Just like other metals, copper is under pressure this year, down 14%. In the meantime, this is one of the best performances across the metal board, because copper has wide industrial implications. The leading copper producer, Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX), is down 14% this year as well. The stock is trading at a multi-year support level. Is it time to get in?
Pros
Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) has diversified into the oil & gas business with the acquisition of Mcmoran Exploration Co (NYSE:MMR) and Plains Exploration & Production Company (NYSE:PXP). Oil prices have been stable this year, so the demand for oil services is expected to be healthy as well.
The company has successfully dealt with a recent accident at its huge Grasberg mine in Indonesia. Operations at the mine were suspended after a tunnel collapse killed several miners. On June 24, the company stated that it had resumed open-pit mining and concentrating operations at Grasberg. Underground operations are still shut down, but the company is working towards resuming them as well.
Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) is operating profitably at a healthy 30% margin. Although the recent decline in copper prices does not improve outlook for profitability, it does not pose any threat to company’s operations. You can compare this to the situation in gold miners, for example, where the drop in the gold prices puts questions about sustainability of some companies’ operations.
Cons
The slowdown in China looks like it is for real. This is the new reality that companies must get accustomed to. As a result, copper price forecasts are being cut by multiple analysts, both sell-side and buy-side ones.
Earnings estimates for Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) have followed copper prices on their way down. Estimates for the current quarter have dropped more than 50% in just 90 days. However, the company has beaten earnings estimates in three out of four most recent reports. We’ll have a chance to see if this happens again in mid July, when Freeport-McMoRan would be presenting its quarterly report.
The acquisitions were taken with the help of debt. Quite a lot of debt, by the way. The company has issued $6.5 billion of senior notes and borrowed $4 billion in term loan. The first bond repayment is due in 2018, which gives Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) plenty of time.
Alternatives
Looking for other ways to get exposure to copper? Consider Southern Copper Corp (NYSE:SCCO) and Vale SA (ADR) (NYSE:VALE). Southern Copper has lost 26% this year. At current prices, the company trades at 12.5 forward P/E. Southern Copper pays a dividend that yields 2.90% and operates at a very healthy 49.7% margin. The company has most of its operations in Mexico and Peru, and exploration projects in Chile. Southern Copper Corp (NYSE:SCCO) is more dependent on copper prices than Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX). If copper prices start to rebound, Southern Copper could rise faster than Freeport-McMoRan.
