3 Reasons to Buy Freeport-McMoRan
Jul 20th 2012 3:35PM
Updated Jul 20th 2012 3:38PM
Mining heavyweight Freeport-McMoRan (NYS: FCX) has had better years. The economic slowdown over the past few months has sent shares sliding to near three-year lows as its business producing copper, gold, and molybdenum is heavily dependent on new construction and industrial growth. While net income has slid over the past few quarters as commodity prices have dropped, that's not a reason to flee from the stock. Let's take a look at three reasons to buy Freeport-McMoRan today.
With the recent pullback in price, the stock looks relatively cheap with a forward P/E of just 8. For that low price, investors get a piece of one of the world's largest publicly traded miners, the owner of the world's largest gold mine, and a company with operations on four continents. The company also pays a healthy 3.8% dividend, has a solid balance sheet with $4.5 billion in cash, and is incredibly efficient with an operating margin of 40%. Fundamentally, there's little not to like about this business.
Shares are going at a discount compared to peers like Southern Copper (NYS: SCCO) , Newmont Mining (NYS: NEM) , and Rio Tinto (NYS: RIO) , which don't have the cash position that Freeport has. In a way, the economic slowdown can be seen as a benefit to Freeport as it has the cash reserves to sweat out any sustained price drops. Shares of Thompson Creek Metals (NYS: TC) , on the other hand, have tumbled this year as low molybdenum prices have suppressed cash flow and brought about financing issues at its Mt. Milligan mine construction.
Economies of scale
Freeport is recognized as one of the lowest-cost producers of copper and molybdenum. Gross profit per pound in 2011 was over 50% for both metals, giving it a significant buffer should prices drop in the future. In 2009, when metal prices were particularly low, gross margins still hovered in the 40% range. Keeping costs low also favors Freeport over higher-cost competitors who may suffer more in lean times. The company's large reserves also serve as another reason to favor it over competitors. With ample proven and probable reserves of copper (119 billion pounds), gold (33.9 million ounces), and molybdenum (3.4 billion pounds), the company has the diversification and the longevity to continue its success.
With its size and diversity of operating regions, products, and customers, Freeport has the economies of scale that will keep it a major industry player for years to come.
Bright future for copper
Seventy-eight percent of Freeport's revenue comes from copper, and demand for the industrial metal should outgrow the global economy as a whole. In addition to its traditional use in construction, it's also an important element in new-technology applications like solar cells and electric vehicles. While demand in China has cooled off and short-term demand may stay low, there is still plenty of room in emerging markets as the middle-class population in these countries expands. Furthermore, a limited global supply should help keep prices up, as the market is currently experiencing a production deficit.
Freeport CEO Richard Adkerson affirmed this belief in the company's earnings report yesterday, citing "mine disruptions, falling grades at existing mines, and delays of constructing new mines" as reasons for the lack of supply. Adkerson added that the outlook for copper was "very positive," and said that copper demand in the U.S. is stronger than the overall economy thanks to the recovery of the auto industry.
Freeport-McMoRan isn't without its problems, of course. The Indonesian Grasberg mine experienced a recent labor dispute and a new Indonesian law will require the company to divest 20% of the mine. Like other miners, it's subject to the volatility of the commodities market. In the short term, a drop in metal prices could hurt the stock, but for the long-term investor this looks like a good bet.
Despite second-quarter earnings coming in at about half of last year's, Freeport's stock still gained 4% after the report came out because of a slight earnings beat, indicating that the stock could have been oversold. The company's 3.8% dividend yield offers another reason to invest, with plenty of room to grow at a payout ratio that has historically been under 40%. With its financial stability and promising long-term prospects, there are plenty of reasons for the buy-and-hold investor to like Freeport-McMoRan.
Don't read this
Unless you want to hear about a gold stock that is ready to take off. With the Fed mulling another round of quantitative easing, inflation can't be far behind, and that means it's a great time to buy gold. The smart way to do it is by investing in one company that has found a deposit in Canada that could yield up to 11 times the amount of gold found in the average mine, and it's ready to cash in. Get the name of this hot stock and all the other information you need in our special free report: "The Tiny Gold Stock Digging Up Massive Profits." You can get your free copy now. All you have to do is click right here.
The article 3 Reasons to Buy Freeport-McMoRan originally appeared on Fool.com.Fool contributor Jeremy Bowman holds no positions in the companies in this article. The Motley Fool owns shares of Freeport-McMoRan. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.