There has been a flurry of new related to Freeport-McMoRan (FCX, Financial) in the recent past and the stock has reacted negatively to some of the news. As a result, Freeport-McMoRan currently trades at $19.24. This article discusses the reasons to gradually accumulate Freeport-McMoRan with an investment horizon on 3-5 years. I must caution at the onset that I don’t expect the stock to surge immediately or over the next 3-6 months. However, this is certainly a good time to consider gradual exposure to the stock considering the valuations.
Starting with the valuations, Freeport-McMoRan is currently trading at an EV/EBITDA of 4.55, a price to book of 0.96 and price to sales of 0.94. In addition, the stock is trading a forward PE of 11.9 and a five year forward PEG of 0.25. Clearly, the valuation metrics show that the stock is trading at very attractive levels.
Coming to the recent news, on January 20, 2015, Indonesia warned Freeport-McMoRan that the company can lose its export permit if the company does not show any progress in developing its new copper smelter in the country. The problems in Indonesia have sustained in the recent past for Freeport-McMoRan and the stock has been negatively impacted.
As a result of the warning coming from Indonesia, Freeport-McMoRan announced on January 22, 2015 that the company plans to invest about $17 billion to build a copper smelter and develop its gold and copper mines in Indonesia. While the copper smelter is likely to be built at a cost of $2 billion, the company will be investing $15 billion on long-term development of underground copper and gold deposits at its Grasberg mine complex.
With this announcement, the Indonesian authorities extended the company’s export permit on January 24, 2015. The export permit has been extended by six months and further extension is likely to depend on the development work that is initiated on the new copper smelter.
The latest news come from an Indonesian company official and according to the news, Freeport-McMoRan is likely to export 500,000 tonnes of copper concentrate from its Indonesian operations over the next six months, down 100,000 tons from the previous six months.
Therefore, there has been a lot of action on the Indonesia front in the recent past and I believe that the overall outlook remains positive considering the point that Freeport-McMoRan has committed to invest in Indonesia and the export permit has also been extended.
With the relation between Indonesia and Freeport-McMoRan being mutually beneficial, it is unlikely that exports from Indonesia will be halted and it is also unlikely that Freeport-McMoRan will not be willing to invest more in the country for the long-term. Therefore, the near-term issues and the decline in exports can be used as an opportunity to consider some long-term exposure to the stock.
The reason to consider gradual exposure is Chin and oil prices. China’s economy remains sluggish and growth in China is likely to remain weak through 2015. This is negative for Freeport-McMoRan in the near-term. Further, one of the big EBITDA growth drivers for Freeport-McMoRan is the company’s offshore oil and gas segment. With oil prices at low levels, the segment is likely to take a hit until there is meaningful recovery in oil prices.
Therefore, there are challenges as well as an opportunity from a valuation perspective. However, I believe that the opportunity is significant as Freeport-McMoRan has strong fundamentals and the company looks good to navigate the current crisis and trend higher once the commodity and oil market stabilizes.
