Company Overview
Freeport-McMoran Inc. (FCX, Financial) is a natural resource company and is engaged in the acquisition of mineral assets and oil and natural gas resources. The company has two segments and is primarily engaged in the exploration of minerals like copper gold, molybdenum, cobalt and silver. The oil and gas segment provides production facilities at the onshore and offshore fields.
The company has a wide global presence with geographical diverse assets in Grasberg complex of Indonesia, the world’s largest copper and gold deposits. The company also has its operations in the North America Copper Mines, South America Mining Africa Mining and United States Oil and Gas Operations to name a few. In addition to this, the company also has a significant high potential exploration rights in various part of the world such as the acreage in Papua, Indonesia and Tenke Fungurme with exploration targets in North and South America.
There are various reasons why we should consider the stock as a buy opportunity. First, the company is undervalued as compared to peers that make it attractive. Second, Freeport McMoran is in the long-term process of increasing its production through several expansion and development projects. The company estimates to increase its copper production to 5+ billion pounds by 2016, a 345% increase from 2013.
Attractive Valuations and Compelling Returns
The company is currently trading at an EV/EBITDA of 5.6 with next 12 month estimate of 5.9. This is fairly low compared to close peers Southern Copper Corporation’s (SCCO, Financial) EV/EBITDA of 8.7 and Turquoise Hill Resource (TRQ, Financial) EV/EBITDA of 12.
Freeport McMoran is also below the sector’s EV/EBITDA of 7.0. Furthermore, the company has a compelling dividend yield of 5.2% and expects to maintain the current common stock dividend of $1.25 per share per annum.
Development and Expansion Projects
The company’s primary operation is the mining of copper and with the development project in Morenci Mills and expansion project in Cerro Verde Mill; Freeport expects to add 850 mm lbs of Cu per annum.
The project is in its advanced stage with the construction on the Morenci mill almost complete. The mill is expected to produce more than 1 million pounds of copper per annum by 2016. Proven technology, capital efficiency and a better risk adjusted returns than Greenfield project is expected from the Cerro Verde Mill project.
Though a decline in oil prices has resulted in a considerable fall in the company’s margin, I believe that its core business concentration through expansion and development will help the company to offset the negatives from oil price decline.
Long Term Fundamentals Look Strong
The copper market looks supportive, and since Freeport’s main business is copper mining, I believe the company will benefit from this growth. Considering a 2.3% global growth in the next 10 years, the copper market is expected to grow by 27% to more than 7.6 million tonnes. Over the same period, production is expected to decrease by 18% from the existing mines. This decline will lead to a shortfall of 10.9 million tonnes of copper production. The shortfall can be considered as a good opportunity for companies like Freeport to expand and start new projects.
Source: Company Presentation
Well-Managed Debt
The company’s current average interest cost of 3.9% looks good. If we look at the company’s strategy, Freeport is taking new debts with a long term maturity profile and refinancing its current debt with a maturity in the next two years.
Freeport has announced the sale of its 80% ownership of interest in the Candelaria mines with a cash consideration of $1.8 billion. The company plans to use the proceed of $1.5 billion to repay its current debt.
On November 14, the company announced the sale completion of $3.0 billion with a maturity of $750 million in November 2017, $600 million in November 2021, $850 million in November 2024 and $800 million in November 2034. This suggests that Freeport has been able to manage its near term loan well with a well planned refinancing strategy.
Conclusion
Though there has been a decline in the company’s stock price, Freeport has the potential to bounce back with big development and expansion projects in the pipeline.
In addition to this, a well managed debt profile, an attractive valuation as compared to peers and a high dividend yield makes the company a good long-term investment.
