Freeport-McMoRan Inc.

Transcription

1 February 05, 2015 Freeport-McMoRan Inc. Current Recommendation Prior Recommendation Neutral Date of Last Change 11/05/2014 Current Price (02/03/15) $18.98 Target Price $17.00 UNDERPERFORM (FCX-NYSE) SUMMARY We are retaining our Underperform recommendation on Freeport-McMoRan. The company swung to a loss in fourth-quarter 2014, hit by sizable charges related to its oil and gas assets and goodwill impairment. Adjusted earnings missed the Zacks Consensus Estimate. Revenues fell by double-digits on lower copper and gold sales, but beat expectations. The company saw lower gold and copper pricing in the quarter. Freeport s copper business remains affected by supply-related issues and slowdown in China (a major market). A still soft global economy is weighing on the copper market. We are also concerned about the weak commodity pricing environment and lingering uncertainties surrounding the Grasberg mine in Indonesia. SUMMARY DATA 52-Week High $ Week Low $16.81 One-Year Return (%) Beta 2.16 Average Daily Volume (sh) 23,105,098 Shares Outstanding (mil) 1,039 Market Capitalization ($mil) $19,720 Short Interest Ratio (days) 1.83 Institutional Ownership (%) 73 Insider Ownership (%) 3 Annual Cash Dividend $1.25 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 3.2 Earnings Per Share (%) Dividend (%) 27.1 P/E using TTM EPS 9.7 P/E using 2015 Estimate 13.8 P/E using 2016 Estimate 6.4 Zacks Rank *: Short Term 1 3 months outlook 5 - Strong Sell * Definition / Disclosure on last page Risk Level * Above Avg., Type of Stock Large-Value Industry Mining -Non Fer Zacks Industry Rank * 204 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) ,583 A 4,288 A 6,165 A 5,885 A 20,921 A ,985 A 5,522 A 5,696 A 5,235 A 21,438 A ,447 E 4,885 E 5,029 E 5,922 E 20,283 E ,990 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.73 A $0.49 A $0.88 A $0.84 A $2.64 A 2014 $0.49 A $0.58 A $0.64 A $0.25 A $1.96 A 2015 $0.11 E $0.31 E $0.37 E $0.59 E $1.38 E 2016 $2.96 E *Note: EPS in 2013 do not add up to the annual figure due to one-time adjustments. Projected EPS Growth - Next 5 Years % N/A 2015 Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 OVERVIEW Headquartered in Phoenix, Arizona, Freeport-McMoRan Inc. (FCX), formerly Freeport-McMoRan Copper & Gold Inc., is engaged in mineral exploration and development; mining and milling of copper, gold, molybdenum and silver; as well as the smelting and refining of copper concentrates. The company conducts its operations primarily through its principal operating subsidiaries, PT Freeport Indonesia, Freeport-McMoRan Corporation (formerly Phelps Dodge) and Atlantic Copper. PT Freeport Indonesia s (where Freeport holds a 90.64% stake) principal asset is Papua, Indonesia-based Grasberg mine, which contains the world s largest copper and gold reserves. PT Freeport Indonesia also owns a 25% stake in PT Smelting that operates a copper smelter and refinery in Gresik, Indonesia. The smelting and refining of copper concentrates and the marketing of refined copper and precious metals in slimes are conducted by Freeport s wholly owned subsidiary, Atlantic Copper S.A., located in Spain. In March 2007, Freeport-McMoRan acquired Phelps Dodge Corporation, a fully integrated producer of copper and molybdenum, with mines in North and South America, processing capabilities for other by-product minerals, and several development projects, including Tenke Fungurume in the Democratic Republic of Congo. The Grasberg mine of Freeport is joined by Phelps Dodge s 14 existing mines and those under development in the Americas and Africa. The merger significantly increased diversification and reduced the one-mine geopolitical risk previously associated with Grasberg. According to the data provided by third-party industry consultants, the Grasberg minerals district contains the largest single copper reserve and the single largest gold reserve in the world. In North America, Freeport operates seven open-pit copper mines Morenci, Bagdad, Sierrita, Miami and Safford in Arizona, and Tyrone and Chino in New Mexico as well as molybdenum mines, Henderson and Climax in Colorado. All of these operations are wholly owned by Freeport, except Morenci, which is under a joint venture with Freeport holding an 85% stake. In South America, the company has two operating copper mines Cerro Verde (53.56% stake) in Peru and El Abra (51%) in Chile. Freeport, in December 2012, inked definitive merger pacts, under which, it agreed to buy Plains Exploration & Production Company and McMoRan Exploration Co. for roughly $9 billion. Freeport closed its takeover of independent oil and gas company Plains on May 31, Moreover, it wrapped up the acquisition of exploration and production company McMoRan Exploration on June 3, 2013, following the approval of the transaction by McMoRan shareholders. Freeport added a high quality portfolio of U.S.- based oil and gas assets to its global mining business through these transactions. The total value of the twin transaction is $19 billion including $10 billion of debt assumed by Freeport as part of the deal, cash consideration of $5.5 billion and 91 million Freeport shares (worth $2.8 billion as of May 31, 2013). The value of the Plains acquisition is roughly $16.3 billion including the assumption of $9.7 billion of Plains debt and cash payment of roughly $3.3 billion. Freeport, in November 2014, completed the sale of its 80% stake in the Candelaria/Ojos del Salado copper mining operation and supporting infrastructure in Chile to Lundin Mining Corporation for $1.8 billion in cash, before closing adjustments. The transaction includes all of Freeport-McMoRan's interests in the Candelaria/Ojos mining district. The sale of its stake in the Chile copper mine represents an opportunity for Freeport to reduce debt. As of December 31, 2014, Freeport s estimated consolidated recoverable proven and probable reserves from its mines include billion pounds of copper, 28.5 million ounces of gold and 3.11 billion pounds of molybdenum. Equity Research FCX Page 2

