Should You Buy Freeport McMoRan?

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

It’s no secret that precious metals have been crushed over the past several weeks. A variety of reasons, including talk of the Federal Reserve tapering off its monthly bond buying, as well as slowing growth in China, have served as body blows to major industrial miners such as Freeport McMoRan (NYSE: FCX). In light of this, is now the time to run for the hills from the miners? Or can Freeport excavate serious gains for your portfolio?

Misery loves company

Over the past few weeks, copper and gold have been taken on a massive downtrend, taking the miners stocks down in tandem. At a recent price of $27, Freeport has lost a massive amount of market value in just a few months.

Freeport traded as high as $42 per share as recently as October 2012. That means that in eight months, the stock has lost 35% over the time. Looking further back, the chart is even uglier: Freeport traded above $60 per share at the beginning of 2011.

As the saying goes, misery loves company, and Freeport isn’t the only miner in the copper and gold business getting crushed. Gold has lost several hundred dollars per ounce, and copper has dropped to levels not seen in years. That means pain for miners all across the board, including not just Freeport but also Southern Copper (NYSE: SCCO) and international firm Rio Tinto (NYSE: RIO).

Southern Copper is comparable to Freeport-McMoRan, holding a $23 billion market capitalization. Southern Copper engages in mining, exploring, producing, smelting, and refining copper and other minerals in Peru, Mexico, and Chile.

Southern Copper, like Freeport, trades for around $27 per share, well below the $42 per share seen over the trailing 52 weeks.

That being said, Southern Copper trades for a price-to--earnings ratio of just 13 times and yields nearly 3%.

Rio Tinto has considerable copper exposure, but operates a diversified mining business. The company engages in exploration, discovery, and processing of such mineral resources as aluminum, gold, silver, diamonds, coal, iron ore, and of course, copper.

Rio Tinto has a long history, having been founded in 1873, and is headquartered in the United Kingdom. It’s also the biggest copper company of the three presented here, with a market value of $75 billion. Investors interested in international diversification may also like Rio Tinto because of its extensive global footprint, operating in China, Japan, Australia, the United States, and Europe.

Rio Tinto traded for $73 per share as recently as the beginning of 2011, and now exchanges hands for nearly half that.  As a result, the stock's yield is above 4%.

Dig deep for value and income

The stunning fall from grace for each of these companies, including Freeport, belies some fairly solid underlying fundamentals.

In its most recent earnings release, Freeport McMoRan reported profit that beat analyst expectations. Net income per share fell 15%, but the drop wasn’t as bad as feared given the aforementioned bludgeoning in copper and gold prices.

Freeport’s first-quarter copper sales actually rose 15%, showing the results of a concentrated effort to ramp up production. Freeport’s $9 billion acquisition of Plains Exploration and McMoRan Exploration are designed to further this strategic priority going forward.

Moreover, to help protect itself against the volatility of its underlying commodities, Freeport maintains a very strong financial position and rewards shareholders with a hefty dividend.

To illustrate, consider that at the end of the last fiscal quarter, Freeport held more than $9.5 billion in cash and equivalents on its books, amounting to 37% of its entire market capitalization.

Freeport’s current ratio stands at 5 times, meaning the company has $5 in current assets for every $1 in current liabilities. The company’s long-term position looks sound as well, evidenced by the fact that Freeport’s long-term debt to equity ratio is under 50%.

Freeport also pays a solid 4.5% dividend yield and has aggressively raised its dividend over the past few years. Freeport provided investors a 25% pay raise just last year.

Prices of precious metals are hard to predict and often swing wildly. As a result, investors should expect continued volatility from miners like Freeport McMoRan. However, if you can put aside the psychological distress of volatility, there’s a long-term buy-and-hold case to be made for Freeport.

Namely, the company’s resilient operations, rock-solid balance sheet, and compelling dividend should more than put your mind at ease. Assuming copper and gold prices don’t stay at depressed levels forever, Freeport McMoRan represents a compelling buy at these levels.

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.

Robert Ciura has no position in any stocks mentioned. 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!

blog comments powered by Disqus