Freeport-McMoRan (FCX, Financial) released not so impressive results for the first quarter. The company had a soft start to fiscal 2014. Freeport saw a decline in its operations in almost every segment due to lower copper and gold prices. Freeport is expecting the downfall to continue in the future also. As a result, it posted a lower forecast for revenue going forward.
Freeport's profit fell by 21% due to weakness in the prices of copper and gold. The profit margin of the company shrank as a result of a rise in the company’s costs. Also, due to stiff conditions in the mining industry, the company’s income was $510 million, which is less than last year's net income of $648 million.
What Freeport is doing to make a comeback
Freeport is focusing on various aspects within its business to improve its profitability. With the weakness in the prices of copper and gold, the company is expecting gains from its oil and gas business to offset the losses. The company has really strong margins and has delivered awesome cash flows in the past. Freeport should focus mainly on improving its operations. The company is capable of doing this as a robust performance by the company can be noted in the regions such as Africa and America. .
The oil and gas segment stands out for Freeport allowing it to seek some scope for improvement in the top line. Further, the company is making aggressive moves to explore this. Freeport’s project in Mexico namely The Lucius development Deepwater Gulf of Mexico project is about to produce its first oil in the near future. With this the company is very positive about the exploratory results from the project. If everything turns out good, this project can prove a rudder to the sinking boat for Freeport in future.
Besides this the company also has many expansions in line –Â for example, the Morenci expansion is expected to start commissioning this current quarter. Also the construction of Cerro Verde expansion is in progress, and it is expected to benefit the company from 2016. Moreover, Freeport is also making adjustments with its operations to align with the present condition.
Moving ahead, Freeport is taking strong steps for maintenance of its facilities. With this the company wants to return back to its operations with full force. In addition to this Freeport is aiming at mining lower grade material in the meantime, focusing penetration to the Grasberg open pit. Once the company gets fit with the Grasberg open pit, by the end of 2016, 2017, FCX is planning a transition from the open pit mine to mining underground at the Grasberg Block Cave beneath the pit.
Looking to improve profit margins
Freeport’s prime focus is on improving its profit margins. Under this the company is making significant moves in by targeting significant reduction in debts by 2016. Freeport is seeking opportunities to accelerate its deleveraging plans through steps such as asset sale, joint venture transactions or monetizations and is engaged in discussions with a number of third parties to achieve this objective. With all such steps Freeport expects to raise its profit margin in future giving company a profitable hold.
China stays as a best option for Freeport. There are lots of opportunities in China so the company is focusing mainly on the Chinese market. Freeport is seeing healthy demands in China which is supported by the infrastructure investment. However, the Chinese government is also liberal in its policies in the areas where copper is consumer. All these factors are a reason for favorable growth of Freeport in the future. On the international front, the company is seeing great opportunities from copper. In Europe Freeport is seeing 40% rises in the demand for copper wire. Also the automobile and construction sectors are showing positive traction for the copper demand. But on a global basis the copper market is still tight.
Despite woes, the company’s Brownfield development projects are proceeding well. The company is seeing great traction from Cerro Verde; it is expected to be the world's largest single site concentrating milling facility where the groundwork is being completed. On the other hand the company is also seeing opportunities in crude oil, Freeport is expanding the crude oil margin.
Thus Freeport is lined up with lot of drilling activities all of them in a long run might benefit the company and help it to improve its profitability.
Conclusion
Looking at the ratios, Freeport has a P/E of 13.91, which is quite reasonable in such a stiff environment. Also, the forward P/E of the company indicates that the company will gain pace gradually. Also, in the long term, the company is expected to clock a growth rate of 27.90%, which is very impressive. So, with aggressive moves, Freeport appears to be a good pick.
