Congratulations to anyone who was lucky enough to own Freeport-McMoRan (FCX) prior to Thursday, as FCX stock finished up some 29% higher — then another roughly 20% after the bell on news that Carl Icahn had taken a sizable stake.
Now get out.
While the news is superficially compelling, in the end it’s only a stopgap to avoid dealing with a much bigger — perhaps insurmountable — problem.
These words won’t be well received by current Freeport-McMoRan shareholders who’ve been waiting for this rebound to take shape. And, a lot of traders likely just got into a position in FCX stock today on the heels of the news.
But, just hear the argument out, and take a look at some longer-term charts that underscore the true hurdle … a hurdle that makes China’s current economic lull look minor.
Freeport-McMoRan Aims to Shrink its Way to Success
On the off-chance you’re reading this and haven’t heard the news, the resource miner (primarily copper, but also oil and gas) Freeport-McMoRan announced this morning it would cut costs and production in an effort to survive the current wave of ultra-low copper and oil prices.
Specifically, FCX will reduce its planned capital expenditures for 2016 to $4 billion, down from the $5.9 billion it was planning on spending in the coming year as of a month ago.
In step with those spending cuts are lowered production estimates.
Next year, Freeport-McMoRan plans to dig up only 5.25 billion pounds of copper, rather than the 5.4 billion it had previously expected, and now plans on daily production of 55 million barrels of oil or oil equivalent in 2016, down from a prior projection of 59.7 million barrels per day.
The market cheered, of course, catapulting FCX stock up to the tune of 26% Thursday. After all, if it costs more to extract oil, gas and copper than the current market price for the stuff, why keep doing it?
Investors who feel the maneuver will buy Freeport-McMoRan enough time to enjoy the rebound in commodity prices — copper prices in particular — may want to rethink their assumption.
What’s Really Wrong With Copper?
Just for the sake of simplicity, let’s take oil and gas out of the equation. That’s not to say they don’t matter to the FCX, but copper is its bread-and-butter.
Sadly, that bread is toast, as copper isn’t in a position to recover anytime soon. And not just because China’s economic growth is slowing down, copper is in dire straits for more troubling reasons.
The core of that reason is, we just have way more of the stuff than we need. Three charts make the point.
First, the amount of copper currently available for purchase is high and still going up. The most recent London Metal Exchange warehouse report reveals 369,000 metric tons of copper ready to distribute. We’ve had more on hand before, but we’ve also had less. Either way, FCX’s oversupply of copper will grow before it shrinks.
Second, the price of copper has been in a downtrend since early 2011, reaching a multi-year low of $2.21 per pound this week. Economic growth and supply growth be damned, nothing has created a situation that’s stopped or even slowed the downtrend. It’s a concern for FCX stock holders, as Freeport-McMoRan reports a net cash production cost of $1.50 per pound of copper. That leaves very little wiggle room, if any.
The surprising prompt for copper’s weakness (and the reason FCX stock remains a liability despite today’s superficially good news) is most painfully evident on the third chart.
Giving credit where it’s due, the article “Why Copper Probably Still Needs to Fall Below $2,” points out that although global demand for copper continues to rise, so does production. The pros aren’t even thinking about a supply deficit until 2017, and that outlook may still be overly optimistic in light of recent economic data.
But does China holds the swing factor in the balance? Perhaps, but China appears to be able to meet its own growing demand for copper, and then some.
Beijing said last week that copper consumption in China was still on pace to grow 5.7% in 2015, yet the country’s refined copper production was on pace to grow 7.6%.
Meanwhile, it’s not as if demand from the United States is on pace to pick up the slack: U.S. usage of copper has been flat since 2010.
Bottom Line for FCX Stock
Kudos to the company for being willing to respond boldly to a problem, but this problem is bigger than a dose of sizable cost cuts.
The shadow looming above is a systemic one rather than a mere cyclical one — the world doesn’t need copper the way it used to, and to the same extent it once did, and there are too many sources other than Freeport-McMoRan to get it from.
This isn’t to say the company is on its deathbed. It is to say, though, there are much better investment choices out there besides FCX stock … choices that aren’t fighting an uphill battle.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
