Last year will go down as a real transformational year for Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX). The megadeal to add oil to its portfolio added a bit of complexity, but that deal appears to be paying off. Because of this added diversification, the company was able to deliver a positive return to its investors of 17% last year when including dividends.
That's significantly better than most of its mining peers. Gold stocks crumbled last year as companies like Goldcorp (NYSE:GG), for example, lost nearly 40% of its value last year. Meanwhile, copper stocks didn't fare much better as Southern Copper Corp (NYSE:SCCO), for example, lost 23% of its value. Diversification really saved Freeport-McMoRan from suffering similar results. That said, the company's future is still greatly affected by one number above all others: the price of copper.
Copper is more than just its name
Last year Freeport-McMoRan sold 4.086 billion pounds of copper. That was well above the 3.648 billion pounds of copper it sold the year before. Looking ahead to this year, the company believes it will sell 4.4 billion pounds of copper. Further, thanks to a number of brownfield developments, Freeport-McMoRan has the ability to grow its annual copper production by a billion pounds by 2016. If it can do that without the cost overruns that have plagued the mining industry, Freeport-McMoRan should be able to create significant value for its investors.
But there still is the other side of the coin to consider -- which, of course, is a copper penny -- and that's the price of copper. Last year Freeport-McMoRan was able to sell its copper for an average of $3.30 per pound. That's down from the $3.60 per pound that the company saw in 2012. Taken another way, while copper sales volumes were up 12% on the year, copper revenue was up just 2.67% over the previous year thanks to lower copper prices.
Behind the numbers
Despite the added diversity into other commodities, Freeport-McMoRan's cash flows are still heavily tied to the price of copper. Looking ahead to 2014, for every $0.10 change in the price of copper, or about 3%, it will impact the company's cash flows by $370 million. While Freeport-McMoRan expects operating cash flow of $9 billion this year, that still means that each dime the price of copper drops it would impact the company's cash flow by 4%.
On the other hand, for a gold-focused company like Goldcorp, a $0.50 drop in the price of copper, or around 17%, would only impact its free cash flow by $30 million. For a company that produced $1.3 billion in cash flow over the past year, falling copper prices won't impact its business very much.
Freeport-McMoRan's addition of oil and gas is adding much needed diversification to a company that's highly levered to copper. That enabled it to vastly outperform copper peers like Southern Copper. But the price of copper will still have a significant impact on the company in 2014, where the company is banking on an average price of $3.25 per ounce to fuel its cash flow. So, while Freeport-McMoRan investors now need to watch the oil and gas industry as well as keep an eye on gold prices, the one number that still matters most is the price of copper.