Ticker: FCX FREEPORT-MCMORAN
Sector: Basic Materials
Industry: Nonferrous Metals COPPER & GOLD INC.
Freeport-McMoRan Copper & Gold, Inc. is involved in the
Recommendation: HOLD exploration, mining, and production of copper, gold, and silver.
Freeport also smelts and refines copper concentrate and markets
the refined copper products1 Freeport is the world’s largest
Pricing publicly traded copper company (second only behind the
Closing Price $108.13 (10/8/07) government owned Corporacion Nacional del Cobre de Chile).2
52-wk High $48.85 (1/4/057
52-wk Low $112.18 (10/05/07)
Operations3
Stop Loss: $85.00 (recommend)
Freeport’s operations are conducted through three principal
Market Data subsidiaries: PT Freeport Indonesia, Phelps Dodge, and Atlantic
Market Cap $42.24B Copper.
Total assets $9.87B
Trading vol 9.04M (3mon avg) Freeport owns approximately 90.64% of PT Freeport Indonesia.
The remaining 9.36% is owned by the Government of
Indonesia.4 PT Freeport Indonesia’s principal operation is the
Valuation Grasberg mine. Its holdings also include a 25% share of PT
EPS (ttm) $8.46 Smelting. The Grasbert mine, discovered in 1988, is the largest
P/E (ttm) 13.08
single copper and gold reserve in the world. Freeport has a 30
PEG 1.21
Div Yield 1.20%
year exclusive operation contract for the Grasbert mine with
provisions for two ten year extensions to 20415
Profitability & Effectiveness (ttm) In May 2007, Freeport acquired Phelps Dodge. Phelps Dodge is
ROA 15.14% a producer of copper and molybdenum. It operates mines and
ROE 25.57% processing facilities in North America, South America, and
Profit Margin 21.68% Europe. It also has the processing capabilities mineral by
Oper Margin 48.64% products, including gold, silver, and rhenium. Phelps is
Gross Margin 57.15% currently developing the Tenke Fungurume mine in the
Democratic Republic of Congo, which is one of the world’s
largest copper/cobalt concessions in the world. Phelps owns a
Caleb Lewis
cml4hf@mizzou.edu
57.75% interest in the project
1
http://finance.yahoo.com/q/pr?s=FCX
2
Standard & Poor’s 9/29/07 FCX Stock Report
3
http://www.fcx.com/about/index.htm, unless noted
4
http://finance.google.com/finance?q=fcx
5
http://en.wikipedia.org/wiki/Freeport_mcmoran (I also read this someplace else that is a little more reputable, but I
can’t remember where)
1
Atlantic Copper operates a copper smelter and refinery in Spain. Along with the production of
copper anodes, and cathodes, Atlantic also produces many byproducts, including sulfuric acid,
electrolytic slimes, gypsum, and granulated slag6.
Production7
While Freeport mines copper, gold, molybdenum, over 78% of Freeport’s mining revenues are
derived from copper. Molybdenum and gold make up 12% and 10% of revenues respectively.
Revenues are currently spread across three continents – North America, South America and Asia
(with future production in Africa). Indonesia is the largest revenue producing country with 38%
of revenues coming from there. The United States produces 35% of revenues with Chili creating
22% and Peru 5%.
Not surprisingly, Freeport’s mines in Indonesia and North America have highest level of
production over the past year. North American mines have actually had slightly higher
production of copper than the Grasberg mine in Indonesia, 1.6 billion lbs. to 1.1 billion lbs.
6
http://www.atlantic-copper.es/2006/index.php?opc=2&cont=6
7
http://www.fcx.com
2
Freeport’s other three mines had production ranging from 190 to 380 billion lbs. During 2007-
2009, Freeport estimates its interest in mining production will be 3.6 billion lbs. of copper, 74
million lbs. of molybdenum, and 1.7 million ozs. of gold.
However, while current/short-term production is important, long term production is key for
mining companies. Freeport has large levels of mineral reserves. As of Dec. 31, 2006,
Freeport’s interest in mine reserves were 77.2 billion lbs. of copper, 1.8 billion lbs. of
molybdenum, and 38.3 million ozs. of gold. North America and Grasberg have the largest share
of Freeport’s reserves with 24.8 and 35.2 billion lbs. Production should begin at the Tenke mine
in the DR Congo in late 2008 or early 20098
Freeport’s mines also still have lengthy mine lives. The Grasberg mine has a mine life of 34
years. The Cerro Verde mine, which has the third largest reserve of copper, has a mine life of 37
years. The shortest mine life is the Candelaria/Ojos del Salado mine with an estimated life of 15
years.
