What is Going On with Freeport-McMoMoran?

Dr. Osman is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Freeport-McMoRan (NYSE: FCX) generates more copper and molybdenum than any other company in the world. The company has major operations in both South and North America. It is among the globe's largest gold producers, and its assets include the Indonesian Grasberg mining complex (the globe's largest gold and copper mine regarding recoverable reserves). Freeport-McMoRan sold 3.7 billion pounds of copper last year.


Freeport-McMoRan has a long-standing history of building shareholder value by investing in projects with appealing rates of return. The company returns cash to shareholders through share purchases and common stock dividends. Freeport paid dividends of $832 million in the first nine months of fiscal 2012. Freeport's existing annual dividend amount for its common stock is $1.25 per share. On Sept. 26, 2012, Freeport's Board of Directors announced a dividend of $0.3125 per share for Q3 2012. Freeport expects to continue to sustain a strong financial position, invest strongly in attractive growth projects, and provide cash returns to investors.

The corporation has a solid balance sheet, with $3.5 billion in debt and $3.7 billion in cash. The stock has traded between a 52 week high of $48.96 and a 52 week low of $31.08. Freeport-McMoRan presently offers a quarterly dividend of $.3125 per share, which presents a healthy 3.0% yield with a very maintainable 32% payout ratio. However, the corporation's cash flow from operations has experienced a decline after continuous increases for many years. For the initial nine months of fiscal 2012, operating cash flows ended at $2.5 billion, versus $5.9 billion in the last year. As Freeport-McMoRan invests more intensely to produce and acquire more profitable assets, capital expenditures are also growing. Capital expenditures for the first nine months stand at $2.5 billion, compared to $1.7 billion in 2011.

Operating Results

The company announced satisfactory Q3 earnings, with net profit of $824 million, or $0.86 per share. The reduction in earnings was primarily attributed to greater-than-predicted production costs and cheaper production volume at Freeport's Grasberg mine in Indonesia. Overall revenue of $4.42 billion was greater than the $4.36 billion predicted by analysts. The company's operating margins went up in the Q3 despite the decline in production of its major productive mining assets. This overall performance scores well for the corporation going forward.

Similar to its closest competitor Southern Copper (NYSE: SCCO), Freeport's latest earnings have been damaged by falling copper prices. Copper prices are dropping as a result of slowing demand in China and elsewhere. The copper prices may experience short-run downward pressures. However, with improving US and Chinese economies, and emerging markets in India and South America, the long-term trend for copper prices has to be upwards. The corporation views recent growth in the US automotive and housing industries as bullish indicators for copper. Moreover, gold prices have lately resumed their upward march and are again approaching new highs. This trend should continue as central banks stick to their plans of ultra low interest rates and monetary quiet period to further encourage economic growth. The corporation also expects production levels to rise at the Grasberg facility in fiscal 2013.

Stock Trend and Acquisitions

Following the merger declaration the company's stock took a deep haircut as shown below

<img src="http://finviz.com/chart.ashx?t=FCX&ty=c&ta=1&p=d&s=l" />

Freeport recently declared that it would be acquiring Plains Exploration & Production (NYSE: PXP) and McMoRan Exploration (NYSE: MMR). This move was considered extremely controversial. The stock price dropped from $38.28 to $31.70 during last five day, representing losses of -17.45%. Freeport is presently at its lowest level in the trailing 52 weeks. One of the biggest shareholders of the Freeport stock stated that the management of the company had busted shareholder trust.

However, after the acquisition news both Plains Exploration & Production and McMoRan Exploration had amazing trading sessions. McMoRan hit its 52-week high by bouncing from $8.46 to $15.82, a gain of 87%. McMoRan stock also traded over 86 million shares on Wednesday, smashing its average of about 4 million shares. Plains Exploration & Production raised from $36.05 to $44.50, a gain of 23.4%. Plains traded almost 57 million shares, although it had been averaging fewer than 4 million shares before the acquisition.

Richard Adkerson, President and CEO of Freeport-McMoRan, mentioned the merger presents a larger and more diverse corporation. In addition, the companies engaged in the merger were long-life, high quality, expandable, and low cost. The new corporation would continue to be centered on mining; however, the merger now offers the corporation exposure to cheap natural gas with a long-term investment view. The merger allows Freeport-McMoRan to switch from a mid-size mining corporation to a key player in the mining and oil/gas business segment. The merger will also transform Freeport-McMoRan from a 100% mining company to a company with a 75% mining segment and a 25% oil and gas segment. This merger will boost the company's exposure in North America from 30% to 50%.

Foolish Summary

The key to the company's success is its investment in dynamic assets, guided by its operational strength. The company expects brownfield expansion in America and Africa to add one billion pounds of copper annually over the following three years. Freeport-McMoRan is restarting several copper plants in the United States. I believe that after the acquisitions announcement Freeport-McMoRan has a diversified asset portfolio. Switching to oil and natural gas along with copper is a good decision. It will increase the company's revenue base and its cash flows.

This could be an extremely convenient time to enter a position for Freeport-McMoRan as the stock price is close to its earlier support level in the range of $31. However, the stock could display some additional downside movements as disappointed investors might keep selling their shares. Nevertheless, at a price of around $30, Freeport-McMoRan looks like a cheap deal.

ecofinstat has no positions in the stocks mentioned above. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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