Freeport-McMoRan Copper & Gold, Inc. (FCX)

Looking at a weekly chart of FCX, it looks like we have a cup and handle forming. A daily chart clearly shows the head and shoulders bottom, and an uptrend now. Buy FCX around its 50 day support, or with a 123.30 buy point.

Precious metals are becoming more and more precious as the dollar wanes and other currencies fluctuate. Gold continues to hold the human race in the same hypnotic state that it has for several thousands of years, with silver not far behind. When the monitary systems begin to falter or look unsteady, he who holds the gold holds the future.

Now that copper is being used more and more in all manner of things it's value continues to rise as well. Copper theft is big business in the US, which shows the lengths people will go to obtain the money brought in from this ever-increasing valuable commodity.

For Freeport the numbers speak for themselves:

Trailing P/E = 12.5
Forward P/E = 9
PEG = 0.20
Next 5 Year Growth Estimate (per year) = 50.75%

These numbers show that when one buys FCX one is not only buying a value company but also a growth one as well. A forward P/E for 12 is cheap for any company yet alone one that is growing at 50% per year. These low multiples will not allow the stock to go down any further than it currently is priced, the only thing that it can do is go up.

FCX will have to go up 35% just to maintain its current P/E ratio of 12. Also, demand for copper will continue to rise and gold prices will continue to increase because of the weak United States and Western European economies.

Even before merging with PD, FCX was a sleeping giant well positioned fo the upward movement of copper...with geographical physical presence in the Asiam growth phenomenon, the addition of PD will not only provide product diversity, but also further global divesity, as well.

As I've said elsewhere, I think that the prevailing assumption that prices for industrial metals like copper will soften in 2008 because of this recession are unfounded. First of all, it's not a recession... we're on the verge of an unprecedented DEPRESSION! All the ingredients are in place for completely rampant hyperinflation, and gold will respond in price accordingly. Gold will pass $1,000 before we know it, and after several unconvincing consolidations, it will resume its rise to $1,650 and beyond! Copper has come off its highs because analysts predict softening US industrial demand will lead the price lower. I do not subscribe to this. As the dollar plummets, the value of copper as denominated in dollars will rise just as gold will. Demand from the BRIC countries will be sufficient to keep the global copper shortage intact. Now FCX is not my favorite pick in this sector by any means. They have a host of labor problems because they underpay their workers in Indonesia, and their environmental record is attrocious. They have also had quite a run already, so I expect more junior and mid-tier producers to outperform the FCXs of the world through 2008 and beyond. BUT... FCX will still outperform any of the major US indeces for several years to come.

Freeport McMoRan (FCX) is a company engaged in mining operations around the world. Subsequent to their recent merger with Phelps Dodge, they are neck-and-neck with Chile’s state owned Codelco for the title of the world’s largest copper producer at almost 4 billion pounds of copper production per year, and may well have taken the top spot by now, given the aging status of Codelco’s mines. They are the undisputed leader in molybdenum production, with nearly 70 million pounds per annum. That figure will in all likelihood rise by approximately 30 million pounds annually with the anticipated re-opening of the company’s Climax molybdenum mine in Colorado in 2010. The company also produces about 2.3 million ounces of gold annually. At current prices as of 24OCT07, the above production is valued at:

4 billion pounds of copper x $3.5344/pound = about $14.140 billion
70 million pound molybdenum x $34/pound = about $2.380 billion
2.3million ounces of gold x $763.30/ounce = about $1.756 billion

So while Freeport is capable of well over $4 billion in annual revenues from other metals, copper is by far their primary product. FCX has very low unit costs on its copper production, which would enable the company to weather any downturn in copper prices while still generating substantial cash flows. Their net unit cash costs per pound of copper produced thus far in 2007 is $0.65, though that figure rose substantially in the third quarter to $1.05 due to several factors. The major reason was the fact that production fell dramatically at the company’s Grasberg mine in Indonesia while the company works through an area of lower grade ore. Second quarter production at the mine was 298 million pounds, which fell to 177 million in Q3. The company expects to be working this area of low grade ore at this mine until Q4 of 2008 as part of their planned mining sequence, and will therefore continue to experience lower production for the next 12 months at Grasberg. Working this portion of the pit is necessary in order to safely access the higher grade ore below, which is scheduled for mining during 2009-2011. Production in their North American mines rose from 335 million pounds in Q2 to 357 million pounds in Q3, while South American production rose from 338 to 377 million pounds over the same timeframe. Also affecting unit costs were lower gold, silver, and molybdenum production as an inherent by-product of the copper. Sales of those by-products, especially gold, are weighted towards the fiscal first half. Other factors include higher energy and labor costs. Even with the higher unit costs, though, gross margins are very high considering an average realized price per pound of $3.53.

