Mining stocks can often prove to be perilous investments. They tend to be complex international operations that must contend with cyclical demand as well as a morass of government regulations and interference. With working assets at their heart, miners can struggle when new projects fail to materialize to replace those that have been tapped out, as well as run the risk of various low-probability, high-cost events such as nationalizations.
That said, there can be rich rewards in the right mining stocks. But it means digging deep. One miner worthy of consideration is Freeport-McMoran (FCX, Financial).
About the company
Freeport-McMoran is a copper miner based out of Phoenix, but with operations all over the world. It has three principal mines in action today, in Indonesia, Peru and Arizona, producing 575,000 tons, 485,000 tons,and 475,000 tons of copper per year, respectively. And Freeport does not simply extract and sell raw copper ore. Like most big and sophisticated miners, it also makes money through connected refining and smelting operations.
Copper is not Freeport’s only valuable commodity. While a “pure play” on copper in aggregate terms, Freeport also extracts gold from its Indonesian mine to the tune of 900,000 ounces per year. The Indonesian gold mining operation is expected to continue at that pace for the full lifespan of the copper mine.
Extracting value
Freeport is on course to generate about $16 billion in copper mining revenue this year, as well as more than $2 billion from refining and smelting. The company’s three main mining assets have about 22 years of life left in them, which means there is a whole lot of value still in the earth for Freeport to extract.
Freeport is set to make a bundle this year, and we expect to see considerable growth in the next couple years as well. But that must be balanced with the risk of a cyclical downturn. When economies slow down, their demand for raw materials (including copper) also tends to drop off. But Freeport should be buoyed by the insatiable demand of rapidly developing economies for the foreseeable future.
Stock price action
Currently, Freeport trades at a steep discount to where it was several years ago. Shares have dropped precipitously since 2012. While the stock has risen a bit in the past couple years, it has been largely flat in 2018.
However, we anticipate solid growth in demand for copper to drive share price for the next two to three years at least. As that demand becomes more apparent, it is likely that the market will start to credit Freeport more and help lift it out of its multi-year slump. This has already been the case since 2016, when the stock finally bottomed out.
Read more here:Ă‚
- Insiders Acquire Shares of Freeport-McMoRan
- Freeport-McMoRan Posts Impressive Sales Results
- Freeport-McMoRan Declares Quarterly Dividend
The gurus agree
We are not alone in our positive assessment of Freeport’s prospects. Indeed, a number of the gurus tracked by GuruFocus have made plays on the American copper miner. In an excellent recent article, Sydnee Gatewood, a prolific contributor to GuruFocus, highlighted the gurus’ holdings in Freeport (as well as the company’s measured strengths and weaknesses):
"Freeport-McMoRan’s financial strength was rated 5 out of 10 by GuruFocus. While the interest coverage is above Benjamin Graham’s threshold of 5, the Altman Z-Score of 1.26 indicates the company is at risk of bankruptcy as its revenue per share has declined over the last several years.
Supported by margins and returns that outperform industry peers, the company’s profitability and growth scored a 6 out of 10 rating. The company also has a high Piotroski F-Score of 8, suggesting healthy business operations, and a one-star business predictability rank.
Carl Icahn (Trades, Portfolio) is the company’s largest guru shareholder with 3.46% of outstanding shares. Other top guru shareholders include Ken Fisher (Trades, Portfolio), Manning & Napier Advisors, Pioneer, Cohen, Mario Gabelli (Trades, Portfolio), Ken Heebner (Trades, Portfolio) and Caxton Associates (Trades, Portfolio)."
We appear to be in good company.
Verdict
Mining is not an easy business. It is expensive to operate existing mines, and even more costly to bring new mines into operation. But it can also be very lucrative.
Freeport-McMoran has suffered in recent years, but it appears now to have come out the other side intact. With macroeconomic factors supporting a growth in demand for copper, as well as domestic tax cuts helping to alleviate some of its financial burden, Freeport should be able to weather future costs of bringing new mines online while increasing earnings significantly.
Freeport is not likely to double any time soon, but we see potential for price appreciation close to 40% over the next three years.
While it will not be for everyone, we see Freeport as a solid opportunity in the copper mining sector.
Disclosure: No positions.
