It’s always comforting when a long-suffering stock you own has a few really good weeks after so much pain. And Freeport-McMoRan Inc (FCX) shareholders certainly have been suffering. FCX has spent the better part of a year falling deeper and deeper into the abyss — falling around 65% over the last 52 weeks.
But things seemed to have gotten a bit more “polished” for the producer of copper and gold.
After rallies in several of its key products and debt reduction moves, FCX managed its biggest month of gains in its history. That’s great news for those long-standing shareholders of FCX and any bottom-fishers out there who bought during Freeport’s fall.
However, investors shouldn’t get too excited about the gains. While things in the short term have gotten a tad bit rosier for FCX, the longer term is still murky. Freeport is still fraught with risk and warrants plenty of caution from investors playing the commodity giant.
First, The Good at FCX
Rebounding by more than 60% over the course of month is great for any stock. But for a beaten down one, it’s even better. Those big-time monthly gains at FCX came on the back of several bullish factors.
For starters, there’s the stealth rally in commodity prices. Despite all the negativity surrounding global growth, commodities have actually been on fire lately. And copper has been one of the best performers in recent weeks and may have bottomed mid-February. Contracts for May copper futures have recently hit highs not seen since November. That has been driven by recent bullish statements from the Chinese government about future stimulus efforts to boost its struggling economy. China is the biggest consumer of copper, and FCX happens to be one of the biggest producers.
Also boosting Freeport-McMoRan have been recent rises in gold and crude oil prices. While copper still runs the show at FCX, gains in its other two products should help on the cash-flow front.
But causing the biggest bump — a nearly 15% daily gain — was FCX’s announcement that it was selling a huge stake in one of its key mines with an eye toward debt reduction. Freeport sold a 13% stake in its Morenci mine to Japan’s Sumitomo Corporation (SSUMY) for $1 billion in cash. After taxes, the $550 million will go right into repaying some of what it borrowed under its bank term loan and revolving credit facilities.
That debt reduction is key, as the firm took on a lot of debt in order expand into oil & gas production. The purchases of Plains Exploration & Production Co. and McMoRan Exploration Co. turned out to incredibly ill-timed, as it was made at the peak of oil prices.
The result of the poor acquisitions and falling oil prices left FCX on the hook to repay around $20 billion in debt with stagnating cash flows. Any reduction here is seen as a major win for the firm and key for its survival.
Still Plenty of Bad at FCX as Well
So with rising copper prices and recent accelerated debt reduction, everything is coming up Milhouse for Freeport, and FCX stock is firmly in the “buy buy buy” camp, right?
Well, it’s not so easy for investors in the commodity firm.
The biggest issue is that debt load. $20 billion is nothing to sneeze at, and plenty of it is maturing pretty soon. With that in mind, Freeport is going to have to continue with asset sales to help pay back this load and kick the can until copper and commodity prices really recover.
FCX has had negative cash flows for the last five quarters and while the rise in copper prices will help, it still realized an average price of $2.18 per pound. That’s more than the current selling price. So investors hoping that the gains in copper will have a dramatic effect on FCX’s debt could be chasing a pipe dream. The best way to raise cash is going to come from asset sales.
But that’s not a panacea either. As we’ve seen with high-debt energy producer Chesapeake Energy Corporation (CHK), when your competitors know your hurting, they don’t exactly jump at what you’re selling. You end up realizing lower prices for your non-core assets and then you’re forced to sell even more and start tapping into the good stuff.
That seems to be happening with FCX. Rio Tinto plc (ADR) (RIO) — which is a partner in several of its mines — threw shade recently when it said no M&A because of “low quality.”
As for that low quality, FCX’s oil & gas assets fit into that camp with oil prices being where they are. The firm has been looking for a solution, but with oil below $40, they aren’t exactly worthy of a buy.
At the end of the day, that debt load is still a hug deal. While default and bankruptcy risks may have diminished today, in the medium-term it’s still on the table.
FCX Is Still a Risky Bet
While the recent gains in FCX stock have been nice, investors need to realize that this isn’t the beginning of the rally that takes Freeport back to go-go days of the commodity boom. The firm still has plenty of ugly warts — chiefly that debt load.
The situation here is still about survival till happier days. And that survival is still pretty darn murky even with the recent progress.
All in all, FCX stock is still a risky bet for investors and maybe only worth a short-term trade or two, rather than a long-term buy.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
