Freeport McMoran (FCX), the largest publicly traded copper company, reported 1st quarter earnings this morning before the open. The numbers were good: revenues up 24%, operating income up 62% and net income up 81%. That’s no surprise as copper prices are sky high and their average realized price per pound was $3.69.
Longer term, with 41 million proven and probable ounce of gold and 93 billion pounds of copper reserves, I believe Freeport is in excellent shape. The demand for raw materials is in a long term bull market with the industrialization of the rest of the world, such as China, India, Russia and Brazil. These reserves are probably worth $200 billion - almost 4 times Freeport’s enterprise value (market cap + net debt).
With high copper prices and the continued growth in China and India, FCX is very attractive at just 13 times earnings. The company pays out great quarterly dividends, but also pays supplemental dividends amounting to $3.50 last year. Acquiring Phelps Dodge will only help the long term outlook.
Analysts estimate China imported nearly 200,000 tons of copper in May, the seventh consecutive month in which it bought more than 100,000 tons on the international market," says Moroney. "International prices are higher than Chinese prices, so the country doesn’t import unless it must. Strong demand from China, the world’s largest copper consumer, should support prices even if demand from Europe and North America weakens further."
The company is highly dependent upon copper for its financial performance, so if you're uncomfortable with the inherent volatility, you'll want to invest elsewhere. "Freeport estimates that a $0.20-per-pound change in the price of copper affects per-share earnings by $1.09," says Moroney. "In 2007, Freeport averaged $3.23 per pound for the 3.88 billion pounds of copper it produced, and it averaged $3.69 per pound for copper in the March quarter, and copper futures point to prices above $3.40 per pound through May 2010."
Freeport estimates that it will boost copper production by 8% this year to 4.2 billion pounds as activity at its gargantuan Grasberg mine in Indonesia moves into more favorable sections.
"Selling for less than 10 times expected year-ahead earnings of $12.34 per share, Freeport trades well below the metals and mining average of nearly 15," says Moroney, who adds that Freeport shares are "likely to reach $150 over the next 12 months."