Freeport-McMoRan Copper & Gold Inc. (FCX): Is it a Good Buy Post-Acquisition?

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Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) recently announced plans to acquire Plains Exploration & Production and McMoRan Exploration for $3.4 billion (McMoRan) and $2.1 billion (Plains), net the 36% of McMoRan interests currently owned by Freeport and Plains. Billionaire George Soros is one Freeport's biggest fans, upping his stake over 200% last quarter (see George Soros' newest picks).

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Freeport saw its shares take a dive after its planned acquisitions, and is still down 13% over the past month. The acquisitions are expected to close in 2Q 2013. Irrespective of the oil and gas additions to Freeport operations, sales are expected to be up 24% in 2013 on higher copper output and gold production. Added long-term growth is expected to come from a secular rise in demand in both of these markets.

Freeport is also the world's largest producer of low-cost molybdenum, and has significant future potential reserve additions in North and South America, while remaining optimistic about its African operations.

Diversification in the oil and gas industry will likely place a lower multiple on the stock and reduce some investor attractiveness. We see the move as a long-term positive given the global economic rebound, which will increase the demand for energy and copper. Although the debt required to orchestrate the merger scares some investors, the fact that Freeport has a leading balance sheet with only 20% long-term debt-to-equity helps ease our fears.

From a valuation standpoint, Freeport is among the cheapest in the industry at 7x forward earnings. The stock also pays a solid dividend yielding 3.7%, which is only a 35% payout. Although the acquisitions will put pressure on the stock's multiples in the short run, we believe that ultimately, Freeport should trade more in line with other competitors. Even at a 10x P/E on next year's EPS estimates, the stock could see an upside of as much as 40% over the next 12 months.

What companies should we compare Freeport to?

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