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It's Time for a Freeport-McMoRan Copper & Gold Rethinking

Commodities prices have taken it on the chin in the past few weeks. One of the hardest hit was copper, which has largely been the victim of concerns about China's apparently softening economy, among other factors.

Clearly, one of the key victims has been Freeport-McMoRan Copper & Gold  (NYSE: FCX  ) , which continues to see its share price rise or fall virtually in concert with the red metal, despite having added a pair of sizable oil and gas operations to its repertoire. The company was affected by copper having dropped to about $2.95 a pound recently, after having oscillated in the $3.20 to $3.30 range during the second half of last year. Largely as a result, Freeport's share price, which inched up about 10% during 2013, has dropped by more than 17% thus far this year.

Freeport's Climax molybdenum mine.

China's economic numbers weren't uniformly horrible
China's impact on copper prices has been multifaceted. For starters, as we moved into last week, the country reported a February export decline of 18%, year over year. That represented a rather significant miss from the positive 7% consensus expectation. But rather than run screaming for the exits vis-a-vis the big country, investors should know that China's import figure -- a far sounder indicator of internal economic strength -- was up nearly 11%.

At the same time, China's inflation rate has dipped to 2%, and is now sitting well below the 3.5% that constitutes the central bank's target. As such, there's one less impediment to a 2014 growth rate near 7%. So while the markets were also shaken by China's first corporate bond default, I'm convinced that the hand-wringing about the country -- which accounts for about 40% of the world's copper demand -- has been overdone.

Indonesia desperately needs copper revenues
Another significant speed bump for Freeport has been a dustup with the government of Indonesia. As you know, the company's Grasberg copper and gold mine in Papua, Indonesia, constitutes a giant asset for the company. It's also been the site of a host of headaches for Freeport in recent years.

The current one is a still-ongoing effort by Indonesian authorities to thwart the export of unprocessed copper and other metals from the country. In addition to Freeport, the effort, which manifests itself in a 25% tax on mineral concentrates (scheduled to reach 60% by the second half of 2016) is also affecting Newmont Mining  (NYSE: NEM  ) , which operates the Batu Hijau mine in the country.

Both companies have refused to pay the tax and have effectively suspended copper shipments from Indonesia in the face of the government's unilateral moves. The companies maintain that the imposition of the tax violates the terms of their original pacts with the country.

Freeport and Newmont control essentially all of Indonesia's copper reserves. On that basis, and with talks continuing between senior executives of the companies and the country's powers that be, I'd be extremely surprised by a continued impasse as we reach midyear.

A liquids boost
Beyond its mining operations, Freeport is benefiting from a host of oil and gas plays, all onshore in the United States or in U.S. waters. They were added in the second quarter of 2013 when the company completed the acquisitions of Plains Exploration & Production Company and McMoRan Exploration Co. While the initial announcement of the impending purchases was generally met with disdain among investors, it's subsequently become clear that the newly added properties almost certainly will benefit Freeport substantially in the years ahead.

The key properties are located in the deepwater Gulf of Mexico, the emerging shallow waters atop the Gulf's Continental Shelf, the prolific Eagle Ford play in South Texas, the Haynesville Shale in Louisiana and Texas, and both on- and offshore California. With more than 90% of the company's production in oil and natural gas liquids, the new energy operations added $1.2 billion in revenues during the fourth quarter alone.

Compelling metrics
There are a couple of metrics that, to my mind, indicate that Freeport is undervalued. For instance, its trailing P/E below 12 times compares with 14.4 times for Southern Copper (NYSE: SCCO  ) , its Phoenix-based neighbor, which operates solely in Latin America. At the same time, Southern Copper's PEG ratio is a hardly shameful 1.29, but it doesn't compare with Freeport's amazing 0.41. And Freeport shares come with a forward yield of 4.00%, to 1.70% for Southern.

Foolish takeaway
Given all of the above -- and I admittedly haven't mentioned Freeport's geographically diverse, expandable, and long-lived assets -- I'm of the opinion that we're at a solid entry point for the company, especially for Fools with at least a modicum of patience. Indeed, I own Freeport shares, and I'm happy to do so.

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David Smith

A longtime securities analyst and multiple-term member of The Wall Street Journal's All-Star Research team, Dave specializes in energy and natural resources.

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