When Freeport-McMoRan Copper & Gold (NYSE: FCX) announced $9 billion in energy acquisitions, the market reaction was fast and furious: Over a two-day period, the stock plunged from nearly 40 to barely 30, and the panic was palpable.
To be sure, few expected the purchase of Plains Exploration (NYSE: PXP) for $6.9 billion and former unit McMoRan Exploration (NYSE: MMR) for $2.1 billion. Freeport had been ramping up copper output, and to a lesser extent molybdenum, and conventional wisdom was the next target would be from those businesses.
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The post-deal company will garner roughly a quarter of cash flow from energy production. And the percentage is likely to rise going forward, as the company spends approximately $2.5 billion to develop oil and gas in 2013, out of a total capital budget of $7.1 billion.
But Freeport’s is hardly the only energy purchase by a mining company in recent years. In fact, there have been 19 such acquisitions in 2012 with a combined value of $19.6 billion, according to data compiled by Bloomberg. That follows 13 deals for $20.2 billion in 2011, $7.3 billion in 2010 and $260 million in 2009.
Miners must go ever-further, ever-deeper and ever-more dangerously to secure supplies of vital resources. Adding energy—which is far less volatile-priced over time than for example copper—will help leaven out Freeport’s earnings as it follows through on its ambitious plans to meet demand for the red metal from China. And Freeport knows the assets and the players it’s combining with, having spun them out 18 years ago.
The post-deal Freeport will have greater scale and ability to follow through with its development plans, even if the global economy should weaken in 2013. The deal also cuts the company’s dependence on politically volatile areas, such as Indonesia and Africa, and brings operations in the US to nearly half of cash flow. Management has pledged to maintain the company’s generous dividend policy as well.
Immediately following the deal, six research houses downgraded the stock. S&P cut Freeport’s outlook to “negative” on “the leveraged nature of the transactions,” and Fitch put the company on negative credit watch.
Just a few weeks later, however, that reaction appears extremely overwrought to say the least. Exhibit A is the company’s announcement this week of fourth-quarter 2012 earnings.
Excluding an environmental expense and insurance gain, profits per share came in at 74 cents, topping estimates handily. Copper sales rose 18 percent from the previous year’s fourth quarter, topping the company’s own forecast and virtually all analysts’ expectations. Robust production of copper and gold in the Americas was the primary reason and the company benefitted from a relative lack of labor strife at its Grasberg mine in Indonesia. That offset lower selling prices.
Grasberg was once Freeport’s signature asset, a fact that made the company extremely exposed to potential for resource nationalism. The company’s biggest achievement in recent years has been using the cash flows from that low-cost mine to build a portfolio of extremely rich properties in more historically stable places.
China dominates global demand for copper and its growth will set the price in coming years. That makes accelerating economic growth in the Middle Kingdom last quarter a very welcome sign for Freeport in 2013.
The stock has moved up to the $35 range, as passions regarding the energy deal have cooled, and some analysts have shifted to a more bullish stance. Given the strength of these numbers, it’s likely we’ll see more follow through.
The real potential of Freeport, however, is long-term, as it ramps up copper production to a projected annual rate of more than 5 billion pounds by 2015. The company now projects sales of 4.3 billion in 2013, up from 3.65 billion in 2012. That’s supplemented by growth in molybdenum, gold and now cobalt, following the company’s purchase of a 56 percent interest in a Finland refinery.
That deal is in conjunction with cobalt miner Lundin, which will own 24 percent of the facility and supply it with production from a mine in the Democratic Republic of the Congo. The latter has been a problematic place for mining companies to invest at times. But Freeport’s exposure from this deal is limited to the facility.
It’s fashionable to second-guess executives who do a big deal, particularly in the mining industry where several high-profile transactions have backfired in recent years.
This is one company, however, that’s consistently made good deals for shareholders. And in light of these numbers, Freeport appears on track and focused for further growth.
This article was written by Roger Conrad.