Tags: freeport | mcmoran | dividend | stock | gold

This Dividend Stock Could Be Good As Gold

This Dividend Stock Could Be Good As Gold
Alexey Novikov | Dreamstime.com

By Tuesday, 10 September 2019 04:10 PM Current | Bio | Archive

Gold prices are on the rise once again. Often viewed as a hedge against inflation and geopolitical conflicts, gold is seen as a safe haven asset class when other asset classes such as stocks are seeing heightened volatility.

The traditional way to invest in gold is to simply buy the hard asset itself. This can be done directly, or indirectly by buying shares in a gold ETF such as GLD. But income investors can also choose to buy gold mining stocks, many of which offer the added bonus of a dividend.

This article will discuss why Freeport-McMoRan Inc. (FCX) could be a highly rewarding dividend stock if gold continues its recent rise.

Business Overview

mines mineral properties from a widely diversified asset base in North America, South America, and Indonesia and primarily explores for copper, gold, molybdenum, silver, and other metals, as well as oil and gas. We view it as one of the most attractive gold mining stocks at current market prices.

As of December 31, 2018, the company’s estimated consolidated recoverable proven and probable mineral reserves totaled 119.6 billion pounds of copper, 30.8 million ounces of gold, and 3.78 billion pounds of molybdenum. It also has an estimated proved developed oil and natural gas reserves of 7.2 million barrels of oil equivalents. These vast reserves represent enormous value for investors at current prices, provided that the company can extract them efficiently and sell them at good prices.

The company recently reported second quarter results. The highlights included strong performance and growing momentum in its innovation and advanced analytics program in the Americas. The company also saw healthy progress in its Lone Star project in Arizona, where Freeport is on track for first copper production by year end 2020 and opportunity for low capital-intensive oxide expansion.

Additionally, the Grasberg Open Pit and Underground projects continue to make solid progress. On the whole, the company reaffirmed its annual sales outlook and continues to execute on a clearly defined strategy to drive shareholder value.

While the company appears to be firing on all cylinders, shares remain suppressed. This is in large part due to the negative past that continues to mar the company’s reputation as Freeport has a history of overpaying for acquisitions and piling on hefty levels of debt.

Furthermore, Freeport is heavily correlated with copper prices, which in turn are often impacted by the state of the global economy. With slowing seen across the globe and the threat of a recession looming on the horizon, this company is viewed by the market as riskier than pure gold miners at the moment. In particular, the slowing Chinese manufacturing sector is weighing heavily on copper prices.

Reasons For Optimism

That being said, the company is well positioned to succeed moving forward. It owns world class assets, copper fundamentals are increasingly robust, and growth is beginning to pick up. As its growth continues to ramp, increased economies of scale will be achieved, boosting margins even as revenues grow. This should take place in the near future as copper volumes are expected to increase by 30% and gold volumes are expected to rise 80% over the next 18 months. With the surging price of gold, this should prove to be very beneficial to the company’s headline results, likely reducing net unit costs by 25% and doubling EBITDA and cash flow.

Furthermore, much of this will turn into free cash flow since the company has already completed much of its capital expenditures for the growth projects about to go on line. These new growth projects (especially the Lone Star project) are also expected to be lower risk due to their location in established areas with minimal geopolitical risk.

Final Thoughts

With ownership of increasingly rare high-quality ore bodies, the outlook for annual copper demand expected to reach 4.2 billion pounds by 2021, and gold and silver prices surging, Freeport-McMoRan has a very bright future.

Given that shares already trade at a tremendous value relative to the rest of the precious metals market and the strong free cash flow growth potential in the company, we see high single-digit to mid-teens total return potential in shares. This would make the company one of the best-returning mining companies in the market today. Furthermore, its diversification across numerous mineral and metals makes it a more conservative investment than a pure gold, copper, or silver would be.

Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.

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Gold prices are on the rise once again. Often viewed as a hedge against inflation and geopolitical conflicts, gold is seen as a safe haven asset class when other asset classes such as stocks are seeing heightened volatility.
freeport, mcmoran, dividend, stock, gold
Tuesday, 10 September 2019 04:10 PM
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