Barrons on FCX.... $75 stock when copper prices rebound or on a takeover offer

Barron's on FCX.... $75 stock when copper prices rebound or on a takeover offer

 

 

Barrons article suggesting that FCX stock is really cheap, trading below the value of its assets. could reach $75 (vs current $36.58) if and when copper prices rebound to $4.

If you apply what ABX paid for EQN, then FCX is worth $129 just for the copper resources. potential acquirers would be : RIO, BHP, Vale.

 

Turning Copper to Cash

By LESLIE P. NORTON | MORE ARTICLES BY AUTHOR

Freeport-McMoRan Copper & Gold trades for far less than the value of its mining assets. The company could be a major beneficiary of the red metal's rebound—or a takeover offer.

 

A gleaming buying opportunity is emerging in shares of the world's largest publicly traded copper miner, Freeport-McMoRan Copper & Gold. The shares (ticker: FCX) are down 40% this year, to a recent $35, amid bitter labor disputes, collapsing copper prices, flagging global demand and concerns that another financial crisis is looming. One key to copper's comeuppance is the decelerating economy of China, the world's largest buyer of the red metal. Taken together, these negatives have confused the outlook for copper prices—and for Freeport's earnings.

Analysts currently expect Phoenix-based Freeport to earn $5 billion this year, or $5.29 a share, on revenue of $22 billion, versus earnings of $4.3 billion, or $4.65 a share, on revenue of $19 billion in 2010. Shares fetch just 6.6 times 2011 estimates, versus an average price/earnings multiple of 12 in the past decade, and three times earnings before interest, taxes, depreciation and amortization, about half the historic range. "In a double-digit recession, if copper were to go to $1.50 a pound, I see the stock at $20 to $25," says Douglas Chudy, a value investor who follows Freeport for New York money manager Dalton Greiner Hartman Maher.

But for a host of reasons, Chudy doesn't see a recession or $1.50 copper—a price not far from the metal's 2008 nadir. Instead, he says, "copper fundamentals should remain solid for the next few years. I don't think 2011 will prove to be the peak in earnings. If copper gets back to $4, this is a $75 stock in the next couple of years."

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George Steinmetz/Corbis

Workers have struck at Freeport's Grasberg mine in Indonesia and elsewhere, forcing the company to mine higher-grade areas to compensate for lost production. The labor disputes have helped depress the shares.

Stephen Leeb, another New York money manager and author of Red Alert: How China's Growing Prosperity Threatens the American Way of Life, adds that investors "should view copper and Freeport as aggressive long-term buys." Others on Wall Street could be coming around to that view, as shares held steady late last week, even as copper prices skidded.

More than three-fourths of Freeport's revenue comes from copper, which has fallen to a recent $3.21 a pound from a February high of $4.66. Another tenth derives from gold, and the rest from molybdenum (a mineral that strengthens stainless steel), cobalt, silver and other metals. The company has 120 billion pounds of proven copper reserves, and around 100 billion pounds of other minerals, including gold.

Freeport reported last week that third-quarter earnings fell 11%, to $1.10 a share, because of disruptions at its giant Grasberg mine in Indonesia. Next year the company is expected to earn $4.9 billion, or $5.18 a share, assuming copper prices stay at current levels, which are below the $3.60 a pound that Freeport realized in the third quarter. Broadly, every 10-cent change in copper prices affects Freeport's earnings by 25 cents a share, although sensitivity can change based on production levels and the amount of byproducts mined.

FREEPORT, WHICH PRODUCES FOUR billion pounds of copper a year, says it will lose 100 million pounds of copper output and 100,000 ounces of gold production this year as a result of the strikes. At Grasberg, strikers have been killed and injured in confrontations with the police; they are seeking an eightfold increase in wages. Workers also walked off the job last month at Cerro Verde, Peru's third-largest copper mine, which is majority-owned by Freeport. Company executives declined to comment.

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These are sensitive and problematic issues. Yet speaking during the company's most recent earnings conference call, Freeport CEO Richard Adkerson noted that Grasberg is operating at "roughly two-thirds of normal rates," and that the company is mining higher-grade areas to compensate. Capacity utilization was higher in the period than analysts expected, while net extraction costs for Freeport, the lowest-cost copper miner in the world, stayed at a modest 80 cents, owing to high gold prices. Jorge Beristain of Deutsche Bank assumes that each 10% increase in wages at Grasberg would reduce earnings per share by three pennies.