3 REASONS TO SELL Freeport s copper business remains affected by the sluggish global economy and supply related issues. The difficult market conditions in Europe are still affecting copper markets. Demand from key end markets, including construction materials and electronics, still remain weak. The recent slowdown in China (a major market for copper) adds to the concern. A slowdown in copper demand in China has been triggered by the country's tepid property market and weaker infrastructure investment growth. The uncertain copper pricing environment represents another concern. Uncertainty regarding inventory levels may cause fluctuations in copper pricing. Looming oversupply in the market poses a threat on copper prices. The copper market is expected to swing into a production surplus in 2014, which may outstrip the demand levels. Copper prices fell during 2014 on a slowdown in China and oversupply of the metal. Prices for the red metal recently tumbled to a five-and-a-half-year low on fears of a slowdown in global economy. Freeport sees further drop in copper prices in Adding to the problem is the slump in oil prices. The Grasberg minerals district, the most significant operating asset for Freeport, is exposed to Indonesian political, economic and social uncertainties. The company faces regular protests from local residents and has been targeted with arson, roadside bombs and blockades ever since it began production in the 1970s. The company faced labor strikes in Indonesia in the recent past. Moroever, Freeport announced a force majeure on shipments from the Grasberg mine in May 2013 after the collapse of a tunnel at the mine that took 28 lives. The closure affected production as the Indonesian operation lost about 125 million pounds of copper and 125,000 ounces of gold in secondquarter Freeport, in Jul 2014, received approval of the Indonesian government for copper export for 2014, allowing it to resume its shipment from the Grasberg mine. Under the agreement with the government, the company has to pay higher royalties for gold and copper and support a smelter development. Under a revised regulation, export duties have been reduced and Freeport will now pay a 7.5% duty on its copper concentrate exports, but the rate drops to 5% when development progress exceeds 7.5%, and eventually becomes zero once investment in the project exceeds 30% of total cost. However, despite this positive development, lingering uncertainties surrounding the mine (with regards to royalties, duties, operating costs and worker strikes) may weigh on Freeport s stock. The mine remains susceptible to strikes, which could affect production as a result of reduced capacity. The company is currently in active discussions with the new government in Indonesia to amend its contract or to extend its rights to operate beyond 2021 (the expiration timeline of the existing contract). While Freeport is aggressive managing its costs of late, high production cost still remains a concern for the company. Ramp up activities at Morenci may drive costs higher in North America. Moreover, unit costs remain higher in South America as a result of lower volume. Unit costs are expected to rise in 2015 across South American and Indonesian operations, partly due to reduced volumes. Moreover, unit costs have been also forecast to rise in Africa this year as the company is seeing high production and delivery costs. As a global company, Freeport transacts business in many countries and in many currencies. Foreign currency transactions at Freeport s international subsidiaries increased its risks as exchange rates can change in the period when the time agreements are made and foreign currency transactions are settled. The company may hedge or protect its international subsidiaries foreign currency transactions from time to time by reentering into forward exchange contracts to lock in or minimize the effects of fluctuations in exchange rates. Equity Research FCX Page 3

