Freeport-McMoRan's Earnings Strike Gold


Following the market's unmistakable disappointment with Freeport-McMoRan Copper & Gold's surprise announcement last month regarding the pending acquisitions of Plains Exploration & Production and McMoRan Exploration , the miner's fourth-quarter earnings released Tuesday helped it to close out a very difficult year on a more positive note.

Helped by strong fourth-quarter production volumes, Freeport blasted through analysts' expectations to deliver net income of $743 million, or $0.78 per share. Combining a relatively upbeat assessment of key markets in China and the U.S. with an outlook for strong growth in production volume during 2013, the release sparked a 5% rally in the shares Tuesday.

But even with that rally, the stock's remarkably low multiple of less than eight times projected 2013 earnings reflects widespread consternation over the pending $20 billion transactions (including acquired debt) with an unexpected move into oil and gas. The company's pro forma earnings projections for the combined companies in 2013 -- featuring robust EBITDA of $12 billion -- appears to be taking a back burner to concerns regarding the alarming pro forma debt burden of $20 billion. In addition, a legal challenge from a pair of institutional investors has alleged "a credible basis to believe that Freeport is dramatically overpaying for its acquisitions ... to improperly benefit Freeport's chairman and certain other insiders." Motley Fool contributor David Lee Smith has also sounded off on those apparent conflicts of interest.

Looking exclusively to the company's mining operations, meanwhile, the impending return to higher-grade ore zones at the critical Grasberg operation in Indonesia -- particularly during the fourth quarter of 2013 -- is poised to restore the roughly 400,000 ounces of gold production declines that helped make 2012 such a deeply challenging year for the company. But the restored output does come at a cost, as Freeport intends to invest some $3.6 billion over the next five years in transitioning operations at Grasberg from the open pit to the underground mines. Look for restored output levels at Grasberg to boost Rio Tinto's copper output as well, since Rio Tinto's Grasberg interest grants the company 40% of production "above specific levels" until 2021 (and 40% of all production thereafter).

All told, the company anticipates an 18% surge in consolidated copper production as multiple brownfield expansions bear fruit. Steady cost projections for the company's molybdenum mines offer the promise of healthy operating margins to coincide with an expected 8% jump in molybdenum output for 2013.

And in an interesting move to coincide with the looming expansion of Freeport's Tenke mine in the Congo, Freeport will invest between $227.5 million and $304 million for a 56% operating stake in a cobalt chemical refinery in Finland currently owned by OM Group . According to the earnings release, that refinery will provide "direct end-market access for the cobalt hydroxide production at Tenke." Perhaps if Freeport had limited itself to acquisitions like this one, which makes strong strategic sense, then this miner's shares would more properly reflect the value of meaningful growth and improvement currently underway within its high-quality mine portfolio.

After putting together a blockbuster deal to expand into the oil and natural gas industry, Freeport-McMoRan will have plenty on its plate as it tries to adapt to the new industry, as expanding into oil and gas carries plenty of inherent volatility. FCX had a profitable copper business, and on top of this foray into a new industry it still has to contend with mining industry bellwether BHP Billiton. To help investors determine if Freeport-McMoRan is a buy or a sell, we've compiled a brand new premium report on the company! Click here now to gain instant access!

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Fool contributor Christopher Barker has no position in any stocks mentioned. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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