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Instead of just listing the reasons to be bullish on Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX), we are going to play devil's advocate and also provide some reasons as to why one should be concerned about investing in this company over the short to intermediate time frames. This should help provide a balanced view on the company.

Reasons to be bullish on Freeport-McMoRan Copper & Gold Inc.

It is the world's largest low-cost producer of Molybdenum. Production has already started at its Climax molybdenum mine. Management is currently working to ramp up production at this site. The company will produce roughly 20 million pounds of Molybdenum in 2013, and is planning to increase this to 30 million pounds a year.

Drilling data in North America continues to illustrate that there is potential to expand sulfide production.

Construction at Tenke (Africa) is moving along well and is projected to be completed by 2013.

Management has stated that they will spend roughly $275 million on exploration in 2012 compared to $221 million last year. The company expects copper production to increase by roughly 25% over the next 3 years.

Production at Chino is projected to increase from 69 million pounds in 2011 to 200 million pounds by 2014. Freeport-McMoRan has started expanding its milling and mining capacity at Morenci to process more Sulfide ores. This project is expected to increase milling rates from 50,000 metric tons to 115,000 metric tons of ore per day. Management also wants to incrementally increase annual copper production with a targeted production of 225 million pounds of copper in three years.

The $4 billion project in Cerro Verde to expand the concentrator facilities continues to advance. The goal is to expand the concentrator's capacity from 120,000 metric tons to 360,000 metric tons of ore per day and incrementally increase annual production of Molybdenum and copper to 15 million pounds and 600 million pounds respectively by 2016.

The company expects copper production in its North and South America operations to reach 3.5 billion pounds by 2016.

Net income rose from $2.7 billion in 2009 to $4.56 billion in 2011.

EBITDA rose from $7.4 billion in 2009 to $10.15 billion in 2011

Cash flow per share increased from $4.44 to $5.95 per share

Annual EPS before NRI increase from $3.43 in 2008 to $4.84 in 2011

It sports a decent yield of 3.9%

A quick ratio of 2.00

A five dividend growth rate of 5%

A low payout ratio of 32%

A retention rate of 68%

An estimated EPS growth rate of 6.9% over the next 3-5 years

A splendid interest coverage ratio of 24

A year over year projected growth rate of 43% for 2013

A decent free cash flow yield of 4.86%

A strong current ratio of 3.5

A few reasons to be concerned

The situation at its Grasberg's mines in Indonesia is volatile. Labor strikes hurt production and there is no guarantee that they will not continue to experience further problems in the future. The company offered the government an additional stake of 9.36% and the government claims it has no interest in increasing its stake. However, the situation could change and the government could demand a larger stake or new issues surrounding work conditions, wages, etc could emerge.

Revenues dropped at a rather fast clip due to lower copper and gold sales.

A hard landing in China could further impact the demand for copper. China roughly accounts for 40% of the worlds demand.

Profit margins dropped from 19% in the last quarter to 17% in the 2nd quarter

Operating margins dropped from 40% in the last quarter to 35% in the 2nd quarter.

Sales vs 1 quarter 1 year came in at - 23%

5 Year EPS growth rate is -5.34%

Company: Freeport-McMoRan Copper & Gold Inc.

Basic overview

  1. Levered free cash flow = $2.15 billion
  2. Quarterly earnings growth = - 23%
  3. Quarterly revenue growth = - 48%
  4. Beta = 2.29
  5. Operating margins= 35%
  6. Profit margins= 17%
  7. Operating cash flow = 5.06 billion
  8. Long term debt to equity ratio = 0.35
  9. Cash Flow 5 -year Average = 5.17
  10. 5 year sales growth rate = 6.55
  11. Operating cash flow = 4.56B
  12. 5 year capital spending rate = 11.8%

Growth

  1. Net Income ($mil) 12/2011 = 4560
  2. Net Income ($mil) 12/2010 = 4336
  3. Net Income ($mil) 12/2009 = 2749
  4. Net Income Reported Quarterly ($mil) = 764
  5. EBITDA ($mil) 12/2011 = 10152
  6. EBITDA ($mil) 12/2010 = 10010
  7. EBITDA ($mil) 12/2009 = 7416
  8. Cash Flow ($/share) 12/2011 = 5.95
  9. Cash Flow ($/share) 12/2010 = 5.77
  10. Cash Flow ($/share) 12/2009 = 4.4
  11. Sales ($mil) 12/2011 = 20880
  12. Sales ($mil) 12/2010 = 18982
  13. Sales ($mil) 12/2009 = 15040
  14. Annual EPS before NRI 12/2008 = 3.43
  15. Annual EPS before NRI 12/2009 = 2.96
  16. Annual EPS before NRI 12/2010 = 4.64
  17. Annual EPS before NRI 12/2011 = 4.84

Dividend history

  1. Dividend Yield = 3.9
  2. Dividend Yield 5 Year Average = 3.10
  3. Dividend 5 year Growth = 5.07

Dividend sustainability

  1. Payout Ratio = 0.32
  2. Payout Ratio 5 Year Average = 0.11

Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 6.9
  2. ROE 5 Year Average = 32.34
  3. Return on Investment = 22
  4. Debt/Total Cap 5 Year Average = 31.21
  5. Current Ratio = 3.5
  6. Current Ratio 5 Year Average = 2.33
  7. Quick Ratio = 2.00
  8. Cash Ratio = 1.71
  9. Interest Coverage = 24.2
  10. Retention rate = 68%

Conclusion

In the short to mid-term time frames the stock could be volatile and there is a chance that it could trade down to the 25 ranges. If you are trader whose time line is less than 1 year, consider waiting for a test of the 25-28 ranges. When and if the stock trades in this range, wait for it to put in a base before taking a position. Divide your money into two lots and deploy one lot at a time. The long term pattern is still bullish and in the years to come this stock should be able to trade well past 60.00. Investors with 3-5 year investment time lines can sell some puts with strikes in the 29-30 ranges. You can also sell some puts with strikes at 25 or better. From a long term perspective this is still good play.

EPS and Price Vs industry charts obtained from zacks.com. A major portion of the historical/research data used in this article was obtained from zacks.com. Earnings estimates sourced from dailyfiance.com.

Disclaimer

It is imperative that you do your due diligence and then determine if the above plays meets with your risk tolerance levels. The Latin maxim caveat emptor applies - let the buyer beware.

Source: Is Freeport-McMoRan Copper A Buy Right Now?