Freeport-McMoRan is a natural resources company with a portfolio of assets that includes the Grasberg copper and gold deposits in Indonesia; metals mining operations in North and South America; the Tenke Fungurume minerals district in the Democratic Republic of Congo; and U.S. oil and natural gas assets.
|Most recent||Growth rate (CAGR)|
|1 year||5 years||10 years|
|Book value of equity per share||$6.89||42.9%||-18.9%||-12.1%|
|BV including aggregate dividends||46.1%||-14.8%||-5.2%|
|1 year||5 years||10 years|
|Most recent||Growth rate (CAGR)|
|1 year||5 years||10 years|
|1 year||5 years||10 years|
A company creates wealth for its long-term shareholders in 2 main ways - through dividend payments and through the accumulation of retained earnings. This graph shows the accumulation of per-share equity of long-term shareholders (green bars), which consists of the retained earnings plus all capital invested in the company, and the cumulative dividends the company has paid over time per share of its stock (blue bars).
In the words of Warren Buffett: "We're looking for... businesses earning good returns on equity while employing little or no debt."
Return on equity is a key metric of financial performance, indicating a company's ability to generate earnings using shareholder capital. Over time, ROE is one of the major determinants of the rate at which a company creates shareholder wealth. The average ROE for large U.S. companies is 12%, and many investors use it as a threshold for attractive investments.
Companies can boost ROE by increasing leverage, which reduces the safety of the investment. Therefore, it is useful to look at the return on assets (ROA), which measures a company's earning power regardless of its capital structure. A widening gap between ROE and ROA may be a warning sign that should be thoroughly investigated.
Earnings per share is a popular metric used to value a company (using P/E ratio); growth in EPS is often used to judge company growth potential. However, many investors believe that EPS is an inferior metric to ROE, because it ignores the amount of capital the company used to generate earnings.
Free cash flow shows how much cash a company generates from operations, above and beyond what is required to maintain or expand its productive assets. This cash can be returned to investors, or spent by management on growing the company or paying back its debts.
Balance sheets of many companies contain intangible assets such as goodwill, trademarks, patents, etc. Many investors consider intangibles more difficult to value than physical assets. If intangible assets had been valued incorrectly, they must be impaired, resulting in a loss charged against shareholder equity. This chart demonstrates the potential loss to shareholder equity from such impairments.
Companies often use debt financing to increase their return on equity. However, as the amount of debt financing increases relative to the amount of equity financing, the company becomes more sensitive to down turns and other negative events. As a result, many investors use the ratio of debt to equity as a measure of a company's financial risk, and avoid companies that have this ratio above 1.
This chart shows shareholder equity as a percentage of total assets, allowing investors to judge the overall leverage. Companies with a higher proportion of equity can be viewed as safer investments. This metric is particularly important for highly leveraged institutions, such as banks, where it must be at least 4% according to government regulations.
The ratio of current assets to current liabilities is known as the current ratio. This metric is a quick measure of the company's ability to pay its short-term obligations. A current ratio below 1 is a warning sign that should be investigated, especially for companies that cannot count on adequate cash flow from operations.
This chart shows the cumulative dilution of investor ownership in a company over time. Dilution reduces an investor's participation in the future earnings. Dilution increases when a company issues new shares, and decreases when a company buys its shares back. Many investors avoid companies with large chronic dilution.
analysis provides insight into factors affecting the Return On Equity of a company.
The DuPont equation decomposes ROE as follows:
ROE = (Net margin) * (Asset turnover) * (Asset to equity ratio)
Net margin indicates operating efficiency, Asset turnover measures the total asset use efficiency, and the Asset to equity ratio is a measure of financial leverage.
The dividend payout ratio tells investors what percentage of earnings a company returns to shareholders, and what percentage it retains and reinvests. This ratio represents a major capital allocation decision by the company, and can be used to judge management rationality. Rational management should pay out all earnings that cannot be productively reinvested. Therefore, a low dividend payout ratio for a profitable company with a low growth potential may be a warning sign.
Many investors use the P/B ratio as a quick way of judging company valuation. Value investors - followers of Graham and Dodd - specifically seek out companies with low P/B ratios. However, investors should be careful not to make investment decisions on this metric alone, without considering a company's earning and growth potential, since a low P/B ratio can be a sign of a bleak future for the business.
