By now, you've likely seen and digested Freeport-McMoRan Copper & Gold's (NYSE:FCX) results for the most recent quarter. So, the key question becomes one of the optimum approach for those considering initiating transactions in the company's stock.
After all, its shares have absorbed direct hits this year from the Indonesian government's determination to figuratively cut off its nose to spite its face, along with lower copper and gold prices. The latter factor relates, at least in part, to concerns that the once fast-moving Chinese economy may be showing signs of becoming winded.
For my money, however, those woes are now baked into Freeport's share price. If that's an accurate assessment, it should be sufficient to stir up new interest in the world's biggest publicly traded copper producer. And beyond that, there are at least five additional reasons I believe that the company's future stands to be brighter than its recent past.
The metrics: once over lightly
Before I describe those factors, however, let's take a quick gander at Freeport's key quarterly numbers, just in case you missed them. Net income fell to $510 million, or $0.49 a share, from the year-ago $648 million, or $0.68 per share. The analysts who track the company had expected a $0.42 per share bottom line. Revenues were $4.99 billion, up from $4.58 billion for the first quarter of 2013.
The income slide was tied to reduced copper and gold production, and to lower price realizations for both metals. Conversely, production at the newly absorbed oil and gas unit actually topped expectations by more than 5%.
The key emerging positives
With all of that established, let's examine the five reasons I'm betting on higher share prices for Freeport-McMoRan in the not-too-distant future:
- In mid-January, a law passed in 2009 in Indonesia went into effect prohibiting unprocessed minerals from being exported from that country. As such, production from Freeport's huge Grasberg complex in Papua, Indonesia, has effectively been halted. But in reality, the most direct effect from that restriction is being felt by the Indonesian economy. Also feeling some resulting pain is Newmont Mining (NYSE:NEM). The Colorado-based company operates the Batu Hijau mine in southern Taliwang Regency, an Indonesian island. It's important to note, however, that Freeport-McMoRan's management has stated that it's "actively engaged in reaching a resolution," which could allow a resumption of copper concentrates exports as early as May.
- Freeport is heading for the conclusion of its first full year as an oil and gas operator. When the acquisitions of Plains Exploration and McMoRan Exploration were announced in December 2012, investors were hardly euphoric. But as I've already noted, the first quarter was a good one for energy. As to the future, the now-combined oil and gas unit will clearly benefit from its operations in such major plays as the Eagle Ford and the deepwater Gulf of Mexico.
- Concerns about a flagging economy in China have dampened enthusiasm about copper -- along with prices for the red metal -- significantly. However, concerns about the big country, which accounts for 40% of the world's copper demand, should be ameliorated by a realization that growth in the country's all-important demand for imports remains in double digits.
- Freeport-McMoRan's debt level was raised substantially by the approximately $20 billion expended for its oil and gas acquisitions. However, management stated on Thursday that it "continues to target significant reduction in debt by the end of 2016..." Given the company's track record, e.g. the impressive pace at which it paid down debt accumulated several years ago in the purchase of Phelps Dodge, I'm a believer that the current debt level will be brought under control reasonably rapidly.
- Like most investors, I find insider share buying to be heartening, especially when the shares in question have suffered a setback. As such, I believe it's positive that James Flores, CEO of Freeport-McMoRan Oil & Gas, has acquired more than three million shares over the past several months. And during the same period, Gerald J. Ford, a director, has added a million shares, the same amount as Chairman James R. "Jim Bob" Moffett.
The Foolish bottom line
While I believe the worst is behind Freeport, and that is future is brightening, I'd note that at this time, the company's shares aren't for the faint of heart. If, however, you're able to employ a somewhat longer-than-usual investment time horizon, Freeport-McMoRan Copper & Gold might be just your ticket.