Risks
International Relations
Freeport faces risk from operating in countries with internal strife. The Grasberg mine is
located in Indonesia. Along with general unrest in Indonesia, there are several separatist
groups opposing Indonesian rule over the province of Papua.9 Freeport’s mining
8
Phelps Dodge 2006 Annual Report pg 9
9
Freeport 2006 Annual Report pg 32
3
operations are located in Papua. The Democratic Republic of Congo is also currently
facing a large amount of internal conflict.
Fluctuations in Copper and Gold Prices 10
Freeport’s revenues are derived primarily from the sale of copper concentrates, which
includes gold and silver. While most of its copper is sold under long contracts, global
metal prices are very volatile. Most of the factors determining copper and gold prices are
beyond the control of Freeport. Any large decrease in price will have an adverse affect
on Freeport’s financial situation. Phelps Dodge was involved in hedging copper prices.
I’m not sure if Freeport has continued using hedges.
Exchange Rate Risk11
Since a large portions of Freeport’s revenues are produced outside of the United States, it
faces a great deal of exchange rate risk. Prior to acquiring Phelps Dodge, Freeport
occasionally implemented currency hedges in the hopes of reducing its exposure to
changes in foreign currency exchange rates.
Phelps Dodge Acquisition
In March of 2007, Freeport acquired rival Phelps Dodge. Freeport paid $26 billion in cash and
stock. The acquisition made Freeport the world’s largest publicly traded copper company. The
market has reacted favorably to the merger. Freeport’s price has nearly doubled since the deal
was completed.12 According to Bill Selesky of Argus Reasearch, there is “no question this was a
good move... [i]t was a home run from the beginning.”13
Benefits to acquisition
One of the largest benefits of the acquisition has been instant diversification. Pre-acquisition,
Freeport was basically a 100% Indonesian based company. The addition of Phelps Dodge’s 14
mines lessens Freeport’s dependence on Indonesia. The acquisition also allows Freeport to
expand without spending large amounts of money on exploration.14 There are also expectations
that Freeport’s management will be able to properly use Phelps’ assets which had been
mismanaged over the past few years.15 Overall, it is estimated the acquisition will cause an
approximately 30% increase in annual sales for Freeport.16
Possible concerns from acquisition
10
Freeport 2006 Annual Report pg 32
11
Freeport 2006 Annual Report pg 34
12
Phelps Dodge Puts Freeport in Driver’s Seat, http://biz.yahoo.com/ibd/071004/newamer.html?.v=1
13
Phelps Dodge Puts Freeport in Driver’s Seat, http://biz.yahoo.com/ibd/071004/newamer.html?.v=1
14
Phelps Dodge Puts Freeport in Driver’s Seat, http://biz.yahoo.com/ibd/071004/newamer.html?.v=1
15
Phelps Dodge Puts Freeport in Driver’s Seat, http://biz.yahoo.com/ibd/071004/newamer.html?.v=1
16
Phelps Dodge Puts Freeport in Driver’s Seat, http://biz.yahoo.com/ibd/071004/newamer.html?.v=1
4
One concern for Freeport is the high level of debt incurred during the acquisition. This high debt
may limit its financial and operating flexibility.17 However, Freeport has actively paid down the
debt incurred in the deal. As of Sept. 26, Freeport’s debt was $7.7 billion, which is a decrease
from $14.2 billion after the acquisition. Freeport also sold off International Wire & Cable, which
was a part of Phelps, to General Cable for $735 million.18 It is also possible there could be some
short term increases in production cost after the acquisition. Phelps had a high cost of
production than Freeport, which is considered to a low cost producer.19 However, this should not
have a huge long term effect.
Performance
Freeport vs. S&P 500
Freeport has had a large increase in price over the past year, particularly since January. The only
large decline occurred from the middle of July to the middle of August. However, since August,
Freeport’s stock price has increased rapidly back to its previous growth. Freeport’s price has
increased close to $40 since the middle of August.
Compared to the S&P 500, Freeport has performed amazingly. Freeport overtook the S&P in
March and never looked back. While the S&P has grown close to 15% over the past year,
Freeport’s performance has grown over 105%. While Freeport did react much more violently to
the market drop in July, it has increased at a much higher rate.
