Freeport-McMoRan's (FCX, Financial) stock has declined ~32% this year and is now trading at its 52 week low of $15.55. Insiders are using this correction as an opportuinity to buy stock and James C. Flores, Vice Chairman of the Board, bought 60,000 shares of the company in June. Prior to this, he has also bought 500,000 shares of the company last December. Flores is not alone in terms of his bullish outlook on the company. Other insiders including the company's director Bobby Lacky and Chief Accounting Officer Michael J Arnold have also bought the company's shares in the recent past. Here's a look at the company in detail.
Freeport-McMoRan is a premier U.S.-based natural resource company with an industry leading global portfolio of mineral assets, significant oil and natural gas resources and a growing production profile. The company's portfolio of assets includes the Grasberg minerals district in Indonesia, one of the world's largest copper and gold deposits, significant mining operations in North and South America, the Tenke Fungurume (Tenke) minerals district in the Democratic Republic of Congo (DRC) in Africa and significant oil and natural gas assets in North America. FCX’s consolidated revenues for 2014 primarily included sales of copper (60 percent), oil (20 percent), gold (7 percent) and molybdenum (6 percent).
The company's stock price has underperformed the broader markets in the last five years given the slowdown in the commodities market. The company has $19 billion in debt, and bears are worried about cash burn. However, it appears that the commodity cycle is bottoming out and the company's balance sheet is going to improve going forward. Recently, copper prices rose to their highest levels in 2015 buoyed by optimism about global demand. Morgan Stanley believes that Freeport-McMoRan's free cash flow has reached an "inflection point,"Ă‚ driven by growing volumes and declining capex/opex costs. In their latest report, Morgan Stanley upgraded the stock arguing,
"FCX's copper growth projects are near an inflection point. Production increase at copper mines will drive a 28% increase in volumes, 22% decline in cash costs, and a 14% decline in total capex in 2016 on a YoY basis. At current prices, operating CF should exceed capex by $1.7 bn in 2016 and $2.3 bn in 2017. Even if copper prices collapse to near marginal cost, we don't think the company will burn cash in 2016-17. Thus, 2015 is the only “bridge year” when the company burns cash, which leaves us less concerned about financing needs to achieve growth targets."
Earlier, Citigroup analyst Brian Yu also upgraded shares citing attractive valuations. Explaining his rationale for upgrade, the analyst wrote,
"Our previous target price of $19 was based on a target 5.4x 2015E EV/EBITDA and 14x 2015E P/E. Freeport currently trades at 4.5x our 2016E EBITDA and at 5.6x on spot prices versus an average forward multiple of 5.8x in recent years. This was before they acquired their oil & gas assets, which should arguably trade at a higher multiple based on trough earnings and organic growth potential."
He also believes the company's improving cash flow will help it reduce its debt load faster, making it an attractive deleveraging story.
FCX is trading at a forward PE of 10.29 and has a dividend yield of 0.90%. Analyst opinion is positive about the stock. Out of 25 analysts covering the company, 13 have buy ratings and 12 have hold ratings. I believe the stock is a good buy at current levels given attractive valuation and improving cash flow profile.
