Freeport’s Copper Cache Keeps Growing

05/04/2011 1:19 pm EST


Yiannis Mostrous

Editor, The Capitalist Times

Despite the current correction in commodities, the fundamental outlook for copper and FCX cash flows remains strong, writes Yiannis G. Mostrous in Global Investment Strategist.

Freeport McMoRan Copper & Gold (FCX) is one of the best-run companies in the mining industry, and a perennial favorite of ours. Four years after the company acquired US miner Phelps Dodge, Freeport McMoRan is net cash positive—a testament to management’s acumen.

Freeport is the world’s largest publicly traded copper and molybdenum producer, and also boasts significant gold and cobalt capacity. The company has a low-cost structure.

Its major assets are the Grasberg copper and gold mine in Indonesia, the company’s southwestern US copper/molybdenum mines, the Cerro Verde, El Abra and Candelaria copper mines in South America, the Tenke Fungurume copper/cobalt mine in the Democratic Republic of Congo, and the Henderson molybdenum mine in Colorado.

The miner has traditionally traded at a discount, because its operations in Indonesia and the DRC are in high-risk regions. Nevertheless, the company has consistently delivered solid results, a trend that continued in the first quarter of the year.

Freeport reported first-quarter earnings of $1.57 per share, outpacing analyst forecasts of $1.26. The Grasberg mine in Indonesia was the star performer, producing more copper and gold than expected.

Overall, the company sold 926 million pounds of copper, 480,000 ounces of gold, and 20 million pounds of molybdenum in the first quarter of the year. The firm expects to sell 3.9 billion pounds of copper, 1.6 million ounces of gold, and 73 million pounds of molybdenum in 2011.

Management recently said that it will focus on organic growth and returning capital to shareholders. Although there have not been any discussions of a specific acquisition, the company has said that it would seek opportunities to acquire strategic assets if the price was right.

Freeport McMoRan’s management expects to increase production in its copper and molybdenum mine in Peru, its copper mine in Arizona (Morenci), and its copper/cobalt mine in the DRC. As these projects grow organically, cash flows should also increase, along with distributions to shareholders.

The company currently pays $1 per share annually in dividends (25 cents quarterly), and it also declared a 50-cent-per-share supplemental dividend for this quarter. These supplemental dividend payouts are likely to continue; Freeport McMoRan is on track to generate more than $6 billion of free cash this year.

The company’s coffers are also in fine shape. At the end of the first quarter, it had $3.2 billion in net cash, as well as $1.5 billion available in its credit facility.

Despite the current correction, the fundamentals for copper are still good for the medium term. Supplies are under pressure because the world’s primary copper mines are aging and, in many cases, the quality of the ore has begun to deteriorate.

Industry research indicates production has declined in eight of the world’s ten largest mines over the past five years. Meanwhile, demand has grown apace, leading to a deficit of copper last year. This year should be no different—mining companies have estimated that copper production will rise by 2% in 2011, while consumption will advance by 4%.

Although we recommend diversifying the metals sleeve of your portfolio, we like the growth potential for copper prices, and Freeport McMoRan is the best way to gain exposure to the space. It remains a buy up to $60. [Shares were down nearly 5%, to the vicinity of $50.70, in Wednesday’s rout—Editor.]

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