Freeport-McMoRan Copper & Gold (NYSE:FCX) has been suffering from the inherent weakness in the basic materials industry as it is involved in the exploration of copper, gold, molybdenum, cobalt, silver, and other metals, as well as oil and gas. Its shares are down 17% this year. However, Freeport is aiming for a turnaround in the future and is focusing on operating efficiency right now, which is a good move.
For instance, last year, Freeport's emphasis on operational execution resulted in a 12% increase in copper sales, with volumes growing across all four regions where it operates. Freeport had a positive and significant contribution from the oil and gas business. It has three major projects in the pipeline to increase its copper sales over a three year period by a billion pounds.
Freeport has completed the second phase expansion at Tenke. The Morenci mill expansion has progressed and is nearing completion. Construction at the major project at Cerro Verde in Peru has started and is progressing on schedule. The Grasberg underground development activities have also moved forward this year, and mining of the Grasberg pit is scheduled to be completed in 2016.
Also, after having resolved problems at Grasberg, there has been a substantial increase in the productivity and performance metrics. Looking forward, between 2013 and 2016, normal operations are expected at the mine. Moreover, Freeport's brownfield development projects are progressing well. The Tenke Fungurume project is complete, while the Cerro Verde is going well. At Morenci, 60% of the project has been completed, and the mine is expected to add 25 million pounds of copper at a very high rate of return.
The Lucius development project is moving toward production in the oil and gas area. The successful acquisition of the PXP assets within the deepwater during 2012, which is now a part of Freeport's portfolio, is progressing and is leading to exciting new growth opportunities there. Also, Freeport is seeing strong gold production. At Grasberg, Freeport had access to higher grades. On the other hand, its oil volumes were in line with its guidance and business performed very well.
Prospects going forward
Looking abroad, in collaboration with Japanese investors, Freeport built Indonesia's first smelter. But the project has run into a bottleneck. So, Freeport is keen on negotiating with the government regarding the application of the new export tax regime and is confident of finding a way that will represent the interests of its shareholders.
In China, the new government policy to reorient the economy towards internal consumption with less emphasis on exports and infrastructure development and major spending on infrastructure has had a major impact on copper consumption there.
However, consumer demand is still strong, reinforcing Freeport's prospects in the region. In fact, copper demand in China, which is the world's largest consumer of copper, has been on the rise despite a slowing economy. Copper demand in China grew 11% last year. Expansion initiatives of Chinese manufacturers have led to an increase in demand for the metal as it is used in applications such as home building, automotive, and power-cable makers. The increasing demand for copper bodes well for Freeport, since it mines and sells the metal.
Also, demand in the U.S. has steadily improved, particularly in key sectors like residential construction and warehousing. Considerable improvement has been noted in non-residential construction, and the automobile industry continues to be very strong. All these point toward the fact that Freeport will be seeing strong demand in the future.
Hence, it is not surprising to see why Freeport projects relatively positive near-term fundamentals for copper despite economic uncertainties. Also, longer-term fundamentals remain particularly strong because of constraints on supply globally. In addition, Freeport continues to focus on cost savings and discipline in capital expenditures. It is targeting debt reduction and is looking for ways to accelerate that.
Freeport will also expand in the deepwater with the arrival of drill ships. As a part of this strategy, it has bought the facilities in Holstein, Marlin, and Horn Mountain, where there will be major development projects to achieve the targeted production rates. Moreover, management has done a fantastic job of maintaining high production without any drilling activity or well intervention activity at these sites.
Moreover, copper demand in China is slated to be strong over the next decade. China accounts for 40% of global copper consumption, and robust growth expectations from this market will provide a solid boost to Freeport going forward.
Valuation and conclusion
Freeport's forward P/E ratio of 10.01 is lower than the trailing P/E ratio of 11.91, depicting improved earnings and lower costs going forward. In addition, the PEG ratio is also impressive at 0.40, indicating that the stock is undervalued. With improvements all around, and earnings growth of 28% expected per year over the next five years, Freeport could turn out to be a solid investment.
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.