Freeport McMoRan Copper and Gold (FCX) continues to execute on its plans to ramp up global copper output to meet anticipated robust worldwide demand, particularly from Asia.
In a few short years, the company has grown to become the world's second-largest producer of the red metal, with its output only exceeded by Chile's government-owned Codelco. Recoverable reserves are estimated at 120 billion pounds, using a projected long-term price for copper of USD2 per pound.
That's a remarkably conservative estimate, because it's more than a third lower than the metal's current price. Adding in "Mineralized Material" - which won't qualify as reserves until feasibility studies are completed - the company has 235 billion pounds in the ground.
With resource nationalism on the rise globally, big reserves in many countries are at constant risk of expropriation. Freeport periodically faces turmoil at its Grasberg mine in Indonesia. Although highly unlikely, a closure of the mine would not pose a serious problem for this commodities stock. That's because of the company's extraordinary geographic diversification, with 54 percent of its resource base in North America and another 17 percent in South America, principally Chile. Freeport now operates five mines on four continents, with potential capacity of 1 billion pounds of copper production a year.
Current plans call for ramping up annual copper output from a projected 2.6 billion pounds this year to 3.5 billion pounds in 2016. Meanwhile, production of molybdenum - a key element in making high-pressure steel needed for undersea energy drilling - is on the verge of ramping up to 90 million pounds a year in 2013.
The company overall expects to make $4.3 billion in capital expenditures in 2012, including steps to increase annual gold output to 1.7 million ounces a year from a projected 1.1 million for this year. Production costs are also among the lowest in the world for all three resources.
How much Freeport makes off this new output depends on one very important factor beyond its control, mainly global demand and pricing for copper and to a lesser extent pricing for gold and molybdenum. Operating cash flow, for example, would be twice as high at a copper price of $4 per pound than it would be at $3 per pound.
Copper has historically been among the most economically sensitive of metals. With more than 70 percent of company revenue coming from production of the red metal, it's not surprising that Freeport's share price also tracks the latest worries about the global economy. Bears also point out labor strife at the Grasberg mine and resource nationalism in Indonesia and the Congo - as threats to the company's aggressive plans to boost output in coming years.
On the other hand, it's hard to argue Freeport isn't priced for these risks at less than 8 times trailing 12-month earnings and a yield of nearly 4 percent. That seems to be the opinion of 22 of the 25 analysts covering the stock who rate it a buy, versus three "holds." Insiders have been buyers on the stock's slide this year and even credit raters are closer to upgrades than downgrades, despite global economic concerns. The company has no debt coming due until 2015, when a $500 million, 1.4 percent coupon note matures.
Source: Freeport McMoRan
I don't expect to see any meaningful rebound in Freeport stock until it becomes clear Chinese growth has leveled off, after dropping for the past year. But this is one mining company with the scale, management acumen and resources - both financial and in the ground - to keep growing despite less-than-optimal market conditions. That's the clear message from the 25 percent dividend increase announced earlier this year.