Freeport-McMoRan (FCX) is an international, leading natural resources company focused on the mining of copper, gold and molybdenum and more recently, oil and gas production.
FCX posted dismal first quarter results with profits falling 21% from last year. Although, FCX still beat analyst expectations. Drivers included lower production volume and lower commodity prices. Second quarter profits were flat as FCX sought to continue its U.S. expansion with increased copper production in New Mexico and Arizona, but copper prices remained flat keeping profit stagnant. Even though Freeport-McMoRan has diversified its commodity exposure beyond copper, the metal still makes up the majority of FCX’s profits.
FCX stock is down about 9% year-to-date as concerns over its high debt load, lower earnings and the ongoing copper supply glut has weighed on investor minds.
In addition, competing mining companies are completing projects and ramping up copper production on deals that were contemplated during the recent period of high-prices. Due to the combination of increased supply with a slow-down in the Chinese property market, which is a large consumer of copper, copper will continued to be under downward price pressure.
FCX: Short-Term Hold, Long-Term Buy
Copper prices are up after a sharp drop at the end the first quarter, but with the anticipated increase in supply and the slow-down in China, prices are unlikely to rise significantly in the near future.
In the short to mid-term, FCX’s profit margins will continue to be under pressure, but long-term prospects continue to look favorable.
FCX is holding some prized assets. The copper supply imbalance should corrects itself in the mid-term, and FCX’s focus on improved cost efficiencies with a concentration on production in the lower cost North American market will allow its stock price to climb higher. In the meantime, FCX offers a 3.4% dividend and occasionally distributes supplemental dividends as well.
FCX’s crown jewel is the massive Grasberg deposit in Indonesia. Early this year, the Indonesian government imposed a ban on ore exports and instituted taxes on mineral-concentration exports in an effort to encourage mining companies to build smelters and refine ore domestically. In July, FCX cut a deal with the Indonesian government that will allow FCX to export production again in exchange for paying higher royalties, building a smelter and paying taxes on copper-concentrate exports.The fact that the Grasberg mine has high concentration of copper and gold and is critical to the overall profitability of FCX is important to note.
Copper prices rose drastically between 2000 and 2011 allowing smaller, inefficient mining companies to turn a profit. As prices have come down, many of those smaller and less efficient miners will have to drop out of the market. Although low commodity prices hurt all mining companies, Freeport-McMoRan’s diversification and greater opportunities to cut costs will provide a buffer until prices improve. In addition, the world’s leading copper producing country, Chile, continues to struggle with aging mines and lower ore grades causing a 350% increase in costs to produce and lower production, which helps bolster copper prices in the long-term.
In Freeport-McMoRan’s second quarter, quarterly cost per pound of production in the U.S. declined from $1.92 to $1.70. Conversely, cost per pound of production in Latin America increased from $1.54 to $1.60. FCX increased its copper production in North America, increasing production 13% from 349 million pounds to 395 million pounds as FCX looked to take advantage of the U.S.’ flexible workforce and the lack of union labor.
FCX should be held for the dividend in the short to mid-term, but look for price appreciation in the long-term.
As of this writing, Kenneth Fick did not hold a position in any of the aforementioned securities. Write him at kfick@piercethefog.com or follow him on his blog at www.piercethefog.com.
