Freeport-McMoRan (FCX), the world's largest publicly traded copper producer, announced disappointing 3rd quarter earnings on Monday, with net income of $824 million, or $.86 per share. Excluding credits for environmental adjustments and deferred income taxes, adjusted income of $.68 per share came in well short of the $.74 per share expected by analysts. The disappointing earnings were mainly attributed to higher than expected production costs and lower production volume at Freeport's Grasberg mine in Indonesia. Overall revenue of $4.42 billion was higher than the $4.36 billion expected by analysts. Despite the weak quarter and the short term headwinds the company faces, I continue to believe that Freeport is undervalued, and would recommend investors consider buying the stock on any earnings related weakness.
Freeport-McMoRan is a leading international mining company, and is the world's largest publicly owned copper miner, the world's largest producer of molybdenum, and one of the world's largest gold producers. Freeport has global mining operations, including the Grasberg mining complex in Indonesia, the world's largest copper and gold mine in terms of proven and recoverable reserves.
Like other miners such as Rio Tinto (RIO), Southern Copper (SCCO), and BHP Billiton (BHP), Freeport's recent earnings have been hurt by falling copper prices resulting from slowing demand in China and elsewhere, and by gold prices retreating from historic highs earlier this year. In addition, production at Freeport's Grasberg facility had been disrupted for several weeks during the first quarter due to labor strikes, which have since been settled. The company also faces the threat of significant mineral export taxes being imposed by the Indonesian government.
While copper prices may face short term downward pressures, with improving US and Chinese economies on the horizon, and emerging markets in India and South America continuing to grow and modernize, the long term trend for copper prices has to be up. The company views recent growth in the US automotive and housing sectors as bullish signs for copper. In addition, gold prices have recently resumed their upward march and are again approaching new highs, and should continue upward as central banks continue their policies of ultra low interest rates and monetary easing to further stimulate economic growth. The company also expects production levels to increase at the Grasberg facility in 2013, according to CEO Richard Adkerson's recent statement:
Next year we'll be returning to a more normal state in Indonesia and we have expansion projects that would add volumes and so we should see a very strong recovery in the near term.
Freeport has a solid balance sheet, with $3.7 billion in cash and $3.5 billion in debt. The stock has traded between a 52 week low of $31.08 and a 52 week high of $48.96. The company also offers a $.3125 per share quarterly dividend, which gives them a healthy 3.0% yield with a very sustainable 32% payout ratio.
This stock has a history of quick moves both up and down, as evidenced by its rise from $33.49 on August 1st to yesterday's $40.58 closing price. Combined with the long term potential for rising copper and gold prices, and its attractive 3.0% yield, I continue to believe that Freeport-McMoRan stock is a very compelling long term investment at current price levels.
Disclaimer: I am not a registered investment advisor and do not provide specific investment advice. The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. It is up to investors to make the correct decision after necessary research. Investing includes risks, including loss of principal.
Disclosure: I am long FCX.