1. What does FCX do? What is their business model? What commodities do they use in their business? Who are their customers?
The company was founded in 1987 and is headquartered in Phoenix, Arizona.Freeport-McMoRan Copper & Gold Inc. (FCX) engages in the exploration of mineral resource properties. The company primarily explores for copper, gold, molybdenum, cobalt, silver, and other metals, such as rhenium and magnetite. It operates in five segments: North America Copper Mines, South America Mining, Indonesia Mining, Africa Mining, and Molybdenum Operations. It is the second largest copper producer in the world and the largest publicly traded copper company. It is also the largest molybdenum mining company and a significant gold producer.
FCX sells its products pursuant to sales contracts entered into with its customers. Revenue for all FCX’s products is recognized when title and risk of loss pass to the customer and when collectability is reasonably assured. The passing of title and risk of loss to the customer are based on terms of the sales contract, generally upon shipment or delivery of product.
A. Determine whether FCX was worth investing in before the acquisition of Nat Gas and Oil assets recently.
After the initial analysis using discount cash flow method the determined intrinsic value was $36 and I recommend buying the stock at $29 (@ discounted price of 10% off intrinsic value) .
I am going with a buy recommendation as I see tremendous potential for the company to grow ,after analyzing their 5 year historical data also considering that stimulus packages by both the Chinese and the U.S. government will help push demand for copper back into high levels as plans for infrastructure development and electrical production makes way in China.
B. Evaluate FCX when it was purely a copper and Gold play: supply and demand of copper and gold, industry situation
* Supply of copper
Due to decreased growth in China and a precarious global economy, falling demand relative to supply managed to keep prices low and supply sufficient for the short-term. Major mining firms such as BHP are postponing or reevaluating plans to expand existing mines and develop new ones because of financial uncertainty in Europe and muted demand in China. The deterioration of ore grades leads us to see a drop in the capacity of firms. As the copper mines become consecutively deeper, this will lead to longer durations of extraction and slow supply considerably. Higher production costs because of extreme weather, ageing mines, dwindling output, and an increase in labor actions in Chile have hindered the path to smooth production.
Decreased Copper Production: Copper sales volume has decreased in 2010, 2011, and is projected to decrease in 2012. Three factors have been the major influence: slow global economic growth particularly in the United States and China, sequencing of mines, and violent labor disputes in Indonesia.
* Demand for copper Global demand for copper is derived from international economic conditions. The economic slowdown the past few years has negatively impacted FCX’s sales volume. Short term we expect conditions in China to remain slow, while slight growth in US homebuilding and car manufacturing will increase copper demand and lead to increases in sales volume.
Another reason for decreased FCX’s sales volume over the past years was a series violent and destructive labor disputes at its Indonesia Grasberg mine, its largest capacity and lowest cost mine. Extended work stoppages and property destruction severely hurt 2011 and early 2012 production volume at a time when copper prices were elevated. FCX estimated that copper production lost during work stoppage was 235 million pounds. In the past year FCX has been attempting to repair damages and ramp up production to full capacity levels. It is currently estimated that the mine is operating at 63% of current capacity levels.26 Slow repairs have been