4 RISKS Freeport is conducting exploration activities near its existing mines with a focus on opportunities to expand reserves that will support the development of additional future production capacity in the large minerals districts, where it currently operates. Favorable exploration results indicate opportunities for significant future potential reserve additions in North and South America and in the Tenke Fungurume minerals district. The drilling data in North America continues to reflect the potential for expanded sulfide production. Freeport has made a major stride to venture into the U.S. energy space. The acquisition of Plains Exploration and McMoRan Exploration represents a part Freeport s strategy to diversify away from its bread-and-butter copper mining business. The buyouts will bring in new opportunities for Freeport. The merger is expected to make the combined entity a leading natural resource conglomerate in the U.S., leveraging Freeport s industry-leading mineral assets and the oil and gas resources of Plains and McMoRan. The addition of Plains established oil production assets and McMoRan natural gas drilling capabilities and shallow water ultra-deep properties provides Freeport a significant exposure to energy markets. Freeport continues to progress with its expansion initiatives. The company is evaluating a potential large-scale milling operation at El Abra mine in Chile to process additional sulfide material and attain higher recoveries. At Cerro Verde, Peru, a large-scale concentrator expansion continues to advance. The roughly $4.4 billion project would provide incremental annual production of around 600 million pounds of copper and 15 million pounds of molybdenum beginning in Freeport is also expanding mining and milling capacity at Morenci to process additional sulfide ores which would lead to incremental annual copper production. RECENT NEWS Freeport Misses Earnings, Beats on Revenues in Q4 January 27, 2015 Freeport reported loss of $2.75 per share for fourth-quarter 2014, compared with earnings of $0.68 per share in the fourth quarter of The results include net charges of $3.1 billion or $3.00 per share. Barring that impact, earnings were $0.25 a share in the fourth quarter, missing the Zacks Consensus Estimate of $0.35. For the full year 2014, net loss came in at $1.26 per share in contrast to earnings of $2.64 in Barring net charges of $3.3 billion or $3.22 per share in 2014, earnings came in at $1.96 per share for 2014, which missed the Zacks Consensus Estimate of $2.05 per share. Revenues declined 11% year over year to around $5,235 million in the fourth quarter, but surpassed the Zacks Consensus Estimate of $5,182 million. For the full year 2014, revenues increased 2.5% year over year to $21,438 million, exceeding the Zacks Consensus Estimate of $21,068 million. Consolidated sales from mines decreased to 972 million pounds of copper in the fourth quarter from 1.14 billion pounds in the year-ago quarter, mainly due to the sale of Candelaria in Nov 2014 and lower sales from Cerro Verde and Indonesia. Sales of gold also declined to 377,000 ounces in the reported quarter from 512,000 ounces a year-ago. Gold sales decreased due to lower ore grades. Equity Research FCX Page 4

