Sunday, February 19, 2006

Freeport-McMoRan Copper & Gold Inc (FCX) Analysis

FCX is one of the world’s largest copper and gold mining and production operations in terms of reserves and production. We are also one of the lowest-cost copper producers in the world, after taking into account credits for related gold and silver production. FCX's principal asset is the Grasberg minerals district in Indonesia. FCX discovered the largest ore body in the district, Grasberg, in 1988. The Grasberg minerals district contains the largest single gold reserve and the second-largest copper reserves of any mine in the world. FCX also smelts and refines copper concentrates in Spain, as well as markets the refined copper products.

The company has the following financial policy. The policy is:
Maintain strong balance sheet and financial flexibility
Maintain regular quarterly dividend that can be sustained through broad range of commodity prices.
In times of high commodity prices, augment regular dividends with special dividends and share repurchases.

This is in general a good policy and it is always good to see a company that has very clear objectives. The company's share prices have leaped ahead of the earnings in the past few months. Let us take a look at the stock to see if it is a buy at these prices.

The company's business is cyclical in nature. The earnings per share is dependent on the commodity prices. The higher the commodity prices, the higher will be the earnings. As an example, the earnings in 2004 were lesser than that in 2003. The revenues have steadily increased in the past five years helped in part by increasing commodity prices for gold, copper and silver. The stock holders equity has steadily increased over the past five years.

The revenues in 2005 were up almost 85% from 2004 looking at the first three quarters of 2005. The EPS almost tripled as cost and expenses rose at a much smaller percentage than revenue. The company also increased its dividends as per its financial policy. The mean target for the stock value is $59=00 this year. The EPS is expected to decline to 3.28 and 2.71 respectively in 2006 and 2007. Given the cyclical nature of the business, it is likely that we are at the peak of earnings before they start to decline. The decline is also largely related to commodity prices. If the EPS declines, it is also likely that the stock price will decline.

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