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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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%.
E-mail: editors@barrons.com
