Freeport - Outgunning, outclassing, gold stocks

Freeport-McMoRan and the art of not maintaining and servicing the idea of being a gold stock.

JOHANNESBURG - 

Freeport-McMoRan, which has long ranked as the world's biggest publicly traded copper miner, continues to thunder back to life on recovering metal prices, as again shown in its third-quarter 2009 results. One of the most intriguing aspects of Freeport is the manner in which its stock market valuation shows just how overvalued gold stocks are, and the extent to which base metal stocks - good ones - are undervalued.

Freeport is, of course, much more than a copper miner, the world's No 2 after Chile's state-owned Codelco. By its own estimates, Freeport's sales for 2009 are expected to be around 4.0bn pounds of copper, 2.5m ounces of gold and 56m pounds of molybdenum. Freeport thus ranks, technically, as a global Tier I gold miner (only three full-time gold diggers produce more than Freeport), the biggest miner of molybdenum, and, in due course, one of the biggest miners of cobalt, a byproduct at the relatively new Tenke Fungurume operation in the Democratic Republic of the Congo.

With this suite of metals, Freeport leaves major gold miners in the dust, in a number of ways. Taking financial results published from the beginning of 2007, Freeport has generated positive free cash flow (operating cash flow less cash spent on capital expenditure) of USD 6.8bn, compared to an aggregated negative free cash flow of USD 3.2bn from eight of the world's gold majors, in the form of Barrick, AngloGold Ashanti, Goldcorp, Newmont, Yamana, Kinross, Harmony, and Gold Fields.

Freeport's achievement is all the more remarkable given that copper prices collapsed from around USD 4.10/lb in mid-2008 to USD 1.28/lb by December 2008. Copper has moved up sharply and pretty consistently since then, to regular recent trades above USD 3.00/lb. Molybdenum and cobalt prices, which also collapsed, are also making a comeback. For dollar gold bullion, the story has been quite different, given the metal's longer-term rise since early 2002, and the mildest correction among metal prices during the so-called global credit markets crisis. 

For Freeport, the devastation was seen in group free cash flow that collapsed from USD 4.5bn in 2007 to USD 662m in 2008. For the first nine months of 2009, free cash flow has recovered substantially, to USD 1.7bn, and looks destined to easily clear USD 2bn for the year. The eight gold majors mentioned have also generated positive free cash flow for the first nine months of this year, to the tune of USD 1.1bn 

Looking beyond the operating level, Freeport in 2007 paid a net USD 13.9bn in cashfor Phelps Dodge; even so, rights issues by Freeport over the past near-three years have raised a relatively light net USD 3.1bn, compared to USD 10.1bn raised by the eight gold majors, which continue to battle in attempts to "tailor" operating cash flows to at least cover capital expenditure, even under the protection of a resilient, and seemingly ever-rising, dollar gold bullion price.

The gold majors have also been busy with a number of acquisitions, and AngloGold Ashanti and Barrick have also taken to attacking their historic hedge books, an exercise that eats hundreds of millions in cash dollars. Even so, the gold majors have continued to pay out dividends, despite negative free cash flow, paying effectively from "capital", financed from a combination of rights issues, increases in net debt, and net asset sales. Freeport, which has paid dividends more prudently, well in line with changing levels of free cash flow, recently reinstated its annual cash dividend on its common stock.

A number of gold majors also mine other metals, such as copper, but none have been able to match the quality of free cash generated by Freeport. The gold majors are also almost universally challenged by heavy ongoing capital expenditure programmes; Freeport's big new mine at Tenke Fungurume, costing close on USD 2bn, was fully commissioned earlier this year. There are certain unresolved issues over the terms of mining engagement, but the twin deposits at the mine rank as the richest in the global copper classification. Freeport's overall capital expenditure has fallen rapidly from around USD 2.7bn in 2008, to an estimated USD 1.4bn this year, and is forecast at about USD 1bn next year 

Just under a year ago, Freeport's NYSE quoted stock price crashed down to just under USD 16.00 a share, where some of its many fans described it as "the buy of the century". It has recently traded well above USD 80.00 a share, and no doubt could one day again make it above USD 120.00, as seen in mid-2008. At this point, for all its class, Freeport's market value is just USD 35.8bn, compared to the aggregate USD 151.6bn for the eight gold majors mentioned. The gold miners have lots of work to do.

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