5 Sales of molybdenum decreased modestly to 21 million pounds in the reported quarter from 22 million pounds in the fourth quarter of Operational Update Consolidated average unit net cash costs (net of by-product credits) increased to $1.47 per pound of copper in the quarter from $1.16 per pound a year ago mainly due to lower copper and gold sales volumes. Average realized price per ounce for gold fell to $1,193 per ounce from $1,220 per ounce a year ago while average realized price per pound for copper declined to $2.95 per pound of copper from $3.31 per pound of copper in the prior-year quarter. Mining Update North America Copper Mines: Copper sales at the mine increased 29.9% year over year to 434 million pounds due to higher mining and milling rates at Morenci and higher ore grades at Chino. Production rose 21.3% to 467 million pounds in the reported quarter. Freeport expects copper sales from North America to be 1.9 billion pounds in 2015, compared with 1.66 billion pounds of copper in 2014, due to higher rates from the Morenci mill expansion. South America Mining: Copper sales of 247 million pounds declined 38.6% from the year ago quarter mainly due to the sale of the Candelaria and Ojos del Salado operations and expected lower ore grades at Cerro Verde. Gold sales went down 76.5% to 8,000 ounces. Copper production went down 33.2% to 253 million pounds in the reported quarter and gold production decreased 67.7% to 10,000 ounces in the quarter. In Nov 2014, Freeport completed the sale of its 80% ownership interests in the Candelaria and Ojos del Salado copper mining operations and supporting infrastructure to Lundin Mining Corporation for $1.8 billion in cash, before closing adjustments and contingent consideration of up to $200 million. Barring contingent consideration, Freeport booked after-tax net proceeds of $1.5 billion and logged an after-tax net gain of $450 million. South America mining is expected to report sales of around 0.9 billion pounds of copper for the year 2015, compared with sales of 1.14 billion pounds of copper in Indonesia Mining: Copper sales of 180 million pounds declined 38.4% from the year ago quarter while production decreased 43.8% to 171 million pounds. Gold sales decreased 23.1% to 366,000 ounces and production fell 29.5% year over year to 354,000 ounces in the reported quarter. Both gold and copper sales decreased in the quarter due to lower ore grades and unplanned work stoppages. Reduced workforce attendance levels in certain operating areas (primarily in the Grasberg open-pit) adversely affected productivity. Freeport expects sales from Indonesia mining to be around 1 billion pounds of copper and 1.3 million ounces of gold for the year In Jul 2014, Freeport signed a Memorandum of Understanding (MOU) with the government of Indonesia under which PT Freeport Indonesia (PT-FI) and the government agreed to negotiate an amended Contract of Work (COW). According to the MOU, Freeport was granted the approval to resume operations at PT-FI. With its export permit, Freeport resumed concentrate shipments from the Grasberg mine in Papua, which had been suspended since January In Jan 2015, PT-FI secured a renewal of its export license through Jul 25, Equity Research FCX Page 5

6 Africa Mining: Copper sales of 111 million pounds were almost at par with the year ago quarter. Production decreased 3.6% to 107 million pounds in the quarter. The sales at the mine are expected to be 445 million pounds of copper and 32 million pounds of cobalt for the year Molybdenum: Molybdenum production of 11 million pounds in the fourth quarter was lower than 12 million pounds produced a year ago. Financial Position Freeport had cash and cash equivalents of $464 million as of Dec 31, 2014, down 76.6% from $1,985 million as of Dec 31, Freeport had long-term debt of about $18.5 billion as of Dec 31, 2014, down from $20.4 billion as of Dec 31, Freeport s operating cash flows were $1.1 billion in the fourth quarter. Capital expenditures totaled $1.8 billion in the reported quarter. Oil and Gas Operations (FMO&G) In May and early June of 2013, Freeport completed the acquisitions of Plains and McMoRan Exploration and formed a premier U.S. based natural resource company collectively called FM O&G, and added a high quality portfolio of U.S.-based oil and gas assets to its global mining business. In the fourth quarter, realized revenues for oil and gas operations were $725 million ($59.95 per barrels of oil equivalents/boe) compared with $1,222 million ($73.58 per BOE) in the year ago quarter. Cash production costs totaled $265 million ($21.93 per BOE) in the quarter. Sales volume was 8.1 million barrels of oil equivalent (MMBOE) in the quarter. Guidance For 2015, Freeport expects consolidated sales to be around 4.3 billion pounds of copper, 1.3 million ounces of gold, 95 million pounds of molybdenum and 55.5 MMBOE. For the first quarter of 2015, the company expects 950 million pounds of copper, 225,000 ounces of gold, 23 million pounds of molybdenum and 13.1 MMBOE. Consolidated unit net cash costs (net of by-product credits) for copper mines are expected to average $1.53 per pound of copper for the year Cash production costs are expected to be around $18 per BOE for the year For 2015, capital expenditures are expected to be roughly $6 billion for the year 2015, including $2.5 billion for major projects at mining operations and $2.3 billion for oil and gas operations, reflecting a 34% decrease in oil and gas expenditures. Freeport is taking aggressive actions to reduce or defer capital expenditures and other costs and has taken efforts to obtain third-party funding for a significant portion of its oil and gas capital expenditures to maintain financial strength and flexibility in response to recent sharp declines in oil prices. The company has reduced budgeted 2015 capital expenditures, exploration and other costs by $2 billion. Equity Research FCX Page 6