CHINA'S COPPER INVENTORIES, a critical factor in the market, were larger than expected at the end of 2010. In this year's first half, China was thought to have been destocking, but today there are signs it is back in the market. London Metal Exchange warehouses are said to be making major copper deliveries, while the price of physical copper in China is rising.

Long term, copper is becoming scarcer, given more demand from emerging markets and few new big sources of supply. "At prices much below $3 a pound and oil above $80"—which makes mining more expensive—"it is not clear that meaningful additional supplies of copper can be brought to the market, barring a technological miracle," says Leeb. "A resumption of even modest worldwide growth without major technological innovations will imply copper prices dramatically higher than fairly recent all-time highs."

Freeport will be a major beneficiary. The company is far healthier than in 2008, when it had $6.5 billion of net debt stemming from its 2007 acquisition of Phelps Dodge. It since has reduced debt and instead is sitting on $1.6 billion of net cash. With copper at $3.25 a pound, the company would have annual operating cash flow of $7 billion—sufficient to cover its capital-spending needs, taxes and $1 billion of annual dividends.

The Bottom Line

Freeport trades around 35 but could rise to $75 a share in several years if copper works its way up to $4 a pound from a recent $3.21.

Freeport plans to boost supply sharply, adding a billion pounds of copper production by 2016 by expanding its mines in Morenci, Ariz., and elsewhere in the U.S., and at Cerro Verde and Tenke Fungurume in Congo. Last week it said it would boost capital spending by $1 billion, to $3.7 billion next year.

Freeport's $33 billion market value is far below replacement value, or the value to a strategic buyer seeking decades of reserves. This year Barrick Gold (ABX) paid $7.5 billion to buy Australian copper miner Equinox Minerals, a price, says Credit Suisse, that would peg Freeport's copper resources at about $123 billion, or $129 a share—not including its gold or molybdenum.

Such calculations could present a golden opportunity for mining giants with lots of cash, such as Rio Tinto (RIO), BHP Billiton (BHP), or Brazil's Vale (VALE). Sometimes it's cheaper to mine for copper on Wall Street. 

Mining for Value

Freeport could be a tasty morsel for cash-rich mining giants such as Rio Tinto, Vale and BHP. Its shares yield 2.9%.

	Recent	12-Month	EPS	P/E
Company/Ticker	Price	Change	2012E	2012E
Freeport-McMoRan Copper & Gold/FCX	$34.79	-27.0%	$5.18	6.7
Rio Tinto/RIO	47.92	-25.5	9.53	5.0
BHP Billiton/BHP*	72.64	-10.7	8.53	8.5
Vale/VALE	22.21	-32.5	4.67	4.8
Barrick Gold/ABX	44.33	-3.4	6.08	7.3
E=Estimate. *Fiscal year ends June. Source: Thomson Reuters

E-mail: editors@barrons.com

 

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GATA - Gold Anti Trust Action Committee

Gold Anti Trust Action Committee spat with Jeff Christian getting personal

The war of words between GATA and CPM's Jeff Christian is getting increasingly bitter coming to a head after a debate at the Silver Summit conference in Spokane (Link to video of the debate attached).

Author: Lawrence Williams
Posted: Sunday , 23 Oct 2011

LONDON -

The war of words between the Gold Anti Trust Action Comittee, GATA, and CPM Group managing director and founder Jeff Christian seems to be escalating. First Christian accused GATA in an interview as "a group that makes money by basically bilking gold investors out of fees to support GATA so they don't have to get legitimate jobs." And most recently, after a debate between Bill Murphy of GATA and Christian at the Silver Summit meeting in Spokane, GATA secretary Chris Powell accused Christian of "graduating from his usual distortions to outright contrivance."
There is obviously little love lost between GATA and Christian. The former is convinced that Governments, Central Banks and their banking sector allies and some major gold mining companies are, or have been, complicit in suppressing the global price of gold, whereas Christian is firmly on the side of the status quo which disputes this.

Indeed many in the establishment mainstream will not openly recognise that GATA maybe has a point - even though it has certainly produced documentation obtained through the U.S. Freedom of Information Act which would on the face of things appear to support at least part of its case. Indeed if one assumes that Governments as a matter of course manipulate currency exchange rates, then there is logic in their manipulating the gold price too as many throughout the world consider gold as money (currency) and that a rise in the gold price thus equates to a depreciation in currencies - notably the US dollar. Why major gold mining companies might also be complicit in this suppression is perhaps a little more obscure.

