Freeport-McMoRan (FCX) has had a wild year. FCX stock has ranged between $3.50 and $24 per share over the past 52 weeks. The multinational copper, gold, and oil producer has been hit hard by global economic woes and the general malaise in the commodity space.
However, since January, things have started looking up for FCX stock. After dropping 80% from last year’s high, the stock reached its low point at $3.50. Since then, there’s been a swift reversal of fortunes. FCX stock tripled off the lows and today sits just under $11. Is it time to take profits on the recent rally, or is there more upside ahead for FCX stock?
FCX Stock: Pros
Great Assets: For all of Freeport McMoRan’s troubles, it is still an excellent copper miner. The company had 2015 costs of $1.53/lb, or $1.78 including delivery costs. In 2016, this is estimated to drop to $1.10/lb, or $1.34/lb including transportation. Those are great by industry standards. Even with copper at just $2/lb, a far cry from the $4/lb salad days a few years ago, the company can still eke out a decent profit.
Yes, after paying interest and having other less profitable businesses such as the star-crossed oil subsidiary, the company will continue to lose money on an earnings basis. But 2016 could well be cash flow positive even if copper doesn’t rally any further. The fact that FCX has large, low cost and (mostly) good jurisdiction mines make it easier for the company to pursue asset sales or even sell the company full stop.
Huge Fall In Price: For the discount shopper, the bigger the sale, the better. For stock investors, many take the opposite view and get scared after big plunges. In Freeport McMoRan’s case, FCX stock has fallen by roughly 80% from the post financial-crisis peak. What was $60 in 2010 is under $11 today.
If the company survives the current dark economic cycle, there’s the possibility of a huge recovery. If the company can maintain its current mine asset base and not heavily dilute shareholders, it’s reasonable to think FCX stock could move back to $20 or $25 if copper steadies itself above $3/lb. In 2001, at the end of the last big mining bust, FCX stock traded under $5. It would go up as much as nine-fold over the next decade.
Asset Sales/Restructuring: Freeport McMoRan is aggressively cutting costs and unloading assets. Earlier this year, Freeport sold a 13% stake in its Morenci copper mine in Arizona to Sumitomo, a large Japanese firm. For that stake, the company received a billion dollars of much needed cash. Last month, the company also sold its stake in a large Serbian copper project for $263 million.
Additionally, the company is rapidly cutting fat. FCX closed one unprofitable mine in Arizona, is making layoffs across the business, and is even cutting executive positions. The company’s board was shrunk by almost half, and the executives of the oil and gas subsidiary were let go. While this has been an exceedingly difficult environment, Freeport is making the right moves to try and survive.
FCX Stock: Cons
China’s Economy Still Troubled: Much of the recent recovery in commodities has been driven by optimism related to China. In late 2015 and early January, Chinese equities were crashing. Furthermore, it appeared that the Chinese banking system was freezing up. Couple that with the Chinese currency repeatedly losing value, and international investors feared the worst.
Since January, Chinese shares have generally recovered. Economic indicators haven’t really picked up for China, but the bleeding has slowed. Additionally, it appears that the credit markets there have eased to some degree.
But the core problems remain. Chinese consumers and businesses have levered up, and the slowdown in the economy will cause a lot of loans to go bad. Particular to FCX, China overbuilt in the infrastructure area in recent years. The slowdown in Chinese construction is likely to persist for at least a few years. Other emerging markets such as Brazil that rode China’s coattails are also in deep economic slumps now. They won’t be needing so much copper going forward.
Copper Glut: There’s a surplus of copper production in the world, and the situation isn’t likely to change in the near term. This is bad news for FCX stock, since copper pays the lion’s share of the bills for the company.
An executive at Freeport McMoRan told Bloomberg that the world’s oversupply of copper would persist throughout 2016, and that the market would stabilize in 2017. Due to a flurry of expansions of existing mines that were already put into process before copper prices dropped, the market is still seeing increasing copper production for the time being. In 2017, this will change, as the mine expansions are completed. New mines are basically out of the picture with prices this low. So supply will catch up to demand. But for this year, copper will remain oversupplied.
Weak Balance Sheet: Freeport McMoRan has a troubled balance sheet. The company’s debt to equity ratio is up to 2.6x. That’s a level of clear distress, and the highest Freeport McMoran shares have faced since 2003. While the market is valuing the company at $12.9 billion, that number is deceptive. The company’s enterprise value is $35 billion, meaning that there’s more than $20 billion of debt that has claim to Freeport’s assets before owners of FCX stock have any say in things.
If the rebound in global markets hold up, Freeport McMoRan can probably avoid bankruptcy. But the debtload is huge. The company trades at more than 10x 2014 EV/EBITDA. That’s expensive for most companies, let alone mining firms. In 2015 the company didn’t even produce positive EBITDA.
Freeport McMoran Stock: Verdict
I give Freeport a reasonably good chance of avoiding bankruptcy. But know that the high debtload is forcing the company to sell off assets at an inopportune moment, and serves as a big overhang on FCX stock. I’m inclined to avoid the stock, and if anything, I’d rather be short. The commodity bust isn’t something that’s going away overnight. There’s no reason to get involved in FCX stock before the copper market rights itself next year.
At the time of this writing, Ian Bezek had no position in any stocks mentioned. You can reach him on Twitter at @irbezek.
