I am increasingly finding myself at a loss to describe what I feel after reading the proxy of Freeport-McMoran Copper & Gold (NYSE:FCX).
I started getting interested in the stock in October 2011 when the stock price dropped precipitously to $28.85. The immediate reason was Indonesian labor strike at Grasberg. There were violent fights between unionized and un-unionized workers and the mine had to be closed at the expense of loss in production. Coupled with a jittery market the stock dropped to a level not seen since Jul 2010.
I have been seeing people trumpet FCX as a very good investment with upsides ranging from 40% to 65%. There has been numerous articles on seeking alpha for example (see here for a few).
FCX is a miner, smelter and refiner of copper, gold and molybdenum. Copper is the main source of revenue and represents nearly 80% of the revenue. The company produced 3.9b pounds of copper in 2010 and has proven reserves 120.5b pounds. FCX owns mining and smelting operations in North America, South America, Indonesia and Europe. Due to high prices of these commodities since 2004 the revenue of the company has increased quite a bit. But the company sells commodities and a drop in spot prices will have dire effects on the operating profit of the company.
Now that we have a brief idea of what FCX does, let us look at the valuation of FCX. The company has very small debt. The market cap at the moment is $35B and the EV is $38B. It has consistently generated good FCF and the figures are as follows.
|FCF (in $B)||0.433||0.200||1.410||1.606||4.470||0.662||2.81||4.861||4.086|
|Income (in $B)||0.182||0.202||0.995||1.457||2.977||-11.067||2.749||4.336||4.560|
We see that the figures were abysmal before 2004 and jumped suddenly in 2005. The FCF is not as stable as one will like it to be, but the improvement has been impressive. The RoIC has been quite elevated since 2004.
Following are the main people on the board.
- Richard C. Adkerson (age 65) has been Director, President and CEO since 1995.
- James R, Moffett (age 73) has been chairman of the board since 1995.
Now I am ready to tell you why I have been disturbed after reading the proxy statement of this company. Let us look at the compensation practice of this company. To keep the figures in picture, the company has generated around $4.3B in net income in 2010 and $4.5B in 2011.
Let us first look at the benefits the management will get if they are fired or resign for “good reason”. A “good reason” includes failure of acquirer to to provide the executive with substantially the same position. What this means is that if the company is acquired and the CEO does not get the CEO position then he can leave the job and receive the sum entitled to him.
Now let me put this in words. The company will pay the CEO $428m in case he is not offered the CEO job if the company is acquired (by Dec 31, 2010). He will get $300m if he leaves the job for some “good reason” or is fired. Think of this for a moment. The company was making around $200m in total income before 2004. Due to some changes in the program the lump sum has been reduced materially and the proxy also lists the figure for April 2011. If the whole board walks out in case of acquisition of the company by April 2011, the total payment would be $518m.
If this is not egregious enough, let us look at the compensation of the board and the management.
In 2008 when the company made a loss of nearly $11B, the CEO received $77m in compensation. I ask you, what kind of performance based incentive is that?
It is quite obvious that FCX started performing better when the commodity prices took a sharp upturn in 2004. Before this period the company was average at best and achieved 6% RoIC with around $200m in net income. How much is the spot prices of Copper being affected by the CEO of the company ? Why does he get to keep so much of the shareholder’s money when he has made no discernible impact on the profitability of the company. How does the board justify the compensation of the management as well as the supervisory board itself ? Since 2002 the share count has gone from 293m to 995m and the shareholders are poorer because of the stock based dilutions and additional stock offerings in 2007. The company has also bought back shares worth of $500m in 2008. From the company’s new releases in 2007.
Freeport-McMoRan Copper & Gold Inc. (NYSE: FCX) announced that it has completed $5.76 billion in equity financings, through the sale of 47.15 million shares of common stock at $61.25 per share[i][/i]Only 7 months later in Dec 2007 the company announced a share buyback of 20m shares and increased dividends. This is management at its best. The news releases do not give me enough information to make an informed judgement on this turn of fortune of FCX in 7 small months but I do not want to waste any more time on a management with such a skewed way of “managing the company for the shareholders”. This is a company in which the management is clearly on the other side of the table from its shareholders.
These offerings generated net proceeds, after underwriting discount and expenses, totaling $5.6 billion, which will be used to repay indebtedness incurred in connection with the acquisition of Phelps Dodge Corporation.
I will be staying away from this company for a long time to come.