But recently Gillian Tett, the award winning U.S. Managing Editor of the Financial Times, a newspaper which is frequently the subject of GATA opprobrium as being on the side of the establishment, did seem to concede that GATA's views should not be dismissed out of hand. "For my money, though" says Tett, " I think there are at least two reasons why it would be foolish simply to deride or ignore GATA. Firstly, some of its points have at least a grain of truth. Even if you find it hard to believe that central bankers would be dastardly enough to create a plot -- or competent enough to do what GATA claims -- the fact is that global commodity markets are pretty murky, central banks are often opaque, and Western rhetoric about "free" markets is often hypocritical. Those issues merit far more debate, not just among journalists but central bankers too."

One has to give Christian credit for potentially throwing himself to the wolves at the Silver Summit - very much a pro-GATA group. Indeed it is probably doubtful if any in the audience would have been sympathetic to Christian's views. There is very much a divide between GATA-friendly conferences and those which the mainstream commentators normally attend, although it is interesting that the principal GATA view proponents seldom attend the latter, and vice versa, but whether this is because they are not welcomed or choose just not to go is perhaps uncertain. To a relatively impartial observer though the GATA conferences are certainly more fun - at least judging by the recent GATA event held here in London - even if being rather more than one-sided in the views expressed!

In truth, the actual debate at the Silver Summit was, in the writer's view, a little disappointing with perhaps insufficient time, or opportunity, for either party to make any killing arguments one way or the other. A link to the video follows so readers can make their own judgements: http://www.youtube.com/watch?v=7hnIqE1_ZGU


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Aristotle's Qualities of a Good Money - Gold Speculator

Aristotle's Qualities of a Good Money

By Gold Investing 101
Published: December 08, 2008

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About 2000 years ago Aristotle defined the characteristics of a good form of money. They were as follows:

1.) It must be durable. Meaning it must stand the test of time and the elements. Money is a medium of exchange and a store of wealth so whatever form it takes, it must be able to handle the wear and tear of constant trading and transactions.

2.) It must be portable. Meaning it should be practical in the sense that it holds a high amount of 'worth' relative to it's weight and size. In other words, it's "worth" must be very dense. Imagine if money was in the form of lead bricks, these bricks would be very dense, but it would be a nightmare and near impossible to constantly exchange large amounts. And you can forget about carrying them around in your pockets.

3.) It must be divisible and consistent. Meaning it should be relatively easy to separate and distribute in smaller forms without affecting it's fundamental characteristics. This concept also works in reverse in that it should be relatively easy to re-combine several divided pieces of the money into a larger, single piece. This makes houses and paintings and cars unpractical as forms of money because taking them apart would affect their fundamental characteristics. An extension of this idea is that the item should be 'fungible'. Dictionary.com describes fungible as:

"(esp. of goods) being of such nature or kind as to be freely exchangeable or replaceable, in whole or in part, for another of like nature or kind."

4.) It must have intrinsic value. This characteristic carries a bit of a subjective quality in that everyone views the world through a different lens and what I view as valuable may not necessarily be valuable to my neighbor, but for the sake of argument let's just say that there is a consensus of value given to a certain material. The basic understanding behind intrinsic value is that the material carries 'worth' in and of itself. It does not derive it's value from anything else. It just sits there and is valuable. This is why paper currencies with no backing will not stand the test of time. Paper currencies only derive their "value" from what is known as legal tender laws, which are in essence a threat of legal prosecution, and or force, if they are not accepted as money for payment.

This fourth point brings up the point of scarcity, which is in essence a matter of intrinsic value. Paper currencies in circulation today, such as the dollar, euro, yen, swiss francs, zimbabwe dollars, etc... they are all now purely fiat instruments. (by fiat, I mean that their use is declared by decree and usually by threat of force. Definition of fiat.) The governments that sponsor them have essentially unlimited power in their ability to create new supplies. Because of technology, it is now simply a matter of typing something into a computer and the amounts are instantly credited somewhere. So in theory the supply of dollars for instance is infinite, and it seems like lately the wizards in Washington are trying to see whether this theoretical limit can be reached. Take Zimbabwe as a practical real world example. It now takes trillions of Zimbabwe dollars to buy a roll of toilet paper.


Not a good form of money:



Not a good form of money:

This image has been resized. Click on image to view full size.

A good form of money:



Do me a favor and think about it,
-Pip

Aristotle's Qualities of a Good Money - Gold Speculator

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