Freeport-McMoRan Copper & Gold: Well Positioned for Global Demand

Today we're looking at our friends in the copper and minerals sector, Freeport MacMoran (FCX). Freeport has been in our pages in the past, with an upside call spread, and we're going there again. We think FCX is one of the premier companies, well positioned to participate in global demand for industrial minerals, particularly copper. Over the last few weeks, FCX has sold off, as perceptions of a global recession clouded investor's expectations for the firm's future. We don't see much of a slowdown for FCX's products, and our outlook is for the share price to rise in the near future.

The chart above shows FCX shares for the last six months. The stock has pulled back about 20% lately, as investors priced in expectations of a possible global industrial slowdown or recession. The Relative Strength Index [RSI] and Moving Average Convergence/Divergence [MACD] stochastic lines have rounded at medium-level oversold areas. Both are turning upwards, in our opinion.

FCX Fundamental Data

• Current Price: $100.30
• Shares Outstanding: 383 million
• Market Cap: $40.4 billion
• Forward Price/Earnings (Avg. Est): 8.0x
• PE/G Ratio (5-Year Expected): 2.0x
• Price/Book: 2.6x

Freeport-McMoRan Copper & Gold, Inc. engages in the exploration, mining, and production of mineral properties primarily in Indonesia, North America, South America, and Africa. It focuses on copper, gold, molybdenum, and silver prospects.

As of December 31, 2007, FCX had total consolidated recoverable proven and probable reserves of approximately 93.2 billion pounds of copper; 41.0 million ounces of gold; 2.0 billion pounds of molybdenum; 230.9 million ounces of silver; and 0.6 billion pounds of cobalt. Freeport-McMoRan Copper & Gold, Inc. was founded in 1987 and is based in Phoenix, Arizona.

FCX has enjoyed the price rise of copper, gold and other precious metals that has occurred over the last few years. Although slowing from the torrid growth of 2007, FCX continues to see growth in revenue, posting the types of numbers that attract serious investors, especially in their profit margins. Comparing year-on-year revenue numbers, FCX's annual revenues are expected to rise to $23.0 billion during 2008, a gain of over 37% from last year's full year figure of $17.0 billion.

At the bottom line, analysts are expecting earnings of $11.70 per share for the full year 2008, up from $9.74 per share earned in the full year 2007. Tuesday, 22 July 2008, FCX released earnings that were a little below their quarterly estimate of 2Q08 of $2.43 per share, due mostly to one-time charges. Actual bottom line earnings were $2.25 for the June 30 ending quarter, down from $2.62 per share one year ago in the same quarter.

Copper prices, which tend to drive the share price of FCX on a day-to-day basis were back up Tuesday, though, and the Company also announced several shareholder-friendly moves, including an increased share buyback and an increased dividend. We think that despite the one-day drop in FCX price, Freeport's shares represent reasonable value from a price/earnings ratio perspective. A price chart of Copper's spot price is included below for reference:

Freeport's balance sheet has $1.8 billion in cash, or about $4.75 per share. The debt they carry, though, primarily from the Phelps Dodge acquisition completed in 2007, amounts to over $7.6 billion. However, the firm's EBITDA is $10.1 billion on a trailing 12-month basis. The debt service is well covered, and FCX could use that additional cash to raise the dividend further, or buy back additional stock.

Recommendation: We recommend investors buy a September call spread in FCX options. We would buy the September $100 calls for $10.30 and sell the September $120 calls for $3.30, for a net cost of $7.00 to this spread. We would look to sell this spread at a price of $17.00 over the next two months, and this 'trigger' can be entered with your broker.

For investors only wishing to go long options on this trade, we would look to purchase the Sept 100 calls outright for $10.30.

Please note: Options trades all involve a high degree of risk and the potential to lose some or all of your investment. These recommendations are general in nature, and you should consult your own financial professional who is familiar with your situation as to the appropriateness of these trade ideas.

Disclosure: Analyst has no position in FCX stock or FCX options, or the commodity copper.

Comments

[CrossProfit]

We agree with the following statement:
"We don't see much of a slowdown for FCX's products, and our outlook is for the share price to rise in the near future."
See:
www.crossprofit.com/vi...

We take issue with the following;
1) "well positioned to participate in global demand for industrial minerals, particularly copper" - FCX should do well even if copper falls 20%. At current prices, FCX 2009 earnings will be double 2007. We do not anticipate that the 'bulk' of profits will come from copper to the exclusion of gold as insinuated by above statement.

2) "Shares Outstanding: 383 million" - excluding warrants (including is about 450M, look it up).

3) "due mostly to one-time charges" - perhaps you meant to say 'due to lower sales due to one time production shifts'.

4) "Copper prices, which tend to drive the share price of FCX on a day-to-day basis" - disagree with assertion.

CrossProfit
Disclosure: no conflicts.

[MarcCourtenay]

The recommendation idea is interesting and it's good to see someone talk about how to participate in the movement of great stocks like FCX. Thanks for the useful article.

[racerz]

I've been a Freeport owner /investor for years and feel it's one of the best run companies out there right now, along with CHK and BTU--my three favorites (for great returns the next 12 months).
I've added to my FCX position following the "fall" this week, and have never felt more sure of a stock like this one, regardless of some short term weakness or "sheep over the cliff" movement by so-called pros.
Cramer loves this one, too, as he does CHK - but he's wrong on BTU calling for selling into strength. BTU is a long term goldmine (black gold, of course), and Freeport is positioned even better with its diverse copper/moly'm/gold/sil... strength.

Thanks for an interesting article!

[copperbaron]

Well, so far this trade has been a dud. I'm looking at the Sept 95/115 bull spread as a better risk reward here. With the terrible market and weak copper price, I'm afraid that FCX could languish for quite a while in the 90s, or even below.

I will buy a ton as an outright trade if it slips back into the 80s.

[racerz]

Yes < Copperbaron --you may well be correct in your assessment - and if FCX does dip to the 80's, Ill be with you in adding to my position. It is indeed a crazy market, but at least with the ACI great profit report, preceded by BTU's, coal finally had a good day today and FCX was up, too, with some better copper news coming.
Any coal favorites? I made some decent money with Massey (MEE) too this year.
RacerZ