Traders love Freeport-McMoRan Inc (FCX) because FCX stock is cheap and volatile, but a recent run and some better news in the copper market doesn’t make it worth the risks of holding.
True, shares in the United States’ largest mining company are up 70% over the last month, but bear in mind that’s off a really, really low base.
The rally isn’t based on fundamentals, either.
Part of the newfound popularity of FCX stock comes from the fact that hedge fund macher Carl Icahn upped his stake in the fourth quarter.
The other part comes from chart-watchers in the commodities market. FCX’s business is copper, and prices for the critical metal have been showing signs of life.
As an aside, strength in copper kind of contradicts the argument that we’re headed for a global recession. After all, copper prices have a good track record of moving ahead of recessions and recoveries. That’s why it’s called the metal with a Ph.D.
Anyway, copper prices have been moving in a technically bullish manner, according to chart watchers. And, indeed, copper prices have had a nice run recently, lifting them to two-month highs.
The trouble is that as good as the forces are for giving traders a chance to profit from dramatic moves in Freeport-McMoRan, they do nothing to help fundamental problems like future revenue, the profit outlook or the company’s balance sheet.
FCX Stock Is a Dangerous Bet
This is a terrible time to sell assets to pay down debt, but that’s exactly what FCX finds itself forced to do. It’s attempting to sell the two oil companies it bought just before oil prices crashed (and which caused its debt to balloon.) Surprise, surprise, there are no takers.
It’s selling off parts of the copper business, too. Heck, Freeport has put all its assets under review for sale in a down market. It also recently suspended its dividend.
Freeport-McMoRan isn’t focused on the business of mining so much as it’s focused on staying afloat.
FCX is carrying $20 billion in debt on its books and just $224 million in cash. As for cash flow, it was negative by about $530 million last quarter after paying interest on debt. A big chunk of debt is maturing in 2018.
There’s a reason why Citigroup issued a rare sell call on FCX stock earlier this week. It’s also not very reassuring that analysts’ average price target of $6.21, according to Thomson Reuters, implies downside of 20%.
Bottom Line
The good news for anyone holding FCX stock is that any rally in shares affords a decent opportunity to salvage what you can. Playing for any kind of sustained rebound in this name looks to have long odds at best.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