20
17
Freeport 2006 Annual Report pg 37
18
http://www.fcx.com/news/2007/091207.pdf
19
Standard & Poor’s 9/29/07 FCX Stock Report
20
www.bigcharts.com
5
Freeport vs. Competitors
Freeport is the largest of the three competitors information is provided for with a market cap of
$42.24 billion. The large quarterly revenue growth is slightly misleading to do the recent
acquisition of Phelps. Freeport’s margins are in between Newmont Mining and Southern Copper
and higher than the industry average. Its net income of $2.36 billion is slightly lower than
Southern’s at $2.45 billion. Freeport also has a slightly higher EPS than Southern. Freeport
does have a higher debt/equity ratio, but much of this could be due to the acquisition of Phelps,
which Freeport is attempting to pay down. Freeport has the lowest P/E of its competitors and the
industry average. Freeport also has a much lower PEG than Newmont and slightly lower than
the Industry average.
DIRECT COMPETITOR COMPARISON21
FCX Pvt1 NEM PCU Industry
Market Cap: 42.24B N/A 20.57B 36.73B N/A
Employees: 9,661 N/A 15,000 12,218 N/A
Qtrly Rev Growth (yoy): 307.20% N/A 0.70% 43.10% 0.00%
Revenue (ttm): 11.39B N/A 5.12B 6.25B N/A
Gross Margin (ttm): 53.96% N/A 43.5% 66.06% 45.50%
EBITDA (ttm): 6.18B N/A 1.16B 4.01B N/A
Oper Margins (ttm): 44.00% N/A 7.29% 59.31% 36.39
Net Income (ttm): 2.36B N/A 148.00M 2.45B N/A
EPS (ttm): 8.459 N/A -3.488 8.335 N/A
P/E (ttm): 13.08 N/A 189.66 14.96 14.18
PEG (5 yr expected): 1.21 N/A 2.5 N/A22 1.29
Debt/Equity 56.4% N/A 36.3% 38.3% 38%
Pvt1 = Corporaci�n Nacional del Cobre de Chile (privately held)
NEM = Newmont Mining Corp.
PCU = Southern Copper Corp.
Industry = Copper
The following shows the performance of Freeport vs. its competitors. Overall, all three
companies have performed well. Southern began to separated themselves from Newmont
Mining and Freeport in January. Freeport began to separate from Newmont in March. Both
Southern and Freeport substantially outperformed Newmont. Since March, Freeport and
Southern have basically tracked each other. While Freeport’s growth of close to 105% is much
lower than Southern’s growth of around 180%.
21
Most of this data was taken from Yahoo. The margins and industry information was accumulated from Reuters.
22
Reuters shows an expected 5 year growth of -9.2%. Reuters Company Research, FCX – Oct. 1, 2007
6
Freeport vs. Copper (MORE TO COME)
Valuation
The recent acquisition of Phelps has made calculating an intrinsic value for Freeport a little
tricky. Freeport’s 2006 financials are not helpful since they do not include Phelps. The only
financial report to cover the entire company post-acquisition is the 2nd Quarter 10-Q.
I’ve decided to use the Buffet Owner’s Earnings Model. Instead of using the 2006 financials,
I’m using estimates for 2007. To find the net income, I have taken the 2007 EPS estimate of
8.34 and multiplied it by the 381.73 million shares outstanding.23 This has given me an
estimated 2007 net income of $3,183,628,200. This seems to be in line with Freeport’s net
income from the first 6 months of the year of $1.58 billion, though it might be a bit conservative.
For depreciation and amortization, I took the 6 month 2007 numbers and added two times the 2nd
quarter only depreciation and amortization. This resulted in total depreciation, amortization, and
depletion of $1.243 billion For capital expenditures, I examined the 2006 annual reports for
23
Yahoo finance. http://finance.yahoo.com/q/ae?s=FCX
7
both. I assumed similar capital expenditures for 2007 which resulted in an assumption of $1.25
billion in capital expenditure
To calculate the discount rate, I used a beta of 1.3424, market return of 10.23%, and a risk free
rate of 3.971 (90 day T-bill)25. Using CAPM, this leads to a discount rate of 12.35%. The
estimated five year growth of Freeport is 11% on Yahoo. Personally, I think this number is low.
