Near-term macroeconomic headwinds and a third-quarter earnings report shy of analysts' estimates should provide opportunities for significant capital appreciation in the mid to long term for metals firm Freeport-McMoRan Copper & Gold (NYSE:FCX). The company has comparable metrics, an adequate dividend, and a robust portfolio of divergent assets that should provide substantial opportunities for increased revenues and earnings, driven by emerging markets and recovering economies in the East. Initiating a position in the near term will optimize shareholders' potential to realize capital appreciation and ROI on this asset.
Diversified mining firms with cold or copper assets like Barrick (NYSE:ABX), Vale (NYSE:VALE), BHP Billiton (NYSE:BHP), and Rio Tinto (NYSE:RIO) are most comparable to Freeport-McMoRan. Freeport-McMoRan and BHP Billiton are both priced around 12.3 times earnings, while Barrick is priced around 9.5 times earnings, Rio Tinto is priced around 22.9 times earnings, and Vale is priced around 5.9 times earnings. Freeport-McMoRan's price is 2.09 times sales and 2.3 times its book value; it has the highest price-to-book ratio among these mining firms.
Freeport-McMoRan's 3.4 current ratio and its 0.21 debt-to-equity ratio are the best among these mining firms. Its annualized dividend is currently $1.25 per share. Freeport-McMoRan's EPS is around $3.32. It's up 4.5% in 2012 and is projected to increase 42.9% in 2013; this is the highest EPS growth projection among the aforementioned firms. Freeport-McMoRan's sales have increased 29.2% over the last five years; this is also the highest growth among these firms. Freeport-McMoRan's ROE is around 20.4%, its operating margin is around 34.3%, and its profit margin is around 22%.
Freeport's 2.94% float short is the highest among these firms, while its 1.7 short ratio is one of the lowest. Freeport-McMoRan's beta is close to two and is the highest among these firms. Its average volume is around 15.8 million and its relative volume is around 1.3. Its relative volume is the highest among the aforementioned names, while only Vale's 21.4 million average volumes is higher than Freeport. The stock has increased around 13.9% YTD, up 0.62% in the past month, and has increased around 17.7% since its last earnings release.
In Freeport-McMoRan's recent earnings report, third-quarter revenues totaled $4.41 billion, decreasing from $5.19 billion year over year. Operating income totaled $1.41 billion, decreasing from $2.15 billion year over year. Freeport-McMoRan's third-quarter net income totaled $824 million, down from $1.05 billion year over year. Operating cash flows totaled $526 million, decreasing from $1.83 billion year over year, while total third-quarter costs and expenses were relatively flat at over $3 billion. Freeport's average unit net costs totaled $1.26 per pound of copper, increasing from $0.80 year over year -- mainly due to the reduced volumes from Indonesia, increased mining costs, and lower by-product credits. Freeport finished September with $3.72 billion in cash and cash equivalents, decreasing from $5.12 billion year over year.
Freeport projects 2012 sales to total 3.6 billion pounds of copper and 1 million ounces of gold; fourth-quarter projections total 930 million pounds of copper and 255,000 ounces of gold. The projected gold sales declined by 50,000 ounces due to the reduced production from Grasberg. This asset accounted for 19% of Freeport's 2011 revenues. Third-quarter copper production totaled 922 million pounds, increasing from 885 million pounds mainly due to increased improved production from Africa and North America. Third-quarter gold production totaled 202,000 ounces, decreasing from 225,000 ounce mainly due to the Grasberg asset. Third-quarter copper and gold sales decreased from 2011, primarily due to lower grades in Indonesia, but were partially offset by improves sales in North America and Africa.
The global economic slowdown is the primary headwind in the near term for Freeport and other mining firms. The impending countermeasures by developed nations and growth in emerging markets are proponents for a long-term bullish outlook for Freeport. China is investing $150 billion to initiate 60 infrastructure projects that will help bolster the country's economy. Demand for gold increased in 2011, due to demands from the investment sectors in Europe, China, and India. These countries account for 45% to 50% of gold's global demand. China is expected to be the leading market in 2012, and its demand is projected to double by 2020.
Second-quarter gold demand totaled 990 tons, decreasing 7% year over year primarily due to reduced demand from the technology, investment, and jewelry sectors. Central banks purchased 157.5 tons of gold, accounting for 16% of total demand -- a 100% increase in this sector's purchases year over year. Gold demand in the second quarter totaled $51.2 billion, decreasing 1% year over year. India's jewelry demand decreased 30% year over year, while Russia has now grown to be the fourth-largest gold jewelry consumer worldwide. As long as mining firms can manage production expenses and increased prices, demand for gold is expected to help improve bottom lines throughout the industry.
During an interview in mid-October, Freeport's CEO noted that despite consensus misgivings about economic slowdown in China, there are no signs that the country's rate of copper consumption are waning. Freeport actually expects to increase its copper output by 25% throughout the next three years. China's commitment to reinvesting in infrastructure development projects and the likelihood for additional stimulus in the near term underscores the bullish outlook for copper demand in this region. Freeport's copper sales are on target in 2012, and may increase 19% for 2013.This is the first time in 17 quarters that Freeport's costs increased and gold sales decreased beyond analysts' expectations.
Copper prices have improved in the past few years due to increased demands from emerging markets bolstered by limited supply, and this trend is expected to continue. Behind iron and aluminum, copper has the third highest level of consumption worldwide. Economic uncertainties have created near-term headwinds, but new development projects and constrained supply should support higher prices for the long term. Growth in China and India will be the primary catalysts behind increased demand. Freeport-McMoRan's stock can realize a significant uptick once copper prices begin to increase on the back of constrained global supply and increasing demands from recovering consumer economies, infrastructure initiatives within industrial countries, and growth from developing emerging markets.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.