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3 Things to Watch With Freeport-McMoRan Copper & Gold

By Sean Williams – Updated Apr 7, 2017 at 1:07PM

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These three factors could hold the key to big gains with Freeport-McMoRan.

Freeport-McMoRan Copper & Gold (NYSE: FCX) is a global explorer and miner of mineral resources including copper, gold, molybdenum, silver, and various other metals. According to its website, Freeport currently possesses 102 billion pounds of copper, 40 million ounces of gold, 2.48 billion pounds of molybdenum, 266.6 million ounces of silver, and 700 million pounds of cobalt.

Today, let's look at three things investors should be watching regarding Freeport-McMoRan, as they will provide us with better insight into the company.

1. China, China, China!
I'm well aware that this headline is getting nauseatingly old, but the simple fact of the matter is that as one of the single-largest providers of copper in the world and with China using far more copper than any other country, the health of China will determine the stability of the copper market and Freeport's bottom line.

Details about copper's health have been relatively mixed in recent months. On one hand, China's GDP growth has been steadily reversing and is at multiyear lows -- although 7.5% growth is still pretty darn good if you ask me! Last week, however, we received positive news from China that it was planning to implement a $156 billion infrastructure project to stimulate its economy which, in turn, should call for a rise in imports of multiple metals from Freeport-McMoRan, including copper -- which is a commonly used metal in construction. This news has lit a temporary fire under both Freeport and Southern Copper (Nasdaq: SCCO), which holds the largest supply of copper reserves at 146 billion pounds. It's therefore imperative that Freeport investors keep a close eye on China.

2. Operating costs and efficiencies
One factor affecting miners of all sizes is the rising cost of building, expanding, and maintaining a mine. In Freeport's second quarter, its net unit cash cost of copper (which includes the positive benefits from by-product sales) rose an undesirably high 60% to $1.49 per pound from the year-ago quarter. That spike in costs comes from a multitude of factors including, a $500 million increase in capital expenditures through the first six months of 2012, the rising cost of fuel and labor, and the falling price of its by-products, including molybdenum.

Freeport shareholders shouldn't feel too bad, as they aren't alone. The cost to build Thompson Creek Metals' (NYSE: TC) copper and gold mine, Mt. Milligan, has doubled since it purchased Terrane Metals. Thompson Creek has needed to divest part of its gold assets in Mt. Milligan to Royal Gold (Nasdaq: RGLD) twice now to generate cash for the project.

With that being said, operational efficiency and cost-saving initiatives are musts for the mining sector. Freeport handles its costs by internalizing as much as it can and utilizing the hourglass approach to work with its suppliers to eliminate waste on both it and its suppliers' end. Freeport is also spending more now -- it had a $4 billion capital expenditures budget in 2012 -- in order to increase production and save more later. It has ongoing mine development projects at its flagship Morenci and Cerro Verde copper mines, and is working on restarting its molybdenum-producing Climax mine.

3. Balance sheet and dividends
One of the driving forces behind the rush into metal stocks in recent years -- other than as an inflationary hedge -- is that many companies have begun doling out dividends. Freeport has actually been parsing out dividends to its shareholders on a regular basis since 2003, and in recent years shareholders have seen an upside explosion in those payouts. Since 2007, Freeport's quarterly payout has doubled, yet it still stands at just 32% of total earnings, leaving the company plenty of room to boost its dividend higher if it chooses to.

Also important is Freeport's rare balance sheet. I say rare because it's incredibly odd for a mining company to boast a net cash position. Freeport's current net cash position stands at about $1 billion, which gives it incredible flexibility when it comes to acquisitions and expansion projects. Even though it's much larger, Rio Tinto (NYSE: RIO) doesn't have nearly that same flexibility with a net debt position in excess of $13 billion. Although both companies have nearly identical yields at the moment, it's Freeport that looks more likely of the two to bump its payout significantly higher.

Foolish roundup
Now that you know what to watch for, it should be easier to analyze Freeport-McMoRan's successes and pitfalls in the future and hopefully give you a competitive investing edge.

If you're still craving even more info on Freeport-McMoRan, I would recommend adding the stock to your free and personalized watchlist so you can keep up on all of the latest news with the company.

Keep in mind that with most precious and non-precious metals still near their decade-long highs, Freeport-McMoRan isn't the only miner standing to benefit. Our analysts at Stock Advisor have identified a small miner that could be sitting on a fortune and whose stock price could catapult significantly higher in the coming years. Find out which miner has our analysts so excited by clicking here to get your free special report.

Fool contributor Sean Williams owns shares of Thompson Creek Metals but has no material interest in any other companies mentioned in this article. You can follow him on Motley Fool CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Freeport-McMoRan Inc. Stock Quote
Freeport-McMoRan Inc.
$30.78 (4.91%) $1.44
Rio Tinto plc Stock Quote
Rio Tinto plc
$59.25 (3.95%) $2.25
Thompson Creek Metals Company Inc. Stock Quote
Thompson Creek Metals Company Inc.
Royal Gold, Inc. Stock Quote
Royal Gold, Inc.
$99.11 (2.75%) $2.65

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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