Reuters and MSN show EPS 5 year growth estimates of 30-50. I don’t see much reason for
Freeport’s growth to slow over the next few years. The merger has gone over well and
production at the Tenke mine should start in 2008-2009. I’ve decided to use 11% at my
moderate estimate, with an optimistic estimate of 15%, and a conservative estimate of 8%. I’ve
also used second term growth of 3% and 4%.
assuming discount rate (k) of 12.35%
Owner Earnings in 2004:
$
Net Income 3,183,628,200.00
$
Depreciation 1,243,000,000.00
Amortization $ -
$
Capital Expenditures (1,250,000,000.00)
$
Owner Earnings 3,176,628,200.00
2008
Prior Year Owner Earnings $ 3,176,628,200.0
First Stage Growth Rate (add) 8.0%
Owner Earnings $ 3,430,758,456.0
Discounted Value per annum $3,430,758,456.0
Sum of present value of owner earnings $28,907,327,465.0
Residual Value
Owner Earnings in year 10 $ 6,858,102,028.0
Second Stage Growth Rate (g) (add) 3.00%
Owner Earnings in year 11 $ 7,063,845,088.9
Capitalization rate (k-g) 9.35%
Value at end of year 10 $ 75,549,145,335.43
Present Value of Residual $23,577,556,166.80
Intrinsic Value of Company $52,484,883,631.79
Shares outstanding assuming dilution 446000000
Intrinsic Value per share $117.68
24
MSN - 1.34, Reuters – 1.34, Google - .93, Yahoo – 1.64, S&P – 1.10
25
http://online.wsj.com/mdc/public/page/mdc_bonds.html?mod=mdc_topnav_2_3000
8
When using the lowest first stage growth of 8% and second stage growth of 3%, the intrinsic
value of Freeport is $117.68. This is above the current price of $108.13. The intrinsic values
using the other growth values are below. According to my calculations, Freeport is undervalued
in all situations. It would take a first stage growth rate of close to 6.5% and second stage growth
of 3% before Freeport would be undervalued.
Second
Stage First Stage Growth
Growth 8% 11% 14%
3% 117.68 144.45 177.55
4% 124.58 153.53 189.41
Analysts Recommendations
Analyst seem to be split on Freeport. Yahoo has a slight lean towards buy over hold. MSN is
also split between buy and hold, but its buys are more positioned as strong buys.
Current Month Last Month Two Months Ago Three Months Ago
Strong Buy 1 1 1 2
Buy 11 11 11 10
Hold 6 7 7 6
Sell 1 1 1 0
Strong Sell 0 0 0 0
Source – Yahoo Finance
Source – MSN Money
Recommendation
Our fund currently holds 430.00 shares of Freeport which is worth $47,583.80. Freeport has
realized gains of $20,619.57. Our current position in Freeport is 3.36% of the fund. Because of
this, I recommend we HOLD. I feel Freeport will continue to increase in price. Anthony
Rizzuto of Bear Stearns has predicted Freeport will hit $135 by the end of 2008.26 This is line
26
Freeport-McMoRan shares could rise nearly 40%, broker says.
http://www.marketwatch.com/News/Story/Story.aspx?guid=%7b1BA9A1C3-431C-46E2-846B-
C784D1D628B7%7d&siteid=yhoo&dist=yhoo
9
with my analysis I think this stock will continue to create value for the fund. I recommend a stop
loss of $85.00.
