRan stocks are one of the leading stocks that trade inverse to the U.S. dollar index futures. However, if the U.S. dollar index begins to catch a bid higher than its stocks, it could come under selling pressure. In my opinion, precious metal stocks will be the first equities to catch a bid, when the U.S. dollar index reduces. As long as the U.S. dollar continues to trade lower, the metal stocks will do well.
I hope Freeport-McMoRan is in a comfortable position compared with its competitors like Newmont Mining (NEM) in the production of copper and gold and Barrick Gold (ABX) in gold. Copper, gold and molybdenum are greatly in demand in growing economies like India, China and Russia. Freeport-McMoRan seems to be in a better position in this highly cyclical industry.
I believe mining companies are directly linked to the price of the commodities they produce. Hence, there may be times where the stock price may not reflect the actual value of the companies. Freeport-McMoRan is currently trading at around $37 per share, which is the base of its range.
Freeport-McMoRan is a copper mining company. Copper comprises 73% of its total reserves and gold is just 5% of its reserves. Gold contributes more than 10% of its overall revenue. The remaining 22% includes the reserves of cobalt, silver and molybdenum.
Freeport-McMoRan has 120 billion pounds of copper, 86 million pounds of cobalt, 4 billion pounds of molybdenum, 330 million ounces of silver and 34 million ounces of gold. If we apply this to shares issued, it is equal to $116 per share.
For the past four years, the gold price has been increasing steadily. It has reached its peak at $1,900 per ounce in August 2011. A recent pullback has caused many analysts to cut estimates for gold miners drastically. In my opinion, this is not right. No one can predict the future gold price. Freeport-McMoRan is very conservative with its valuations on its reserves. The fluctuations in gold and copper prices will have an impact on the earnings of the company, but it will not last for long. The overall demand for these metals will never be affected.
I expect that there will around 9% growth in China in the next five to 10 years. This in turn will increase the demand for raw materials produced by Freeport-McMoRan and will cause the price to rise continuously.
Further Chances of Stock Appreciation
As the setbacks experienced by Freeport-McMoRan last only for a short period of time, I think it is worth looking for the other factors that would influence the stock movement. There are certain company specific events that would have an impact on the value of the stock.
Freeport-McMoRan had a mine in Lake County, Colorado producing molybdenum, which was closed in 1995. The company is planning to re-open this mine now. The mine is one of the largest sources of molybdenum in the world. It would produce around 30 million pounds molybdenum each year. Recently, China has imposed restrictions on molybdenum export from that country, which in turn increases its price all over the world.
Freeport-McMoRan owns a gold mine in Grasberg, Indonesia. It is the largest gold mine and third-largest copper mine in the world. In July 2011, the employees in the copper mine went on strike demanding an increase in their wages. As a result the company lost its production and there was a significant decline (60%) in profits in the last quarter. The issue has been resolved and workers have come back to work. Consequently, production (pdf) increased compared with the previous quarters. A temporary labor related shut down occurred again in late February. The mining and milling operations have restarted since then. The company expects that full production capacity will be reached in the second quarter of 2012.
Investors may have concerns about the impact of Indonesian Government laws on the mines on Freeport-McMoRan. But the company says its contract with the Indonesian Government will safeguard its ownership in Grasberg copper mine from the new rules that require foreign investors to reduce their stakes in mines.
I expect the company would divest a few percentage of its hold on the mine due to the new rules. This divestment could bring it a fair market value and so it would not have a negative impact on the financial status.
Freeport-McMoRan offers 3.3% dividend, which attracts both individual investors and organizational holders. I think the U.S. treasuries will remain at low levels. Any return above 3% gives potential investors an attractive reason to buy stock. The company has increased its operating cash flow to around $6.6 billion, so I believe that the high yield is more secure.
Freeport-McMoRan has announced a cash dividend recently, which will be payable to shareholders on May 1, 2012. There is an increase in the cash dividend (pdf) from $1 to $1.25 per share. This gives me a strong feeling that the company is all set to attract more investors.
Freeport-McMoRan is the operator of some of the world's largest and best-producing mines. It has a shareholder-friendly management team and has a record of returning capital to investors in the form of cash dividends. Moreover, recent global fluctuations in copper, gold and molybdenum are not likely to end for the next few decades. With all these favorable points, I believe at current prices Freeport McMoRan stock is a great investment, which has the potential to increase in the near future.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.