Freeport-McMoRan Copper & Gold Inc. (FCX), And Why Diversification Is Crucial

Gold is plunging and cooper entered a bear market in recent days; the fact that Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) is entering the oil and gas market is beginning to make more sense. Freeport has been heavily tied to the copper industry:

Freeport’s stock has been pressured by 10% in recent days on tumbling gold and copper prices. Freeport currently derives more than 80% of its revenue from cooper, but its foray into oil and gas should help diversify the company’s revenue.

In December 2012, Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) agreed to buy Plains Exploration & Production and McMoRan Exploration for around $9 billion. It will pay $6.9 billion for Plains (oil production) and $2.1 billion for McMoRan (natural gas driller).

Freeport expects the combined entity to generate operating cash flow of roughly $9 billion in 2013 compared to the $3.7 billion the company generated in 2012. What’s more is that the new additions should add significant synergies. Analysts expect EPS to grow nicely from $3.22 in 2012 to $4.10 in 2013 and $4.49 in 2014.

Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) is also progressing with its expansion initiatives in South America and is conducting pre-feasibility studies for a potential large-scale milling operation in Chile. What’s also encouraging is that sales outside the U.S. account for 65% of total performance. Freeport also has a couple billionaires that love the stock, including John Paulson (top hedge fund owner by shares) and Leon Cooperman.

Southern Copper Corp (NYSE:SCCO) is one of Freeport’s major competitors, acting as an integrated copper producer. All of its mining, smelting and refining facilities are located in Peru and Mexico.

Two other major metal miners include Rio Tinto plc (ADR) (NYSE:RIO) and Vale SA (ADR) (NYSE:VALE). Rio Tinto mines and processes mineral resources. Vale is a Brazil-based metals and mining company. However, much like the weight that copper prices have on Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX), these two companies have immense exposure to the steel industry.

Both companies have been hurt recently due to low steel demand and pressured iron-ore prices. However, tailwinds from GDP growth should help with increasing the steel and cooper demand.

In recent weeks, Vale posted fiscal second quarter results that fell 18% year-over-year due to lower sales, but the company still beat analysts’ estimates. The iron ore company reported net income of $3.1 billion for the quarter, while analysts had expected an average of $2.7 billion.

The result was still down from approximately $3.8 billion a year earlier, and 25% below the average $4 billion quarterly profit the producer of iron ore recorded for the previous 11 quarters. Analysts now expect the company to see earnings fall by annualized 3% over the next five years.

The big news for Rio Tinto plc (ADR) (NYSE:RIO) of late has been substantial write downs of its assets. This includes the $14.4 billion write down in 2012; $3.4 billion for Rio Tinto Coal Mozambique and $11.0 billion for the company’s aluminum assets.

For 2012, on a year-over-year basis, Rio experienced significant declines in its revenue due to the downward movement in the prices for iron ore, pellets and nickel. Rio Tinto plc (ADR) (NYSE:RIO)’s year-over-year decline was 16%. However, unlike Vale’s annualized negative 3% five-year expected EPS growth, analysts expect Rio to grow EPS at a rate of 16.8% annually.

Billionaire Ken Fisher is the top hedge fund owner by shares in both Rio Tinto plc (ADR) (NYSE:RIO) and Vale. However, beyond Fisher, the hedge fund interest in both of these stocks is minimal.

By the numbers

Compared to the other major miners, Freeport trades on the low end of the industry:

What’s also encouraging about Freeport is its relatively strong balance sheet.

Don’t be fooled

The move by Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) is a big positive, with the company moving away from gold and copper and into the energy markets. The deal should diversify Freeport, as well as offer new growth opportunities. Thus, the recent sell-off due to falling gold prices might be overblown, where gold accounts for less than 10% of revenue. Freeport also offers investors a robust 4.5% dividend yield.

The article Why Diversifying Is Key for This Copper Play originally appeared on Fool.com.

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