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Will Freeport-McMoRan Be Boosted By Its Energy Buys?

By David Smith - Apr 22, 2013 at 11:56AM

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With copper prices softening amid a sluggish worldwide economy, and a pair of controversial acquisitions in the hopper, it may be time to remain on the Freeport-McMoRan sidelines.

Freeport-McMoRan Copper & Gold (FCX -1.12%), the world's largest publicly traded copper producer, has reported reduced earnings for the first quarter of this year. But with copper sales surprising on the upside -- albeit amid lower prices -- the company was able to top the consensus per-share earnings estimate of the analysts who follow it.

For the quarter, Freeport's net income was $648 million, or $0.68 a share, a decline from $764 million, or $0.80 cents for the first quarter of 2012. However, without one-time items, the per-share figure for the most recent quarter was $0.73, two pennies higher than the analysts had anticipated. Revenues were $4.58 billion, a slight dip year over year from $4.61 billion.

Copper's prices slide but sales rise
Despite a slide in the price of copper from about $3.80 a pound in early October to approximately $3.15 in midday trading on Friday, the company was able to generate sales of 954 million pounds of the red metal during the quarter, a substantial increase from 827 million pounds for the comparable quarter of 2012. In the most recent quarter the company benefited from the completion of an expansion project at its Tenke Fungurume facility in the Democratic Republic of Congo. Also, with fewer disruptions than it experienced a year ago in Indonesia, copper sales from its the Grasberg operations rose by fully 48%.

Freeport operates seven open-pit copper mines in Arizona and New Mexico, and another four in Peru and Chile. Sales from the U.S. mines reached 353 million pounds, compared with 338 million pounds a year earlier. Product from the South American mines totaled 285 million pounds, down very slightly from 286 million pounds last year. And while gold sales were down year over year by 26% to 214 thousand ounces, molybdenum sales increased by 4 million pounds to 25 million pounds.

The pending purchases
Aside from its current core metals operations, Freeport is in the process of acquiring a pair of independent oil and gas producers, Plains Exploration & Production (NYSE: PXP) and McMoRan Exploration (NYSE: MMR). In December, Freeport announced that it would pay 0.6531 shares of its common stock and $25 in cash for each outstanding share of Plains. In addition, for McMoRan it stated that it would pay $14.75 in cash and 1.15 units of a royalty trust that will hold a 5% overriding royalty interest in McMoRan's shallow water and ultra-deepwater prospects.

The pending acquisitions were met with an at best lukewarm response when they were announced. Oil and gas is a technical departure for Freeport-McMoRan. I say "technical" because therein was the second rub: The three companies were replete with overlapping board and other relationships. For instance, James R. Moffett serves as both co-chairman of McMoRan and chairman of Freeport. And Kathleen Quirk, while serving as CFO of Freeport, is also treasurer of McMoRan.

Freeport CEO Richard Adkerson was, however, optimistic on his company's call about the fit between the metals company and the energy properties being acquired. Regarding the addition of McMoRan, he spoke of "... its pioneering effort to drill to very large attractive structures that have not been drilled before, but have the potential of achieving the kind of production that the industry is achieving in the deepwater."

Looking at Plains, he noted that the company is "... focused in large part in the deepwater Gulf of Mexico, where they recently acquired some strategic and very attractive assets from BP (BP 0.81%)... what this will do is add assets that are generating cash which will allow the oil and gas business to fund its capital expenditures and give our company and expanded growth profile with the benefits of having our geographical profile enhanced by more business in the United States."

The Foolish bottom line
Despite soft copper and gold prices, along with a general lack of enthusiasm about its pending acquisitions -- which are expected to close during the current quarter -- 47% of the analysts who follow Freeport McMoRan rate the company at least a buy. This compares with 87% of the analysts who follow its Phoenix-based neighbor Southern Copper (SCCO 1.46%) who rate that company no better than a hold.

Nevertheless, in the process of confession that I am a Freeport shareholder, I'd caution Fools to be wary of the further effects of a sluggish world economy on copper prices and potential disruptions from the Plains and McMoRan purchases. Overall, it appears to be an ideal time to remain on Freeport's sidelines.

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Stocks Mentioned

Freeport-McMoRan Inc. Stock Quote
Freeport-McMoRan Inc.
$36.31 (-1.12%) $0.41
BP p.l.c. Stock Quote
BP p.l.c.
$31.28 (0.81%) $0.25
Southern Copper Corporation Stock Quote
Southern Copper Corporation
$59.06 (1.46%) $0.85

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

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