Freeport-McMoRan's Long-Term Prospects Not Reflected In The Short Term

| About: Freeport-McMoRan Inc. (FCX)

The share price of copper mining company Freeport-McMoRan Copper & Gold (FCX) mirrors the results of many mining companies concerning the global outlook for industrial production. The economic problems in Europe and a slowing of economic growth from China have many forecasters predicting lower results for these companies. However, the financial strength and longer term prospects of Freeport-McMoRan make this stock an attractive investment if short-term bad news drives the stock price down further.

The 2007 takeover of the larger Phelps Dodge positioned Freeport-McMoRan as a major metals mining producer. The company is the world's second largest producer of copper, the largest producer of molybdenum and a major producer of gold. The company owns and operates copper mines: In the U.S. - seven mines, South America - four mines, as well as single mines in the Congo, Africa and Indonesia. The company's Grasberg complex in Indonesia is the world's largest mine in terms of recoverable copper reserves.

Labor troubles, mechanical problems with some pipelines and an extended labor strike in Indonesia resulted in a significant production reduction during the second half of 2011. Fourth quarter copper production from Grasberg was 78% below the 2010 fourth quarter rate. Freeport-McMoRan reach a labor agreement in Indonesia in mid-December and production started to ramp back up near the end of 2011. Even with the lower production out of Indonesia, 2011 was a very good year for Freeport-McMoRan. Higher metal prices allowed the company to increase revenues by 10% over 2010 and net income was up 7% for the year.

For 2012, the Wall Street consensus forecasts predict revenue for Freeport-McMoRan will decline by 3.6% and consensus earnings estimate is 14% below the 2011 results. The Wall Street estimates for competitor Southern Copper (SCCO) are a 0.4% increase in revenue and a 5% drop in earnings. Forecast results for copper and coal mining company Teck Resources Limited (TCK) are for a 2% decline in revenue and a 10% drop in net income. With the larger expected decline in results, Freeport-McMoRan is selling at a significantly lower earnings multiple than the two competitor shares.

Freeport-McMoRan management predicts the company's copper production will increased to 3.8 billion pounds in 2012, up from 3.7 billion pounds in 2011. Gold production is expected to decline to 1.2 million ounces from 1.4 million and molybdenum production will be 80 million pounds in 2012, up from 79 billion pounds. Forecast cash operating cost is $1.38 per pound of copper, up from $1.01 for all of 2011 but lower than the $1.57 per pound reported cost for the fourth quarter of 2011. Flat production estimates and higher production costs give weight to the Wall Street estimates that Freeport-McMoRan's 2012 financial results will come in well short of the 2011 results.

It is possible that the headwinds facing the company will affect the stock negatively early in 2012 and more positive factors will help the shares later in the year and into 2013 and 2014. Some of the positive factors include a combination of Grasberg returning to full production levels plus expansions and mill upgrades at several U.S. mines will result in growing production numbers in 2012. Production results will be better than 10% better in 2013 and the company is shooting for a 25% copper production improvement by 2015.

As production volumes from Grasberg ramp up to pre-strike levels and better, the lower production cost of that mine will have a significant effect on the company-wide cash operating cost per pound figure. At the expected 2013 production levels for the mine, total operating costs across the company are reduced by 20 cents per pound to an expected $1.18. Multiply 20 cents times 4 billion pounds and the result is a significant increase in operating earnings.

Since the Phelps Dodge acquisition, Freeport-McMoRan has reduced the company's debt load from $17.6 billion down to $3.5 billion. Currently, the $4.8 billion of cash on the balance sheet exceeds outstanding debt and the company was recently able to issue $3 billion worth of debt at a rate of 3%, retiring the bulk of outstanding debt issued at a rate of 8.375%.

Of course, final results for Freeport-McMoRan depend on the prices of copper and gold, primarily copper. A recent report indicates the global stockpiles of copper are at a three-year low. This is good news for the price of copper going into 2012. There are fears that new mines coming on line will boost supply and hurt prices. However, the new production is not expected for several years and recent expected production growth has not materialized. New, large copper deposit finds are rare and the bulk of production will come from a handful of companies - including Freeport-McMoRan - which controls the bulk of global production.

The expectation here is that Freeport-McMoRan will not have a good first quarter earnings report, due to slow restart results in Indonesia. The resulting share price sell-off will be a buying opportunity. It may take a year or more for the shares to fully reward investors, but the attractive 3.4% dividend will make the wait easier to handle.

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

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