7 Freeport Beats Earnings, Revenue Estimates in Q3 October 28, 2014 Freeport reported earnings of $0.53 per share for third-quarter 2014, reflecting a decline of 32.9% from the year-ago earnings of $0.79. Profit declined 32.8% year over year to $552 million, hurt by lower pricing of copper and gold. The results include net charges of $115 million or $0.11 per share. Barring that impact, earnings were $0.64 a share in the third quarter, topping the Zacks Consensus Estimate of $0.62. Revenues declined 7.6% year over year to around $5,696 million in the third quarter, but surpassed the Zacks Consensus Estimate of $5,596 million. Consolidated sales from mines increased to 1.08 billion pounds of copper in the third quarter from 1.04 billion pounds in the year-ago quarter. Sales of gold also jumped to 525,000 ounces in the reported quarter from 305,000 ounces a year-ago. Gold sales increased due to higher ore grades. Sales of molybdenum decreased moderately to 22 million pounds in the reported quarter from 23 million pounds in the third quarter of Operational Update Consolidated average unit net cash costs (net of by-product credits) decreased to $1.34 per pound of copper in the quarter from $1.46 per pound a year ago. Average realized price per ounce for gold fell to $1,220 per ounce from $1,329 per ounce a year ago while average realized price per pound for copper declined to $3.12 per pound of copper from $3.28 per pound of copper in the prior-year quarter. Mining Update North America Copper Mines: Copper sales at the mine increased 20% year over year to 436 million pounds due to higher mining and milling rates at Morenci and higher ore grades at Chino. Production rose 19.5% to 423 million pounds in the reported quarter. Freeport expects copper sales to be 1.7 billion pounds in 2014, up from 1.4 billion in For 2015, Freeport expects copper production to increase due to higher mining and milling rates at Morenci and higher ore grades at Chino. South America Mining: Copper sales of 271 million pounds declined by 16.1% from the year ago quarter mainly due to lower ore grades at Candelaria and Cerro Verde. Gold sales went down 38.5% to 16,000 ounces. Copper production went down 18.7% to 284 million pounds in the reported quarter and gold production decreased 33.3% to 20,000 ounces in the quarter. South America mining is expected to report sales of 1.1 billion pounds of copper in The guidance excludes production from the Candelaria and Ojos del Salado mines (expected to be around 80 million pounds of copper). Indonesia Mining: Copper sales of 258 million pounds declined 8.9% from the year ago quarter while production decreased 19.8% to 203 million pounds. Gold sales increased 81.7% to 505,000 ounces and production rose 43.4% year over year to 426,000 ounces in the reported quarter. Both gold and copper sales increased in the quarter due to higher ore grades. Freeport expects sales from Indonesia mining to be around 0.7 billion pounds of copper and 1.15 million ounces of gold for Equity Research FCX Page 7