Value at risk = [($108.13-85) x 430] / $1,415,311.37 = .07%
10
Appendix A – Freeport 2nd Quarter Income Statement
FREEPORT-McMoRan COPPER & GOLD INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2007 2006 2007 2006
(In Millions, Except Per Share Amounts)
Revenues $ 5,807 $ 1,426 $ 8,110 $ 2,512
Cost of sales:
Production and delivery 2,850 605 3,802 1,083
Depreciation, depletion and amortization 379 44 495 87
Total cost of sales 3,229 649 4,297 1,170
Exploration and research expenses 40 3 47 5
Selling, general and administrative expenses 139 35 188 66
Total costs and expenses 3,408 687 4,532 1,241
Operating income 2,399 739 3,578 1,271
Interest expense, net (182) (21) (234) (44)
Losses on early extinguishment and conversion of debt, net (47) - (135) (2)
Gains on sales of assets 38 9 38 9
Other income, net 43 6 66 11
Equity in affiliated companies’ net earnings 7 1 12 5
Income before income taxes and minority interests 2,258 734 3,325 1,250
Provision for income taxes (777) (310) (1,237) (532)
Minority interests in net income of consolidated subsidiaries (313) (42) (427) (69)
Net income 1,168 382 1,661 649
Preferred dividends (64) (15) (81) (30)
Net income applicable to common stock $ 1,104 $ 367 $ 1,580 $ 619
Net income per share of common stock:
Basic $2.90 $1.95 $5.27 $3.29
Diluted $2.62 $1.74 $4.80 $2.97
Average common shares outstanding:
Basic 381 188 300 188
Diluted 446 222 346 222
Dividends paid per share of common stock $0.3125 $1.0625 $0.625 $1.875
11
Appendix B – Freeport 2nd Quarter Balance Sheet
FREEPORT-McMoRan COPPER & GOLD INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, December 31,
2007 2006
(In Millions)
ASSETS
Current assets:
Cash and cash equivalents $ 2,078 $ 907
Accounts receivable 2,455 486
Inventories 2,387 724
Mill and leach stockpiles 320 -
Prepaid expenses, restricted cash and other 215 34
Total current assets 7,455 2,151
Property, plant, equipment and development costs, net 24,302 3,099
Other assets 743 140
Trust assets 612 -
Long-term mill and leach stockpiles 530 -
Goodwill 6,992 -
Total assets $ 40,634 $ 5,390
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 2,647 $ 789
Accrued income taxes 629 165
Copper price protection program 592 –
Current portion of long-term debt and short-term borrowings 152 19
Total current liabilities 4,020 973
Long-term debt, less current portion:
Senior notes 6,951 620
Term loan 2,450 -
Project financing, equipment loans and other 236 41
Total long-term debt, less current portion 9,637 661
Other liabilities and deferred credits 1,230 298
Deferred income taxes 6,856 800
Total liabilities 21,743 2,732
Minority interests 1,524 213
Stockholders’ equity:
5½% Convertible Perpetual Preferred Stock 1,100 1,100
6¾% Mandatory Convertible Preferred Stock 2,875 -
Common stock 50 31
Capital in excess of par value 13,331 2,668
Retained earnings 2,818 1,415
Accumulated other comprehensive income (loss) 16 (20)
Common stock held in treasury (2,823) (2,749)
Total stockholders’ equity 17,367 2,445
Total liabilities and stockholders’ equity $ 40,634 $ 5,390
12
Appendix C – Freeport Income Statement
13
Appendix D – Freeport Balance Sheet
14
Appendix E – Freeport Statement of Cash Flows
15
Appendix F – Freeport Consolidated Balance Sheet
FREEPORT-McMoRan COPPER & GOLD INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, December 31,
2007 2006
(In Millions)
ASSETS
Current assets:
Cash and cash equivalents $ 2,078 $ 907
Accounts receivable 2,455 486
Inventories 2,387 724
Mill and leach stockpiles 320 -
Prepaid expenses, restricted cash and other 215 34
Total current assets 7,455 2,151
Property, plant, equipment and development costs, net 24,302 3,099
Other assets 743 140
Trust assets 612 -
Long-term mill and leach stockpiles 530 -
Goodwill 6,992 -
Total assets $ 40,634 $ 5,390
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 2,647 $ 789
Accrued income taxes 629 165
Copper price protection program 592 –
Current portion of long-term debt and short-term borrowings 152 19
Total current liabilities 4,020 973
Long-term debt, less current portion:
Senior notes 6,951 620
Term loan 2,450 -
Project financing, equipment loans and other 236 41
Total long-term debt, less current portion 9,637 661
Other liabilities and deferred credits 1,230 298
Deferred income taxes 6,856 800
Total liabilities 21,743 2,732
Minority interests 1,524 213
Stockholders’ equity:
5½% Convertible Perpetual Preferred Stock 1,100 1,100
6¾% Mandatory Convertible Preferred Stock 2,875 -
Common stock 50 31
Capital in excess of par value 13,331 2,668
Retained earnings 2,818 1,415
Accumulated other comprehensive income (loss) 16 (20)
Common stock held in treasury (2,823) (2,749)
Total stockholders’ equity 17,367 2,445
Total liabilities and stockholders’ equity $ 40,634 $ 5,390
16
Appendix G – Net income since 2000 with growth
2000 2001 2002 2003 2004 2005 2006 E2007
Net
Income $76.99 $113.03 $167.70 $197.25 $202.27 $995.13 $1,456.51 $3,183.62
Growth 46.81% 48.37% 17.62% 2.54% 391.98% 46.36% 118.58%
17