As gold continues to test the lower bounds of its 18-month support line above $1500, the miners keep sliding down the shaft even faster.
Copper king Freeport-McMoRan (FCX - Analyst Report) is hardly immune, just because it is the world's lowest-cost producer. That's because the industrial metal with a PhD in economics isn't exactly predicting gangbuster global growth with its consolidation around $3.50 per pound.
Freeport-McMoRan is engaged in mineral exploration and development, mining and milling of copper, gold, and silver in Indonesia, North America, and the smelting and refining of copper concentrates in Spain and Indonesia. It is one of the world's largest producers of gold and copper.
The chart below shows a 3-year performance of FCX vs. a basket of its peers, the MarketVectors Gold Miners ETF (GDX). Worth noting is that FCX has been a Zacks #4 Rank (Sell) or #5 Rank (Strong Sell) since October of 2011. Hopefully this served as a warning sign to bottom-fishers in the miner.
How to Boost Reserves: Dig Closer Mines
Fourth-quarter 2012 adjusted earnings matched the Zacks Consensus Estimate while profit rose year over year on higher production. Revenues climbed on higher copper and gold sales, but missed the Zacks Consensus Estimate.
Freeport is conducting explorations close to its existing mines with a goal to boost reserves, which will facilitate the development of additional future production capacity across the large minerals districts where it operates.
How to Remove Heavy Metals: Buy Oil
In December 2012, FCX inked definitive merger pacts, under which, it will buy Plains Exploration & Production Company (PXP) and McMoRan Exploration Co. (MMR) for roughly $9 billion. The company said that it will pay $6.9 billion in cash to acquire Texas-based independent oil and gas company, Plains and it will takeover Louisiana-based exploration and production company McMoRan for roughly $2.1 billion in cash (excluding 36% interest currently owned by Freeport and Plains).
The total transaction value is roughly $20 billion taking into account the debt to be assumed by Freeport as part of the deal. This move into the energy space was not well-received by investors with the stock dropping hard from $38 to $31.
And while it appears the stock finds some substantial buying interest in the $30-31 area -- support in 2011 and 2012 corrections and bouncing from there in December and this month -- the analysts are obviously still under-whelmed with the company's prospects and new debt-heavy energy investments.
What Business Are You In?
While the move to diversify into energy seems smart on the surface -- and clearly still commodity-focused -- analysts are going to take their time digging for solid answers to what the company's future earnings will look like. Estimates from the company itself are that the energy division could become 26% of EBITDA this year.
As one example of the likely difficulty of metals and mining analysts to figure in the energy acquisitions, the Australian investment bank Macquarie recently lowered estimates for FCX substantially based on declining gold and copper price forecasts.
They are now at $4.05 for this year vs. the Zacks consensus of $4.42, but they left their 12-month price target unchanged at $41. They also acknowledged that they hadn't modeled for PXP and MMR yet.
The stock is cheap, trading under 8X, but until the earnings outlook changes, look for FCX to continue to track the spot prices of gold and copper. And if gold finally takes a dive below $1500, expect FCX to do the same.
Kevin Cook is a Senior Stock Strategist with Zacks.com