There are many factors that affect global copper demand. The lowered demand associated with the weakness in the US housing market has been brought up as a possible drag on copper demand. While it’s true that the average new-build home in the US contains approximately 400 pounds of copper, I see these concerns as being far overblown by the stock market since the entirety of US consumption only represents about 12% of global consumption, according to FCX’ CEO Richard Adkerson during a 17OCT07 CNBC interview. The main factor in copper demand growth remains China’s continuing economic boom. China has scant resources of copper ore, and must import the vast majority of its copper. According to a 19OCT07 article on xinhuanet.com, China’s imports of copper ore fines, or concentrates, in the first eight months of 2007 rose 35.9% year-over-year to 3.192 million tons, which were valued at over $6 billion, a rise of 63.2%. That same article reported that global supply fell short of global demand by 260 million pounds in the first half of 2007, according to iscg.org. Global supply is projected to slightly outpace demand in 2008, but only by slightly over 1%. Therefore any supply constraints, or demand increases, will result in unmet demand.

In March of 2007, Freeport McMoRan completed their acquisition of Phelps Dodge. The $26 billion transaction was financed by a combination of debt, issuance of notes, and issuance of a very significant amount of FCX stock. Despite the highly dilutive nature of the transaction, the deal was very successful for FCX. As a former shareholder of PD, I recall the announcement vividly, and I also recall my ire at what I felt were meager terms for PD shareholders. I thought the company was worth quite a bit more. The merger took FCX from a one-pit miner to a global copper-production power, with major operations on four continents.

Analyst consensus is for FCX to earn $10.90 in FY2008. Their consensus is for earnings to grow at a rate of 37.5% over the next five years. I disagree with both of these numbers. I think the former is too light by half, and I think the latter is too heavy by half. My own guesstimates are for earnings of $15/share, and a medium-term earnings growth rate of 25% per year. That would yield a forward PEG of just under 0.3. During the Q3 conference call, the CEO disclosed that FCX would generate approximately $18 of excess cash over the next two years net of current dividend commitments, capex and debt-reduction payments. The CEO and the board are always looking for capex opportunities, but are focusing on finding highly accretive potential projects that will integrate into their existing infrastructure without requiring construction of all new processing facilities. The remainder of that $18/share is available for either a special dividend or a share repurchase, according to the CEO.

The company has some new production start-ups on the horizon to ensure earnings growth. The Climax mine near Leadville, CO is a virtual lock for a 2010 re-start, adding 30 million pounds of molybdenum production per year. Current spot price values that production at just over $1 billion per year in revenues. The mine is designed to facilitate rapid doubling of that production to should molybdenum prices warrant. Year-end 2010 production at Big Gossan near the Grasberg mine in Indonesia is expected to reach 135 million pounds of copper and 65 thousand ounces of gold per year at a current price revenue addition of $530 million per year. 2009 should see initial production at the Tenke Fungurume mine in the Democratic Republic of Congo. Expectations there call for 250 million pounds of copper and 10 million pounds of cobalt, of which 57.75% is Freeport’s, for annual revenues of $824 million at current prices. So that’s an estimated total of roughly $2.35 billion in annual revenues flowing in from new sources expected in the next two to three years even if metals prices remain where they are. That is 15% of current annual revenues.

One of the tenets of successful investing is an ability to find the drivers of future stock price appreciation before those drivers become recognized by the rest of the investing community. Some people call these drivers ‘nuggets’. While I can’t point to a single ‘nugget’ that makes FCX such a compelling investment in my mind, I can point to a lot of ‘flecks’ that more than add up to a nugget.

? The US only represents 12% of global copper consumption. I found this piece of data to be very surprising, and would have expected this figure to be much higher. Total building construction makes up roughly half of annual US copper usage, and residential construction is only a portion of that figure, so a homebuilding slowdown isn’t a death knell to copper producers. The rapidly expanding economies of China and India represent a far larger portion of the global demand. China has meager copper ore reserves and must purchase copper on the open market. This set of facts is the closest thing I have to a full-fledged nugget.

? FCX does the bulk of its business overseas, thereby benefiting from continuing weakness in the dollar.

? FCX has a high likelihood of announcing either a special dividend or a substantial share repurchase plan in the near future.

? FCX operates in a high free cash flow business with substantial barriers to entry.

? With unit production costs so low, FCX would be profitable even with metals prices at much lower levels than they currently enjoy.

? FCX has great potential for organic growth from existing assets and concessions without the need to expend huge sums on exploratory and developmental operations.

There are a few other factors that are not 100% reliable, and therefore should not be considered in a straightforward analysis. However, they are compelling enough that I feel they warrant a mention.

? Since China must import the vast majority of its copper reserves, the Aluminum of China Company has announced publicly that it is on the prowl for overseas copper miners. As we learned with CNOOC’s unsuccessful attempt to purchase Unocal in 2005, US regulators can and will block sales of US companies that they deem strategically important. Freeport would almost certainly be such a company. However, as with Unocal, there exists a possibility that another global player might step into the mix and make an offer if Chinalco expresses/announces specific interest in FCX.