P/E ratio is a popular way of making a quick judgment of a company valuation. Value investors - followers of Graham and Dodd - often seek solid companies with low P/E ratios as investment opportunities. However, P/E ratio represents an oversimplified approach to business valuation, and can often lead to incorrect investment decisions.
In August 2003, FCX privately negotiated the early conversion of approximately 51 percent of its 8 1/4% Convertible Senior Notes, which resulted in a $311.1 million reduction in debt. The holders converted their notes into 21.76 million shares of FCX common stock in accordance with the terms of the notes and received $23.0 million in cash from restricted cash held in escrow for payment of future interest on these notes.
In December 2003, we called for redemption the depositary shares representing our 7% Step-Up Convertible Preferred Stock. Of the 14.0 million depositary shares outstanding at the time of the call, 13.8 million depositary shares were converted into 11.5 million shares of FCX common stock. The remaining shares are being redeemed for approximately $7 million cash.
In January 2004, we completed a tender offer and privately negotiated transactions for a portion of the remaining 8 1/4% Convertible Senior Notes, resulti ng in the early conversion of $225.8 million of notes into 15.8 million shares of FCX common stock.
The Board also approved a new open market share purchase program for up to 20 million shares, which replaced our previous program. Under this new program, no shares were acquired through the first quarter of 2004. Thus far during the second quarter of 2004 through May 10, 2004, we purchased 3.1 million shares for $92.4 million (an average of $29.42 per share) and 16.9 million shares remain available under this program.
On March 30, 2004, FCX sold 1.1 million shares of 51/2% Convertible Perpetual Preferred Stock for $1.1 billion, with net proceeds totaling $1.067 billion. Each share of preferred stock is initially convertible into 18.8019 shares of FCX common stock, equivalent to a conversion price of approximately $53.19 per common share. The conversion rate is adjustable upon the occurrence of certain events, including an increase in FCX's common stock dividend rate above the current annual rate of $0.80 per share. Beginning March 30, 2009, FCX may redeem shares of the preferred stock by paying cash, FCX common stock or any combination thereof for $1,000 per share plus unpaid dividends, but only if FCX's common stock price has exceeded 130 percent of the conversion price for at least 20 trading days within a period of 30 consecutive trading days immediately preceding the notice of redemption. FCX used a portion of the proceeds from the sale to purchase 23.9 million shares of FCX common stock owned by Rio Tinto for $881.9 million (approximately $36.85 per share) and used the remainder for general corporate purposes.
On March 19, 2007, FCX acquired Phelps Dodge. Phelps Dodge, now a wholly owned subsidiary of FCX, is a fully integrated producer of copper and molybdenum, with mines in North and South America and processing capabilities for other minerals as by-products, such as gold, silver and rhenium, and several development projects, including the Tenke Fungurume mine in the Democratic Republic of Congo. Additionally, Phelps Dodge has an international manufacturing division, Phelps Dodge International Corporation, which manufactures engineered products principally for the global energy sector. The estimated fair value of assets acquired and liabilities assumed and the results of Phelps Dodges operations are included in FCXs consolidated financial statements beginning March 20, 2007. In the acquisition, each share of Phelps Dodge common stock was exchanged for 0.67 of a share of FCX common stock and $88.00 in cash. As a result, FCX issued 136.9 million shares and paid $18.0 billion in cash to Phelps Dodge shareholders. The acquisition has been accounted for under the purchase method. The total purchase price was $25,891 million.
During fourth-quarter 2008, we evaluated the carrying values of our long-lived assets, including goodwill associated with the acquisition of Phelps Dodge, for impairment. These evaluations resulted in the recognition of impairment charges of $10.9 billion ($6.6 billion to net loss or $17.34 per share) associated with long-lived assets and $6.0 billion ($6.0 billion to net loss or $15.69 per share) associated with goodwill.
All outstanding 6 3/4 % Mandatory Convertible Preferred Stock automatically converted on May 1, 2010, into FCX common stock (refer to Note 6 for further discussion). During the second quarter of 2010, 28 million shares of preferred stock were converted into 39 million shares of FCX common stock (conversion rate of 1.3716 shares of FCX common stock).
