Freeport-McMoRan (FCX) has announced that its Indonesian gold and copper mining activities are back to normal after disruptions that are related to labor problems in the first quarter of the year. The problems have not been completely resolved but there has been an increase in productivity. The disruptions took place in March 2012 even after a three-month strike at the end of 2011.
A little earlier, Freeport-McMoRan had reported a profit for the first quarter of the current year of $913 million [earnings per share of $0.96] which was a drop of almost 40% on the $1.5 billion [EPS of $1.57] for the corresponding quarter in the previous year. The EPS figure for the first quarter exceeded the consensus estimate of most analysts which was $0.85. If losses of $149 million relating to the early repayment of debt are taken into account, the net income would become $764 million or $.80 per share. Performance for the quarter was affected by the labor troubles at the Grasberg mine in Indonesia though stronger sales in North America compensated to some extent.
Revenues in the quarter were $4.6 billion down 19% from $5.7 million in the previous year quarter. Once again this exceeded the consensus estimate of $3.8 billion. Those sales of copper and gold were down, molybdenum sales improved slightly. Operating income was down from $2.9 billion in the year-ago quarter to $1.7 billion. Cash and cash equivalents stood at over $5 billion down slightly from the figure as at Dec. 31, 2011. Total debt was at the same level as the end of the previous quarter amounting to $3.5 billion. The board of directors has authorized a 25% increase in dividend from $1 per share to $1.25 per share.
For the year 2012, the company expects to generate operating cash flows in the region of $4.7 billion net of a little over $1 billion for working capital. Capital expenditure is expected to be in the region of $4.3 billion of which $2.7 billion related to major projects. Given the relatively steady prices in the short term for copper, gold and molybdenum, and despite the increasing costs caused by lower volumes in the first quarter, the company looks to be on track to achieve these figures. With a few favorable circumstances, it could outperform the consensus estimates again.
Let us now take a look at what the future is likely to hold for Freeport-McMoRan. The uncertain economic conditions of the last couple of years have caused investors to flee to the traditional haven of precious metals and if the mess in the eurozone gets any worse, this tendency is likely to accelerate. A slower than expected rebound in the U.S. economy is likely to have the same effect. It is extremely unlikely that things in the eurozone get any better in a hurry. All the solutions involving Greece appear to be just kicking the can down the road and now Italy, Spain and Portugal have become causes for concern. The continued uncertainty is likely to sustain the bullish trend in precious metal prices and, if you prefer not to invest directly in commodities, gold mining stocks are an acceptable alternative.
A number of skeptics have pointed out that the current boom in commodities and metals have largely been catalyzed by China but, despite some possible reduction in Chinese demand, it is difficult to see the major mining companies being seriously affected. Other skeptics tend to look at the difficulties of doing business in Indonesia but Indonesia is hardly the archetypal Third World dictatorship. In fact, getting the Indonesians to take a larger stake in the company could actually work out quite well.
A look at the behavior of the stock prices of the competitors showed similar trends in their peaks and troughs. For instance, the stock price of Vale S.A. (VALE), whose operations are similar, peaked a few months ago before declining to the present level. Of course, Vale operates in the Brazilian stock markets which are much more volatile and it is restricted to some extent by its markets at home.
The stock price movement of one of the largest mining companies in the world, Newmont Mining (NEM), also shows a similar peak and trough, though the movements are not as sharp. Southern Copper (SCCO) seems to have escaped this trend, but this is because their business is focused on Mexico, Chile and Peru and it is therefore insulated against global trends.
Actually, at the current depressed stock price, Freeport-McMoRan could be an attractive acquisition at its current market cap of around $30 billion. Even if an acquirer has to pay a premium, an acquisition could cost no more than a little over $40 billion. The company has denied that it is looking at being acquired or itself making an acquisition as a defensive move. If an acquisition was to take place, the most likely acquirers would be the usual suspects, the trinity of BHP Billiton (BHP), Rio Tinto (RIO) and Anglo-American (AAUKY.PK). In addition, the prospects for the Indonesian mines as well as the potential of the mines in the Congo bolster the attractiveness.
If you currently own Freeport-McMoRan stock and you are confident in the prospects for precious metals, I would continue to hold on to the stock to wait for the upturn. The 25% increase in the dividend should prove to be an additional inducement. I would emphasize that the prospects for the company's stock would depend as much on the international economic developments as on its own fundamentals. If you like gold, investment in a gold mining stock will always beat the direct investment in gold especially if the stock appears to be reasonably valued. You could of course look at other commodity companies who are in the metals business and appear to be more consistent in performance. However, they may be more expensive and may not provide the same kind of upside that Freeport-McMoRan does.
About the author:I'm mostly interested in income investing using dividends, preferred stocks and other debt instruments, and pair trading.
I fundamentally analyze every business from the top down.
In my personal life, I have a strong Jewish faith and enjoy playing Scrabble and entrepreneurship.