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There's a shakeup occurring in the metals and mining space, which investors would be wise to consider going forward. Freeport-McMoRan Copper & Gold (NYSE: FCX ) intends to not just enter the U.S. oil and gas space, but to do so in a meaningful way with high-quality assets that, in the company's estimation, will position it as an industry leader.
Freeport classifies itself as a premier natural resource company, and the company's strategic initiatives undertaken in this regard lead me to believe this is an attainable objective. In two separate transactions totaling $19 billion, Freeport acquired Plains Exploration and McMoRan Exploration, and the company now believes it has the ability to become a diversified resources powerhouse. Here's what fuels such management optimism.
A natural resource conglomerate in the making
The two acquisitions allow Freeport McMoRan entry into deepwater drilling, which is on a clear upswing thanks to the global boom in oil production, particularly in the area of offshore production. In addition, Freeport now has access to promising fields, including Haynesville and the Eagle Ford, where production should be strong. Because of this, Freeport already has ambitious plans—its goal is to double oil and gas production over the next five years. This will result in oil and gas operations comprising a fairly large portion of Freeport's overall business. In total, the company expects 25% of its 2014 earnings before interest, taxes, depreciation, and amortization (EBITDA) to come from its oil and gas businesses.
Thankfully for investors, Freeport is not undertaking its empire-building plans at the expense of the balance sheet. Although it's allocated billions to its oil and gas pursuits, the company maintains tight oversight over its financial position. The company's net debt position stands at $17.2 billion, which it plans to reduce to $12 billion over the next three years. In addition, Freeport will target opportunities going forward to refinance debt related to its acquisitions, to further bolster its financial condition.
Not just a pure-play minerals company
Unlike its major U.S.-based competitors within the minerals space, Southern Copper (NYSE: SCCO ) and Newmont Mining (NYSE: NEM ) , Freeport is no longer just a minerals company. Southern Copper and Newmont Mining remain steadfast in their positions as pure-play miners, which will likely result in a tough road ahead due to gold falling in price over the past several months and copper prices languishing at low levels.
In addition, production woes provide a further headwind for Newmont. Newmont's preliminary projections are for third-quarter copper production to fall 3% year over year, driven by weakness in one of its key geographic regions, South America, where total production is expected to drop by 24% versus the same quarter last year. This was the major factor behind the company's decisions to slash its dividend. Newmont just announced its fourth-quarter shareholder payout will be 42% lower year over year.
Southern Copper, meanwhile, is keeping production growth intact, but is nonetheless hurting from poor metals pricing. Sales volumes of zinc, molybdenum, and silver are all up through the first nine months of the year, but total revenue is down 12% versus the same period last year. Moreover, consider that Southern Copper's capital expenditures through the first three quarters of the year rose a whopping 78%, and when taken together, these factors have dragged down net income by nearly 14% over the first nine months of 2013. Unfortunately, like Newmont, Southern Copper reduced its own dividend, by half versus the same quarterly payout last year.
That being said, Southern Copper's management is optimistic that its massive investments will pay off in short order, which couldn't come at a better time for shareholders. Much of the increase in capital expenditures pertains to expansion of the company's Buenavista project, where the substantial investments are projected to result in copper production increasing from 180,000 tons to 495,000 tons by 2016. This, combined with the fact that Southern Copper doubled its share buyback program from $1 billion to $2 billion, likely indicates management feels its company's shares are undervalued.
The bottom line
While it appears Southern Copper is positioning itself for future success, indicated by its accelerating production and strong capital investments, it, along with Newmont Mining, remains a pure-play metal company. That in itself may not be a bad thing, assuming metals prices turn favorable sooner rather than later, but Freeport has much more ambitious plans. As opposed to its peers, Freeport is making huge strides to expand its presence outside minerals, and if management expectations prove accurate, the company may be at the beginning stages of becoming a true natural resources juggernaut.
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