8 During the quarter, the miners at Grasberg met with a fatal accident due to which operations were temporarily suspended. However, Indonesian authorities approved the resumption of operations after issuing recommendations on traffic control procedures which have been implemented by PT-FI. But, PT- FI received notice from union leadership indicating its intention to conduct a 30-day strike beginning on Nov 6, Africa Mining: Copper sales of 112 million pounds represent a year over year decrease of 5.1%, reflecting timing of shipments. Production increased 7.3% to 117 million pounds in the quarter. The sales at the mine are expected to be about 445 million pounds of copper and 30 million pounds of cobalt in Molybdenum: Molybdenum production of 13 million pounds in the third quarter was higher than 12 million pounds produced a year ago. Financial Position Freeport had cash and cash equivalents of $658 million as of Sep 30, 2014, down 70.3% from $2,219 million as of Sep 30, Freeport had long-term debt of about $18 billion as of Sep 30, 2014, down from $21.1 billion as of Sep 30, Freeport s operating cash flows were $1.9 billion in the third quarter, flat compared with the year ago quarter. Capital expenditures totaled $1.9 billion in the reported quarter. Oil and Gas Operations (FMO&G) In the third quarter, realized revenues for oil and gas operations were $867 million ($69.08 per BOE) compared with $1,333 million ($80.93 per BOE) in the year ago quarter due to lower oil prices and higher realized cash losses on derivative contracts. Cash production costs totaled $263 million ($20.93 per BOE) in the quarter. Sales volume was 8.6 MMBOE in the quarter. Guidance For 2014, Freeport expects consolidated sales from mines of 3.9 billion pounds of copper, 1.2 million ounces of gold, 95 million pounds of molybdenum and 56.2 MMBOE. These estimates exclude estimated fourth-quarter 2014 production from the Candelaria and Ojos del Salado mines (totaling around 80 million pounds of copper and 25,000 ounces of gold). For the fourth quarter, the company expects 1 billion pounds of copper, 350,000 ounces of gold, 21 million pounds of molybdenum and 11.5 MMBOE. Consolidated unit net cash costs (net of by-product credits) for copper mines are expected to average $1.52 per pound of copper for The impact of price changes for the fourth quarter on consolidated unit net cash costs would be roughly $0.01 per pound for each $50 per ounce change in the average price of gold and $0.005 per pound for each $2 per pound change in the average price of molybdenum. Cash production costs per BOE are expected to be around $24 per BOE for the fourth quarter 2014 and $21 per BOE for the year For 2014, capital expenditures are expected to be roughly $7.5 billion, including $3 billion for major projects at mining operations and $3.4 billion for oil and gas operations. Equity Research FCX Page 8

9 VALUATION Freeport-McMoRan s current trailing 12-month earnings multiple is 9.7X, compared to the 12.8X average for the peer group and 18.8X for the S&P 500. Over the last five years, the company s shares have traded in a range of 5.3X to 13.4X trailing 12-month earnings. The stock is trading at a discount to the peer group, based on the estimated earnings for 2015 and We take into account uncertainties surrounding the Grasberg mine and weak pricing. Our Underperform recommendation on the stock indicates that it will perform below the broader market. Our price target of $17 is based on 12.3x our 2015 earnings estimate. Key Indicators P/E F1 P/E F2 Est. 5-Yr EPS Gr% P/CF P/E P/E 5-Yr High P/E 5-Yr Low Freeport-McMoRan Inc. (FCX) N/A Industry Average S&P Alcoa, Inc. (AA) Fission Uranium Corp. (FCUUF) Southern Copper Corp. (SCCO) First Quantum Minerals Ltd. (FQVLF) TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Freeport-McMoRan Inc. (FCX) Industry Average S&P Equity Research FCX Page 9

10 Earnings Surprise and Estimate Revision History Equity Research FCX Page 10

11 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of FCX. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1120 companies covered: Outperform %, Neutral %, Underperform 6.8%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research FCX Page 11