Wednesday January 09, 2013
by Adrian Day, editor Global Analyst
The outlook for copper—one of the best performing metals of the last few years—remains positive. China’s economic growth seems to be accelerating again; manufacturing was up over 10% last month and the new government has promised renewed infrastructure spending. This is positive for copper.
There is one clear candidate for investment, and that is Freeport Copper & Gold (FCX), the world’s largest publicly traded copper company.
It now has world-class mines in four continents, as well as refining operations and considerable gold (Grasberg is the world’s second largest gold producer), molybdenum (the world’s largest producer) and silver. Indeed, while copper accounts for about $16 billion in revenue, the other metals contribute about $4.5 billion.
Freeport is a well-managed and disciplined company and cheap on fundamentals, selling at 10 times earnings, and yielding 3.8%, generous by mining standards. The yield is even understated, since the company has a record of paying special dividends when there is excess cash flow.
Significantly, the balance sheet is very strong, with debt just 11% of assets, again very low for a capital-intensive mining company.
A sign of its strong cash flow and financial discipline is the speed with which it paid down the $26 billion in debt it took on to buy Phelps Dodge. It has also actively managed its debt, so that most maturities are now at least five years out.
This would have been the end of the story just a few weeks ago, when Freeport unexpectedly announced a deal to acquire two oil and gas companies, including McMoRan Oil, which had been spun out of Freeport in the 1990s and has overlapping management and directors; the second company, is McMoRan’s largest shareholder.
In addition to diversifying the company and improving its geographic-risk profile, the transaction gives Freeport another undervalued asset with world-class potential (575 million BOE reserves at just $15 a barrel).
But the move has proven to be controversial, and, as is typical when a company takes over another company at a premium, the acquirer’s stock price falls.
Freeport fell from almost $40 to the low $30s, giving us a great opportunity to buy this world-class company, a company with a great balance sheet and low multiples, and extraordinary potential in both copper and oil & gas.
We would buy Freeport here and expect to hold it a long time. Given the controversy over the oil & gas acquisitions, there is no need to pay over, say $33.70.
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