New Buying Opportunities with the World's Largest Copper & Gold Producer
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Maintaining a reputation as the major producer of gold and lowest-cost producer of copper in the world, Freeport-McMoRan (NYSE: FCX) is scheduled to report its earnings very soon and it will have all attention focused on it. The reason for this is not far from the concerns being generated by the slowdown in China as far as copper is concerned. Another reason why investors are itching to read the earnings report of Freeport-McMoRan is the lingering issue of royalties in Indonesia, where the company's biggest mine is presently located.
Although, even in the face of all these, demand is still high for gold, which is one of the hard assets being produced by Freeport-McMoRan. But the question that remains unanswered is, where does all this drama leave investors? Based on the current analyst estimates on Yahoo! Finance, Wall Street expects the company to report a 16.6% fall in revenue to $4.33 billion. This is expected to come along with an EPS of $0.71, versus $1.10 for thr same period the previous year. It would interest you to know that the EPS estimate of $0.71 is down from $0.97 three months back.
Wall Street expects Freeport-McMoRan to report an 11.10% revenue decline to $18.56 billion, with an EPS decline of $3.35 for 2012. As for 2013, it expects revenue to rise 19.10% to $22.10 billion, with EPS growing from $3.35 to $4.81. All these ups and downs are mainly due to the fact that there could be changes in the prices of commodities and how the issue of royalties in Indonesia finally plays out.
There are other mining stocks that are also expected to report their earnings soon. This includes Goldcorp (NYSE: GG), which is scheduled to report its earnings on the same day as Freeport-McMoRan. Analysts estimate that Goldcorp will see a 5.8% increase in revenue, while earnings per share (EPS) will contract by 17.5%. Goldcorp has a low debt-to-equity ratio of 0.03, which means that management has been able to control debt levels very well. Meanwhile, Vale (NYSE: VALE) is scheduled to report on Wednesday, Oct. 24.
Brief analysis of Freeport-McMoRan's last year's earnings report
Last quarter the company reported a revenue decline from $5.81 billion to $4.48 billion, with its net income dropping from $1.37 billion to $710 million at $0.74 per share. This decline was mostly a result of the dip in copper prices, which was out of Freeport-McMoRan's control but did not in any way impact the company's plan to increase 25% copper production within the next three years. It hopes to achieve this through the development of its brownfield projects close to existing mines. Also, it reported that after the crippling strike of the previous year at its Grasberg mine in Indonesia, activity there has returned to normal and the company looks forward to an extension of its operating contract in the country after the review being carried out by the Indonesian government.
What you need to know as an investor
From observations, I think what should be uppermost in the minds of investors is how much of an impact the slowdown in China and the declining global economy is having on Freeport-McMoRan. However, from the statements issued at Bloomberg by the CEO of the company, Richard Adkerson, he pointed out that due to the various infrastructure projects being carried out in China, it is inevitable that any time soon there will be a tremendous increase in the demand for copper in that country. It would, however, interest you to know that in the second quarter report there was a decline in the company's copper sales from $1.6 billion to $1.48 billion; based on this, analysts are closely watching the company's next report.
Another area of concern is what is currently playing out in Indonesia. The country is reviewing the contract extensions of both Freeport-McMoRan and Val,e with a view to increasing the royalty percentage. While coal mining companies are paying up to 13.5% in royalties, Freeport-McMoRan is paying a 3.5% royalty for copper and a 1% royalty for gold; but all that is about to change since the team that is formed for the review wants to increase these royalties to 10% for both Freeport-McMoRan and Vale. With more than a year left for the wrapping up of the review, there is ample time for negotiations between Freeport-McMoRan and the Indonesian government.
There is every likelihood that a fair compromise will be reached since the mine in Indonesia only accounts for 19% of Freeport-McMoRan's revenues while, for the Indonesian government, it is one of their vital sources of revenue. The company could be likened to the goose that lays the golden egg; as such, it does not need to be killed.
Based on all of these, I strongly believe that a fair deal will be arrived at by both parties, such that will be mutually beneficial to Freeport in the long run. There is also the likelihood that the issues of conflicts with the insurgent Free Papua Movement, strikes by workers, and pressure from environmentalists will be sorted out once for all. As for Freeport-McMoRan, it has all the time it needs to fully prepare itself for added expenses as a result of accruing higher taxes. Finally, investors should know that the issues of declines in copper prices are beyond what Freeport-McMoRan can control, because it is the market that determines the end price while unforeseen events like strikes and mining laws affect the cost and level of production on the other hand.
What should matter to every investor right now is where the global economy is actually headed and from the look of things, that question still remains unanswered for now. Freeport-McMoRan is currently heading down from a price level of around $40. I urge investors to wait until after earnings are announced before making a decision to buy. Sour earnings could sink this stock by several dollars, creating a stellar buying opportunity for patient investors.
StockCroc1 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.If you have questions about this post or the Fool’s blog network, click here for information.