Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) recently announced plans to acquire Plains Exploration & Production and McMoRan Exploration for $3.4 billion (McMoRan) and $2.1 billion (Plains), net the 36% of McMoRan interests currently owned by Freeport and Plains. Billionaire George Soros is one Freeport’s biggest fans, upping his stake over 200% last quarter (see George Soros’ newest picks).
Freeport saw its shares take a dive after its planned acquisitions, and is still down 13% over the past month. The acquisitions are expected to close in 2Q 2013. Irrespective of the oil and gas additions to Freeport operations, sales are expected to be up 24% in 2013 on higher copper output and gold production. Added long-term growth is expected to come from a secular rise in demand in both of these markets.
Freeport is also the world’s largest producer of low-cost molybdenum, and has significant future potential reserve additions in North and South America, while remaining optimistic about its African operations.
Diversification in the oil and gas industry will likely place a lower multiple on the stock and reduce some investor attractiveness. We see the move as a long-term positive given the global economic rebound, which will increase the demand for energy and copper. Although the debt required to orchestrate the merger scares some investors, the fact that Freeport has a leading balance sheet with only 20% long-term debt-to-equity helps ease our fears.
From a valuation standpoint, Freeport is among the cheapest in the industry at 7x forward earnings. The stock also pays a solid dividend yielding 3.7%, which is only a 35% payout. Although the acquisitions will put pressure on the stock’s multiples in the short run, we believe that ultimately, Freeport should trade more in line with other competitors. Even at a 10x P/E on next year’s EPS estimates, the stock could see an upside of as much as 40% over the next 12 months.
What companies should we compare Freeport to?
Other major mining peers include Southern Copper Corp (NYSE:SCCO), Rio Tinto PLC (NYSE:RIO), Vale SA (NYSE:VALE) and BHP Billiton Limited (NYSE:BHP). Southern Copper is a copper producer with mines in Mexico and Peru, and has more exposure to the metal than Freeport. We like Freeport given its exposure to gold, though, which should bode well going forward. Southern paid a recent one-time dividend of $2.75, but its regular quarterly dividend has been erratic. Southern also trades well above Freeport at 17x earnings.
The three major natural resource miners include Rio Tinto, Vale and BHP. Rio is the most expensive of the three on a trailing P/E basis at 25x, but interestingly enough, it’s the cheapest on a forward P/E basis at 8x. Also boding well for Rio is its leading 17% long-term expected growth rate, well above its peers. Rio has a recent target of over $7 billion for spending cuts in order to boost profit margins. Billionaire Ken Fisher – founder of Fisher Asset Management and long-time Forbes columnist – is the top fund owner of Rio Tinto with over 11 million shares (see Ken Fisher’s big bets).
BHP recently sold its stake in Browse – a liquefied natural gas project in Australia – to PetroChina for $1.63 billion. This should help prop up BHP’s dividend – yielding 2.9% – after the company saw its cash position decline by over 50% during the past twelve months. BHP is mildly expensive at 16x forward earnings, but fails to present the growth prospects to back up the premium valuation; it sports a 6% long-term expected growth rate. One of BHP’s big-name investors is Steven Cohen of SAC Capital (check out Steven Cohen’s top bets).
Vale, meanwhile, pays the best dividend of the three natural gas stocks at 5.4% on a 50% payout. This is where the good news for investors runs out. The company is relatively flat year to date and recently announced plans to sell underperforming assets. This announcement comes after weak 3Q earnings and work stoppages at one of its mammoth ore mines in West Africa. Together, these issues put Vale’s long-term expected earnings growth at -20%. Ken Griffin of Citadel Investment Group is one Vale’s biggest backers, increasing his stake over 300% last quarter (see Ken Griffin’s new picks).
We believe that Freeport is one of the best miners in the industry, having solid exposure to copper and gold. The addition of Plains and McMoRan will help the company gain greater exposure to the base commodities that fuel global economies. For more related coverage, continue reading below:
How to profit from the copper turnaround
Vale: Mega mining company cuts CapEx
Freeport, Plains Exploration: When is a deal too close to home?