? I’m almost embarrassed to even put this one in here, but since Jim Cramer mentioned it on his TV show, I suppose that I have to. In 1960, Fidel Castro’s government nationalized Freeport’s Moa Bay nickel mine. Cramer’s argument is that when Castro passes away and US-Cuban relations normalize, that the mine will be returned to FCX’ control. I highly doubt it, but that’s what the crazed man said.

This company has it all, gold, copper and silver. Its share price discounts a lot because the company's majority production comes from one mine in Indonesia but what a mine!!! Investors are worried due to political risks but forget that at the current prices for these metals, the company is minting money.

Good company long term, involved in "real" products. Copper has been hammered and may be continue to be in the short term, though I am not investing to sell in 2 weeks or even 2 years and neither am I playing the commodities market to bet on the short term price of copper. However, I will put my money in this effectively managed company which provides essential materials for long term and ongoing infrastructure development.

I forgot to green thumb this stock when I wrote my blog, but I still think it can go up from here even through it is near its high for the year. It has several appealing feature:
1. Relatively low labor costs.
2. Relatively low energy costs (recently).
3. Relatively high likelihood of rising gold price.
4. If the world economy improves, then copper prices should rise.
5. If the Dollar index continues to go down, investor will be looking for assets which can hold their value. Both mining stocks and metals will meet that requirement.

How to...

1. Cheap - P/E = 8.9
EV/EBITDA = 4
ROIC > 100%
High Dividend

its not cheap...it's damn cheap

2. Insiders buying ? A LOT... insiders are hungry for this stock

3. Get rich, go have holidays.

I was back in Butte Montana my home town a few weeks back to play some golf. I asked my Cousin how things were in Butte becuse usually they suck. I was surprised to hear the the drivers in the copper mines were pulling in 150K a year. I asked how could this be so, I was told they are on profit sharing and the demand in China and India has driven the price of copper so high everyone is making a killing. I asked how long this might last, and was told as long as they have two billion people in China and India.

I think FCX will fall in the short term due to differences in supply and demand. In the long run, I think buying the stock at around $60 per share would be a good entry. Although the chance is there for further movement upwards before a pullback, I would not be willing to risk anymore capital on such an approach.

I have a full in depth report up on my site including technical analysis, option strategy, and reasons supporting my conclusion. Check it out!

http://financialderivatives.net/?p=980

It says something about management when they buy a company thats 3 times the size of their own. They know something we don't about future copper prices. Unlike PD, FCX will not put a ceiling on copper prices. This purchase will give them the leverage they need to increase and control prices. FCX forcasts paying off two thirds of the debt, acquired from their purchase of PD, by 2009. Their current book value is $12. Add 11.9 billion in equity by 2009 (2/3 of PD purchase), adjust the 136 million share dilution from the business combination. Thats a book value of $43 by 2009(triple the current book value). Don't forget the nice dividend, currently around 8%.

Cheap goldmine.
ROA=33
ROE=68
PEG= 0.8

Plenty of free cash flow, so someone could easily buy this company and use the cash flow to pay for it.

Insiders are buying.
PCU has a better dividend.
I own PCU and FCX.

Freeport has had 65% EPS growth for the last 5 years and is projected to grow earnings 50% per year for the next 5 years ... all while having a P/E a little over 9. That's a PEG of less than 0.2 where anything under 1.0 is good. Sales, earnings, and cash flow are all increasing.

They have been aggressively paying down debt incurred for the acquisition of Phelps Dodge. Their (modified) return on capital is 85%, which is more than double that of BHP, RIO, and RTP. This is a well-managed company in a sector that has and will benefit from a long-term bull market in commodities. Freeport looks like a screaming buy to me.

the big boss dumped all his stock at around $20.....big cleanup lawsuit in Oklahoma.....things are looking ugly here.

After the acquisition of Pelps Dodge, Freeport McMoran is now a copper producer. 78% of their expected output is now copper, while 12% is molybdenum and only 10% is gold!

Goldbugs might be disappointed, but Freeport had already made 75% of last years profit from copper and only 25% from gold.

As a hard asset bull I still like the stock and the insiders, it seems, too:

http://www.form4oracle.com/company?cik=0000831259&ticker=fcx

Huge loss reported (about $14 billion). What followed that was even worse. The Company plans to issue common stocks worth about $750 million so that it can pay off its debts.

Expect the current stockholders value to be diluted and the Company's stocks to underperform in this economy.

inexpensive valutation, nice dividend, mining sector in general should out perform until global economic slowdown. Appears to be making ascending triangle on daily chart over last 3 months - hopefully breaking out above 60.