Freeport-McMoRan Copper & Gold (NYSE:FCX) has been going through a challenging environment on account of weakness in the materials industry. As a result of this, its stock has tumbled around 17% this year. The company is in the exploration business of materials such as copper, gold, molybdenum, cobalt, silver, and other metals along with oil and gas. But, management has various strategic moves under its sleeve to bring the company back on track. As of now, it is mainly focusing on improving its operating efficiency, which will benefit the company in the long run.
In fact, it has already started to see some results because of the strategic moves it has undertaken. Last year, the company reported a 12% increase in its copper sales with volumes growing across all four regions where it operates. And going forward, it has three major projects under its sleeve, which will considerably increase its copper sales in the next three years. In addition to this, its oil and gas business also helped boost its numbers.
- Warning! GuruFocus has detected 3 Warning Signs with FCX. Click here to check it out.
- FCX 15-Year Financial Data
- The intrinsic value of FCX
- Peter Lynch Chart of FCX
Freeport is making various expansions of its projects, some of which have just started, while others are reaching its completion. It has completed its second phase expansion at Tenke, and the Morenci mill expansion is nearly completed. The company has started its project at Cerro Verde in Peru and is moving ahead according to schedule. The company expects its Grasberg project to be complete in 2016.
The company is also making considerable progress in its oil and gas business. In 2012, Freeport had acquired the assets of PXP, which has a good progress report and is leading the company in to new growth opportunities. Its oil volumes were in line with its guidance and business performed very well.
Freeport has seen some weakness in China as the new government’s policy has a major impact on tits copper consumption. The Chinese government is focusing more on internal consumption with less emphasis on exports and major spending on infrastructure development, which could be a problem for the company. However, consumer demand is still strong, reinforcing Freeport’s prospects in the region.
In the U.S., the demand for its products has improved steadily, especially in key sectors such as residential construction and warehousing. Apart from infrastructure, demand is also seen in automobile industry and management expects this to continue.
It is because of these reasons that in spite of economic uncertainties, Freeport is positive about its prospects. Not only this, its long term fundamentals remained particularly strong because of constraints on supply globally. It is also focusing on improving its cost structure and a more disciplined capital expenditure, along with reducing its debt that will enable the company to deliver better results in the future.
Freeport has also taken various initiatives for its international expansion. But, the company has run into a bottleneck with its project in Indonesia to build its first smelter, which was in collaboration with Japanese investors. However, management is in talks with the government and is confident that it will find a way out that will be in the interest of its shareholders.
Similarly, it had some issue at Grasberg as well, but they have been sorted out, resulting in a considerable increase in its productivity and performance. Its brownfield development projects are also progressing as per schedule. The Morenci project, which is around 60% complete, is expected to add 25 million pounds of copper at a very high rate of return.
Moreover, the company also has plans to expand into deepwater with the help of drill ships, which will arrive shortly. Keeping this in mind, it has bought facilities at Holstein, Marlin, and Horn Mountain, where there will be major development projects to achieve the targeted production rates. In fact, management maintained high production without any drilling activity or well intervention activity at these sites.
Currently, Freeport has a trailing P/E of 11.91, while its forward P/E seems more attractive at 10.01. This reflects that its earnings will improve in the days ahead along with reduction in its costs. It also has an impressive PEG ratio of 0.4, indicating that the stock is undervalued. Considering these factors, Freeport seems to be a good investment option.