FCX Stock: Great Long-Term Value … or Trash?

Advertisement

What do gold, copper and crude oil all have in common?

Freeport-McMoRan Copper & Gold FCX logoThey’re all some of the worst performing commodities over the last few years. Prices for copper have plunged since the global credit crisis and have never fully returned to their pre-recession highs.

Gold seems to have lost its luster since the world’s economies have being grinding forward towards growth and prices for crude oil — which are now awash in huge supplies — has fallen to levels not seen since the recession.

The three troubled commodities also happen to be the three main products produced by Freeport-McMoRan Inc. (NYSE:FCX). And the latest earnings report by Freeport shows just how terrible things have gotten for the three commodities and FCX stock.

The question now is whether or not FCX stock is a huge long-term value or just a huge value trap.

FCX: Buying The Shale Revolution At Just The Wrong Time

After dropping 54% in just six months and sporting a new whopping 7.2% headline dividend yield, FCX stock looks like a tantalizing bargain for new investors. After all, the firm is working hard to become more of a broad-based resources firm among the likes BHP Billiton Limited (ADR) (NYSE:BHP) or Rio Tinto plc (ADR) (NYSE:RIO).

The unfortunate thing is that the hangover from those efforts may not subside anytime soon.

In order to push back the tide from falling copper and gold prices, FCX plowed headfirst back into energy production — a business it left back in 1994. It did this, ironically, by buying what it spun off.

Freeport paid $9 billion for McMoRan Exploration and its partner Plains Exploration & Production. That huge deal was mostly financed through debt and gave FCX access to lucrative deepwater and shale fields in the United States.

That access to higher priced crude oil & natural gas seemed like a godsend for the firm. The addition of energy assets into Freeport’s mix was designed to remove the volatility from the company’s earnings. Certainly, that has worked for multi-commodity rivals BHP and RIO. As we’ve seen from these two natural resource giant’s earnings, their wide variety of production has allowed them to benefit from the full commodity cycle.

For FCX, oil was seen as a way to counteract the fact that investors fled gold’s safe-haven status for equities while copper continued to plunge amid lower demand and rising supplies. That plan seemed to work … until about six months ago.

But with oil now falling, all bets are off for FCX stock.

Since FCX bought MMR and PXP, West Texas Intermediate (WTI) benchmarked crude oil has fallen by 47%. In the same time, copper has fallen by 30% and gold has tanked by 23%. And given just how capex-intense mining/producing these natural resources are, you need a relatively high price or huge volumes to justify producing them. And FCX has seen neither.

Actually, FCX hasn’t even finished paying for the MMR and PXP buyouts. In fact, its debt has actually gotten worse since the purchases.

When the deal was announced at the end of 2012, Freeport’s total debt was a tad over $3.5 billion. By the end of the next quarter, when the deal was finalized, debt had ballooned up $10 billion. Freeport finished 2014 with $19 billion in debt on its balance sheet. And making matters worse, FCX’s cash on hand has fallen to a mere $357 million. That compares to more than $2 billion at the end of 2013.

In response to this, FCX has undergone about $5 billion in asset sales and a series of initiatives designed to reduce capital spending and operating costs in order to maintain its financial strength.

FCX Stock Could Be A Big Value Trap

Given its high debt, FCX management has plans to reduce this load down to “just” $12 billion by 2016. That’s going to be a hard pill to swallow given the low price environment for crude oil, copper and gold. And that price environment could last for quite a while, especially if you look at how the oil service stocks are reacting to the downturn and just how big copper surpluses are getting.

Don’t be surprised if we see more asset sales coming down the pike during 2015. Considering FCX has already sold off some arguably “core” assets, any further sales might be cause for concern. FCX has already dumped assets like fertile fields in the Eagle Ford shale and copper mines in Chile, which means the company is already starting to get into the meat of its assets.

That doesn’t make for a long-term plan.

With all this in mind, in order to reduce debt and continue operating, FCX may be forced to deliver a nasty cut to that juicy dividend. We’ve already seen plenty of gold miners and few oil and gas firms do the same. Add in the fact that FCX managed to lose roughly $2.85 billion dollars — or $2.75 per share — for the fourth quarter of 2014, and it’s not looking too great for FCX.

As tantalizing as a nearly 50% drop in FCX stock is, Freeport is quickly shaping up to be the classic definition of a value trap. There aren’t any near-term catalysts to propel FCX stock much higher over the next few years. Add in its debt woes, the possibility for a dividend cut and FCX stock is firmly in the “don’t buy” camp.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

More From InvestorPlace

Aaron Levitt is an investment journalist living in Ohio. With nearly two decades of experience, his work appears in several high-profile publications in both print and on the web. Also likes a good Reuben sandwich. Follow his picks and pans on Twitter at @AaronLevitt.


Article printed from InvestorPlace Media, https://investorplace.com/2015/01/fcx-stock-value-trap/.

©2024 InvestorPlace Media, LLC