This Copper Miner Looks Attractive After Pullback

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

Just like other metals, copper is under pressure this year, down 14%. In the meantime, this is one of the best performances across the metal board, because copper has wide industrial implications. The leading copper producer, Freeport-McMoRan (NYSE: FCX), is down 14% this year as well. The stock is trading at a multi-year support level. Is it time to get in?

Pros

Freeport-McMoRan has diversified into the oil & gas business with the acquisition of McMoRan Exploration and Plains Exploration & Production. Oil prices have been stable this year, so the demand for oil services is expected to be healthy as well.

The company has successfully dealt with a recent accident at its huge Grasberg mine in Indonesia. Operations at the mine were suspended after a tunnel collapse killed several miners. On June 24, the company stated that it had resumed open-pit mining and concentrating operations at Grasberg. Underground operations are still shut down, but the company is working towards resuming them as well.

Freeport-McMoRan is operating profitably at a healthy 30% margin. Although the recent decline in copper prices does not improve outlook for profitability, it does not pose any threat to company’s operations. You can compare this to the situation in gold miners, for example, where the drop in the gold prices puts questions about sustainability of some companies’ operations.

Cons

The slowdown in China looks like it is for real. This is the new reality that companies must get accustomed to. As a result, copper price forecasts are being cut by multiple analysts, both sell-side and buy-side ones.

Earnings estimates for Freeport-McMoRan have followed copper prices on their way down. Estimates for the current quarter have dropped more than 50% in just 90 days. However, the company has beaten earnings estimates in three out of four most recent reports. We’ll have a chance to see if this happens again in mid July, when Freeport-McMoRan would be presenting its quarterly report.

The acquisitions were taken with the help of debt. Quite a lot of debt, by the way. The company has issued $6.5 billion of senior notes and borrowed $4 billion in term loan. The first bond repayment is due in 2018, which gives Freeport-McMoRan plenty of time.

Alternatives

Looking for other ways to get exposure to copper? Consider Southern Copper (NYSE: SCCO) and Vale (NYSE: VALE). Southern Copper has lost 26% this year. At current prices, the company trades at 12.5 forward P/E. Southern Copper pays a dividend that yields 2.90% and operates at a very healthy 49.7% margin. The company has most of its operations in Mexico and Peru, and exploration projects in Chile. Southern Copper is more dependent on copper prices than Freeport-McMoRan. If copper prices start to rebound, Southern Copper could rise faster than Freeport-McMoRan.

Vale, which trades at 6.5 forward P/E, is a diversified mining giant. Vale is based in Brazil. Brazil has faced significant political pressure this year. Brazilians are unhappy about huge money that is being spent on the Soccer World Cup 2014, while a lot of people are living in poverty. Trying to get more money, the government proposed a bill to reform the country’s mining code.

According to this bill, the royalties would go up to 4%, which is twice as much as the current rate. Vale is an interesting dividend play with a 5.7% yield. Vale could enjoy an inflow of money when the political situation becomes clearer.

Bottom line

Freeport-McMoRan is a solid company that trades at an attractive 7.5 forward P/E. It is a dividend play too, with a 4.53% yield. Despite the recent cuts in share price forecasts, the mean analyst target price for Freeport-McMoRan is $36.62, almost 33% higher than current price. Freeport-McMoRan is a serious candidate to consider for your portfolio.

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Vladimir Zernov has no position in any stocks mentioned. The Motley Fool owns shares of Companhia Vale Ads and 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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