Freeport McMoran is one of the largest copper and gold producers in the world. It has operations across North America, South America, Europe, Africa and Indonesia. While Freeport has posted record profits in recent years, its stock price has fallen as investors demand greater returns. An analysis of Freeport's financial ratios shows it has a lower return on equity and assets than its main competitor Southern Copper, but a liquid capital structure. Freeport's stock is currently undervalued and trading well below its estimated intrinsic value, making it a strong buy.

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FREEPORT MC MORAN
Introduction:
Freeport McMoran is one of the largest producers of copper and gold and the
largest publicly traded copper producer in the world. Its headquarters are located in
Phoenix, Arizona. The company has operations in North America, South America,
Europe, Africa and Indonesia. The company was formerly based in New Orleans, before
it acquired copper producer Phelps Dodge in 2007.
Freeport operates in a global mining industry, which is facing a growing
disconnect. Despite record profits for the world’s 40 biggest mines in 2011 due to high
commodity prices, investors proved versatile, demanding greater capital discipline and
increased shareholder returns.
According to PWC, “against a backdrop of shareholder demands for heightened
capital discipline, the outlook for the future will depend on the ability to bring on supply
through developing the right projects”, in other words cutting down production costs.
As a matter of fact, in the past years, the industry has observed a structural change of
higher than average commodity prices (driven by emerging markets), which are
underwritten by higher production costs. Despite record investments by top players in
the industry in 2012 it seems like the market, doesn’t seem to be responding positively
to the industry’s long term growth objectives, which has sent share prices down.
Where does Freeport stock stand in the midst of such a paradox? We will
provide the reader with a comprehensive understanding of key management ratios to
assert the viability of Freeport McMoran; we will also use financial calculations to
determine the stock’s intrinsic value as well as the cost of debt and equity.
Structure of the Board & Corporate Governance:
Freeport’s Board of Directors is comprised of 12 members that possess a diverse
range of experience and perspectives in the mining industry, geology, business finance,
economics, accounting and public affairs. Four Advisory Directors provide general
policy advice to the Board. James R. Moffett serves as Chairman of the Board and
Richard Adkerson serves as President and Chief Executive Officer. Freeport also has a
Corporate Responsibility Committee in charge of assisting the Board of Directors in
fulfilling the Board’s responsibilities with respect to the company’s environmental
policy, human rights policy and other related public matters. Furthermore, the company
has an Audit Committee, whose primary function is to assist the Board of Directors in
the effectiveness of its financial reporting and integrity of the financial statements. In an
era where corporate governance is under close scrutiny due to recent scandals, Freeport
seems to be a pretty well balanced company as far as the concentration of power.
Key Ratios:
The return on equity reveals how much profit a business generates with
shareholders’ equity. ROE for Freeport is 18.44% while that of Southern Copper
Corporation is 44.08% (Bloomberg). Shareholders would prefer investing in SCC since
they would generate higher return on their investments.
The Return on asset is an indicator of the effectiveness of management of assets
owned by the business, therefore the higher the ratio the better, since more dollars are
being earned from each dollar of assets the company controls. Freeport has an ROA of
11.27%, while Southern Copper Corp has a ratio of 23.21%, and therefore seems to be
doing better at managing its assets (Yahoo finance).
The total asset turnover ratio determines the ability of a business to use its assets
efficiently to generate sales. TATO for Freeport is 0.53, while Southern has a ratio of
0.72 relative to the industry ratio of 0.58 (Hoovers). The higher the ratio, the more
efficient the firm is at utilizing its assets.

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The profit margin reveals how much of each dollar earned is turned into
profits. The industry average is 12.5% (Yahoo Finance). With a 16.89% profit margin
Freeport is above average. However its main competitor, Southern Copper generates
more profit per dollar spent with a 29.01% profit margin (Hoovers).
The current ratio measures the ability to pay debts over a business cycle.
Freeport has a ratio of 3.08, which means it is able to pay its obligations. The main
competitor Southern Copper Corporation has a ratio of 5.00, which is higher than the
industry ratio of 3.00 (Daily Finance). Freeport is considered liquid and has the closest
ratio compared to the average market ratio.
Beta:
The tendency of a stock to move with the market is measured by its beta. The
current beta for Freeport is 1.96, which is slightly higher than the industry’s average of
1.62. We have attributed this to the fact that 66.6% of Freeport’s production comes from
relatively unstable countries (Chile, Indonesia, Congo). The beta for the industry is
higher than most because commodities are more sensitive to the market. For example,
when China’s projected growth rates were released earlier this week, the beta for
Freeport spiked to 2.18. However, Freeport has an adjusted beta (estimate of future
beta) of 1.54, due to Freeport’s investments in the natural gas industry, where growth
prospects are anticipated to be extremely high over the next decade.
Capital Structure (WACC):
The WACC is the average cost of each whole dollar. Freeport’s WACC is 11.41%.
This means that for each additional dollar needed to increase the size of the “pie”, it
costs investors 11.41 cents. It can also be seen as the opportunity cost of investing in
Freeport. Freeport’s relative high WACC is due to its high startup and capital costs as
well as its high long-term investments (oil & gas explorations). With such a high WACC,
investors require higher returns for each dollar invested.
Gordon Model:
We used the Gordon model to determine the intrinsic value of the stock, based
on a future series of dividends. We determined an intrinsic value of 53.89 (the stock is
currently trading at 28.52). Our intrinsic value falls within a 45-55$ range, where
investors such as Warren Buffet believe Freeport’s stock should fall (Nohilo).
Conclusion:
We saw that Freeport McMoran exhibits many of the characteristics of a solid
company: more-or-less consistent earnings, high returns on equity with limited debt,
tenured management, and a straightforward industry. Based on our analysis of
Freeport’s stock it clearly appears that the stock is undervalued, currently trading 40%
under its intrinsic value. Furthermore, in the past few days the stock has taken a hit due
to the announcement by the Congolese government of a ban on exports of copper
concentrate combined with a sliding demand as Chinese growth prospects are at their
lower levels in decades. Nevertheless, we advise investors to carefully monitor the
evolution of the stock, as Freeport is diversifying into the high potential natural gas
industry. We believe that the combination of an undervalued stock price with high
growth perspectives makes the stock a strong buy at its current market value of $28.52
(April 23).

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References
"Freeport-McMoRan Vs. Southern Copper: Which Is The Winning Bet For 2013?" -
Seeking Alpha. N.p., 20 Feb. 2013. Web. 23 Apr. 2013.
"IndustryBrowser - Yahoo! Finance - Full Industry List." IndustryBrowser - Yahoo!
Finance - Full Industry List. Yahoo Finance, n.d. Web. 23 Apr. 2013.
"Interactive Stock Chart for Freeport-McMoRan Copper & Gold Inc (FCX)." Bloomberg.
N.p., n.d. Web. 23 Apr. 2013.
"Return on Equity by Sector." Return on Equity. New York University, Jan. 2013. Web. 23
Apr. 2013.
"Return on Equity by Sector." Return on Equity. N.p, n.d. Web. 23 Apr. 2013.
"Nohilo - FCX Intrinsic Value Report (Buffett-style)." Nohilo - FCX Intrinsic
Value Report (Buffett-style). N.p., n.d. Web. 24 Apr. 2013.