We have retained our Neutral recommendation on Freeport-McMoRan
(FCX - Analyst Report
). While we are encouraged by the attractive opportunities arising from its recent acquisitions and expansion initiatives, we maintain a cautious stance factoring in weak pricing and high costs.
Freeport reported mixed second-quarter 2013 results on July 23 with adjusted earnings topping the Zacks Consensus Estimate while sales missing the same. Profit slid year over year on lower gold and copper pricing. Gold sales fell due to temporary suspension of operations in Indonesia.
Freeport, which is among the prominent players in the mining industry along with Newmont Mining Corporation
(NEM - Analyst Report
), is conducting explorations close to its existing mines with a goal to boost reserves, which will facilitate the development of additional future production capacity. The company’s strategy is to pare debt and maintain a strong balance sheet, while investing in financially attractive projects and providing returns to shareholders.
Freeport made a major stride to venture into the U.S. energy space with the acqusitions of Plains Exploration and McMoRan Exploration. The buyouts brings in new opportunities for Freeport. The combined entity is expected to emerge as a leading natural resource conglomerate in the U.S., leveraging Freeport’s industry-leading mineral assets and the oil and gas resources of Plains and McMoRan.
Freeport continues to progress with its expansion initiatives in Latin America. We are optimistic about its African operations considering the potential at the Tenke Fungurume minerals district in Democratic Republic of Congo.
However, demand for copper still remains somewhat weak. Freeport’s copper business has been hit by the sluggish global economy. Demand from key end markets, including construction materials and electronics, remain weak due to the overall economic softness.
We are also cautious about the uncertainties surrounding the Grasberg mine. Freeport suspended operations at the mine in May 2013 after the collapse of a tunnel that took 28 lives. While the Grasberg mine has resumed operation and is currently operating at full capacity, sales volumes for 2013 are now expected to be lower than what expected earlier given the impact of the suspension, timing of access to high ore grades which is not expected before 2014.
Moreover, higher production costs and weak pricing remain concerns for Freeport as these may continue to weigh on its bottom line.
Other Stocks to Consider
Other companies in the mining industry with favorable Zacks Rank are NovaGold Resources Inc.
(NG - Snapshot Report
) and Pretium Resources Inc.
(PVG - Snapshot Report
). Both retain a Zacks Rank #2 (Buy).