On Oct 31, we reaffirmed our Neutral recommendation on Freeport-McMoRan ( FCX). While we are impressed by attractive opportunities arising from its recent acquisitions and expansion initiatives, we remain on the sidelines factoring in weak pricing and high costs.
Freeport’s revenues and adjusted earnings for third-quarter 2013, reported on Oct 22, topped Zacks Consensus Estimates. Profit, however, fell year over year on lower gold and copper pricing. The company’s acquisition of oil and gas operations boosted sales in the quarter. Freeport saw higher copper and gold sales in the reported quarter.
Freeport, a Zacks Rank #3 (Hold) stock, is conducting explorations close to its existing mines with a goal to boost reserves, which will facilitate the development of additional future production capacity. The company’s strategy is to pare debt and maintain a strong balance sheet, while investing in financially attractive projects and providing returns to shareholders.
Freeport made a major stride to venture into the U.S. energy space with the acquisitions of Plains Exploration and McMoRan Exploration. The buyouts ushered in new opportunities for the company. The combined entity is expected to emerge as a leading natural resource conglomerate in the U.S., leveraging Freeport’s industry-leading mineral assets and the oil and gas resources of Plains and McMoRan.
Freeport continues to progress with its expansion initiatives in Latin America. We are optimistic about its African operations considering the potential at the Tenke Fungurume minerals district in Democratic Republic of Congo.
However, we are concerned about higher production costs and weak pricing as these may continue to weigh on Freeport’s bottom line. Consolidated unit net cash costs for copper mines are expected to rise year over year in 2013, mostly due to an expected double-digit increase across North American and Indonesian operations. The uncertain copper pricing environment represents another concern.
Moreover, the company’s copper business remains affected by the sluggish global economy and supply related issues. Demand from key end markets, including construction materials and electronics, still remain somewhat soft due to the overall economic softness.
While Freeport’s Grasberg mine in Indonesia has resumed operation and is currently operating at full capacity, sales volumes for 2013 are expected to be lower than what expected earlier given the impact of the suspension of operations following the collapse of a tunnel. Uncertainties surrounding the mine may weigh on the stock.
Other Stocks to Consider
Other companies in the mining industry with favorable Zacks Rank are Franco-Nevada Corp. ( FNV), Pretium Resources Inc. ( PVG) and Allied Nevada Gold Corp. ( ANV). While Franco-Nevada and Pretium carry a Zacks Rank #1 (Strong Buy), Allied Nevada retain a Zacks Rank #2 (Buy).