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Published: July 21, 2010
Shares of copper and gold miner Freeport
McMoran (NYSE: FCX) are trading off of their early highs,
but still up a respectable +4%, thanks to surprisingly strong
second-quarter profits.
Quarterly results for this mining giant are based on two simple
factors. How much it can produce, and what price it can garner.
In this quarter, production was the key: FCX sold 289 million
pounds of copper in North America, 30% above analysts’
forecasts. (Sales of copper outside of North America, which
still account for 70% of output, were slightly below plan).
For a long time, shares of FCX were seen as
a proxy
for copper prices. Those prices soared toward the $4 per pound
mark in early 2008, pushing the company’s stock north of $100.
But as copper prices fell below $1.50 in late 2008 on the heels
of a quickly-slowing global economy, FCX shares lost more than
-80% of their value. Investors grew spooked by the fact that FCX
spends at least $1.50 per pound just to mine and transport
copper, so that weak price was a profit-killer.
Copper prices have since bounced back, and now trade just north
of $3. The company would love to see copper prices breach those
2008 highs, but that won’t happen any time soon. The world is
awash in nearly 150 million tons of copper, and that surplus
would need to be worked off to boost prices. The industry would
need to throttle back output sharply to work off that glut. But
as noted, the company intends to make up in volume what it can’t
achieve in price. For example, after selling 914 million pounds
of copper in the second quarter, it expects to boost that figure
to 970 million in the current quarter.
Freeport’s copper output accounts for about 70% of revenue. The
company also mines about one million ounces of gold every year,
and has clearly benefited from a price spike for the yellow
metal.
Freeport is likely to post sharply improved profits this year,
simply because 2009 contained an absolutely dismal first quarter
when it earned just $0.11 a share. (Other than that,
earnings per share (EPS) have remained fairly above $1.40 in
every other quarter of 2009 and thus far in 2010). Looking into
2011, expansions at key mines should boost output nicely,
pushing
EPS up almost +20% to $7.15 (assuming copper stays above $3
a pound). And that should translate into
earnings before interest, tax, depreciation and amortization
(EBITDA) exceeding $9 billion.
Action to Take --> By those
measures, this is a cheap stock. Shares have historically traded
at 11 times mid-cycle EPS, implying upside to near $90.
Similarly, shares are also undervalued at less than four times
projected 2011 EBITDA, on an
enterprise value basis. Applying a multiple of five times
also gets you to a $90 price target. Shares, at a recent $66,
have more than +30% upside toward that target.
Of course, investors should remember that this is a very
economically sensitive play, and the projections cited above
assume that the global economy will stay in this slow-growth
mode. Another economic downturn would hammer copper prices --
and the company’s profits. Copper prices have already fallen
-20% in the past three months on concerns of weakening demand
from China. Prices have started to firm in recent sessions,
indicating that those concerns may have been overblown.
-- David Sterman
Staff Writer
StreetAuthority |
