This Copper Producer Is Looking Interesting

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Freeport-McMoRan Copper & Gold (NYSE: FCX), known simply as “Freeport,” is one of the largest copper producers in the world with production of 3.7 billion pounds last year. Despite higher projected output and optimistic earnings projections, Freeport has been one of the worst performers on the S&P 500, down more than 20% so far in 2013. At a ridiculously low valuation and with a strong yield while waiting for it to turn around, is Freeport worth a look? Are other copper producers in the same boat?

About Freeport

Freeport produces Copper, Gold, and Molybdenum, and has recently diversified its operations through major acquisitions, but more about that in a minute. Freeport’s proved reserves total around 116.5 billion pounds of copper, 32.5 million ounces of gold, and 3.4 billion pounds of molybdenum. The company’s copper reserves are split almost evenly between North America, South America, and Indonesia. 

Demand for metals such as copper and molybdenum is low right now, primarily due to oversupply issues partially (but not entirely) caused by China. Molybdenum, by the way, is primarily used in steel alloys due to its corrosion-resistant properties and is therefore very dependent on the level of steel production. For those who don’t know how bad the steel industry is doing right now, check out shares of U.S. Steel, which have performed even worse than Freeport this year!

Recent acquisitions and what they mean for the company’s future

Just recently, the company completed the acquisitions of both Plains Exploration & Production and McMoRan Exploration for a combination of cash and stock. The Plains deal closed on May 31, and the McMoRan deal a few days later.

Plains Exploration & Production is a petroleum company that gives Freeport oil assets in California, Texas, Louisiana, and the Gulf of Mexico. Plains is by far the larger of the two acquisitions, and Freeport paid $16.3 billion for the company, including debt. McMoRan Exploration is involved in the exploration, development, and production of natural gas in the Gulf of Mexico. Together they form a newly created subsidiary of Freeport, called Freeport McMoRan Oil & Gas. 

According to industry analysts, the diversification into oil and gas may make Freeport less attractive to investors as a copper play, but I don’t buy it. I embrace the diversification of their operations and personally believe that demand for energy has nowhere to go but up over the long term. In fact, energy industry experts believe that world energy demand will quintuple by 2050, making this a great time to get in on energy production.

Cheap!

My favorite thing about Freeport is how ridiculously cheap it is. Freeport is expecting earnings of around $3.38 per share this year, meaning that it trades for just 8.2 times current year earnings. Additionally, even after estimates were lowered as a result of acquisition-related concerns, the consensus is projecting earnings of $3.80 and $4.04 in 2014 and 2015, respectively, and in fact estimates for 2015 range as high as $5.67 per share. Even if the company simply meets the consensus, we’re talking about 20% earnings growth over the next two years. 

Alternatives: Rio Tinto and Southern Copper

Rio Tinto (NYSE: RIO) is one of the world’s largest mining companies and is about twice the size of Freeport by market cap. Although Rio is the fourth largest copper producer in the world, it accounts for just 12% of the company’s revenues, with the rest coming from iron ore (44%), aluminum (18%), coal (10%), and diamonds (7%). Shares have been beaten down even worse than Freeport’s, down about 30% year-to-date due to their massive reliance on iron ore. As a result, Rio trades for 8.1 times 2013’s earnings, and bear in mind that they don’t have uncertainty related to a new acquisition.

Southern Copper (NYSE: SCCO) produces mainly copper and molybdenum and operates in Peru, Mexico, and Chile. Because this company is the closest to a pure copper mining play of the three listed (77% of sales come from copper), it does not have exposure to additional negative catalysts such as iron and gigantic diversifying acquisitions. However, in my opinion the lack of diversification among Southern Copper’s business is a negative. The company is also the most highly valued at 12.5 times current year earnings and relatively flat growth projected.

Conclusion

The depressed valuation resulting from a combination of a weak market for copper and the recent acquisitions, which added a lot of debt and diversification, have resulted in a rock-bottom valuation for Freeport. While there may still be headwinds in the short term, I think investors with the stomach to ride out the storm in Freeport will be handsomely rewarded in the years ahead.

After putting together a blockbuster deal to expand into the oil and natural gas industry, Freeport-McMoRan will have plenty on its plate as it tries to adapt to the new industry, as expanding into oil and gas carries plenty of inherent volatility. FCX had a profitable copper business, and on top of this foray into a new industry it still has to contend with mining industry bellwether BHP Billiton. To help investors determine if Freeport-McMoRan is a buy or a sell, The Motley Fool has compiled a premium research report on the company. Simply click here now to access your copy today.


Matthew Frankel owns shares of Freeport-McMoRan Copper & Gold. 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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