During second-quarter 2013, we completed the acquisitions of Plains Exploration & Production Company (PXP) and McMoRan Exploration Co. (MMR). PXP per-share consideration was equivalent to 0.6531 shares of our common stock and $25.00 in cash, resulting in issuance of 91 million shares of FCX common stock and payment of $3.8 billion in cash (including $411 million for the special dividend paid to PXP stockholders on May 31, 2013). In the MMR acquisition, for each MMR share owned, MMR shareholders received $14.75 in cash ($1.7 billion in cash, net of our and PXP's existing interests in MMR) and 1.15 units of a royalty trust, which holds a five percent overriding royalty interest in future production from MMR's ultra-deep exploration prospects that existed as of December 5, 2012, the date of the merger agreement.
In June 2014, FM O&G completed the sale of its Eagle Ford shale assets for cash consideration of $3.1 billion.
In June 2014 and September 2014, we completed acquisitions of Deepwater GOM interests totaling $1.4 billion.
In November 2014, we completed the sale of our 80 percent ownership interests in the Candelaria/Ojos to Lundin Mining Corporation (Lundin) for $1.8 billion in cash and contingent consideration of up to $200 million. Excluding contingent consideration, after-tax net proceeds from the transaction approximated $1.5 billion.
In September 2015, FCX completed a $1.0 billion at-the-market equity program and announced an additional $1.0 billion at-the-market equity program. Through September 30, 2015, FCX sold 97.5 million shares of its common stock at an average price of $10.35 per share under these programs, which generated gross proceeds of $1.01 billion (net proceeds of $1.00 billion after commissions of $10 million and expenses). From October 1, 2015, through November 5, 2015, FCX sold 34.1 million shares of its common stock at an average price of $12.15 per share, which generated gross proceeds of $414 million (net proceeds of $410 million after commissions of $4 million and expenses).
FCX had a 70 percent interest in TF Holdings Limited (TFHL), and TFHL owns 80 percent of Tenke Fungurume Mining S.A. (TFM or Tenke) located in the Democratic Republic of Congo. On November 16, 2016, FCX completed the sale of its interest in TFHL to China Molybdenum Co., Ltd. (CMOC) for $2.65 billion in cash (before closing adjustments) and contingent consideration of up to $120 million in cash, consisting of $60 million if the average copper price exceeds $3.50 per pound and $60 million if the average cobalt price exceeds $20 per pound, both during calendar years 2018 and 2019. One-half of the proceeds from this transaction was used to repay borrowings under FCX's unsecured bank term loan. The contingent consideration is considered a derivative, and at December 31, 2016, the fair value was $13 million and was recorded in other assets on the consolidated balance sheets and reduced the loss on disposal, which is reflected in net (loss) income from discontinued operations. Future changes in the fair value of the contingent consideration derivative will be recorded in discontinued operations.
On December 15, 2016, FM O&G completed the sale of its Deepwater GOM oil and gas properties to Anadarko Petroleum Corporation for cash consideration of $2.0 billion (before closing adjustments from the August 1, 2016, effective date) and up to $150 million in contingent payments. The contingent payments were recorded under the loss recovery approach, whereby contingent gains are recorded up to the amount of any loss on the sale, and was included in other assets ($150 million) on the consolidated balance sheets and reduced the loss on the sale. The contingent payments will be received over time as Anadarko realizes future cash flows in connection with a third-party production handling agreement for an offshore platform. Anadarko assumed abandonment obligations associated with these properties. A portion of the proceeds from this transaction was used to repay FCX's remaining outstanding borrowings under its unsecured bank term loan.
On December 30, 2016, FM O&G completed the sale of its onshore California oil and gas properties to Sentinel Peak Resources California LLC (Sentinel) for cash consideration of $592 million (before closing adjustments from the July 1, 2016, effective date) and contingent consideration of up to $150 million, consisting of $50 million per year for 2018, 2019 and 2020 if the price of Brent crude oil averages over $70 per barrel in each of these calendar years. The contingent consideration is considered a derivative, and at December 31, 2016, the fair value was $33 million, which was recorded in other assets on the consolidated balance sheets and included in the gain on the sale. Future changes in the fair value of the contingent consideration derivative will be recorded in operating income. Sentinel assumed abandonment obligations associated with the properties.