On Jan 23, we reiterated our Neutral recommendation on Freeport-McMoRan
(FCX - Analyst Report
). While we are impressed by attractive opportunities arising from acquisitions and expansion initiatives, we maintain a cautious stance factoring in weak pricing and regulatory challenges in Indonesia.
Freeport's adjusted earnings for fourth-quarter 2013, reported on Jan 22, beat the Zacks Consensus Estimate. Revenues surged year over year riding on the acquisition of oil and gas operations, but missed expectations. The company saw higher copper and gold sales in the quarter.
Freeport, a Zacks Rank #3 (Hold) stock, 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 acquisitions of Plains Exploration and McMoRan Exploration. The buyouts ushered in new opportunities for the company. 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 sees significant synergies from the acquisitions.
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, we are concerned about weak gold and copper pricing as it may continue to weigh on Freeport's bottom line. Moreover, the company's copper business remains affected by the sluggish global economy and supply related issues.
While Freeport's Grasberg mine in Indonesia is currently operating at full capacity, uncertainties surrounding the mine may weigh on the stock. Freeport faces new challenges as the Indonesian government recently came up with new requirements for the continued export of copper concentrates, including imposition of export tax.
Under the mandate, Freeport and other miners have to pay a progressive export duty which will increase from 25% in 2014 to as high as 60% by 2016. This may lead to significant tax burden for Freeport. The company is currently working with the Indonesian government to clarify the situation and defend its right under its contract with the government.
Other Stocks to Consider
Other mining companies with favorable Zacks Rank include General Moly, Inc.
(GMO - Snapshot Report
), Stillwater Mining Co.
(SWC - Snapshot Report
) and Atlatsa Resources Corporation
. While both General Moly and Stillwater Mining hold a Zacks Rank #1 (Strong Buy) Atlatsa Resources carry a Zacks Rank #2 (Buy).