Freeport-McMoRan Inc: The FCX Stock Rally Is Out of Control

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Freeport-McMoRan (FCX), a major copper producer, put on an epic rally of nearly 300% from the $3.52 low of Jan. 20 to the April 29 high of $14.06, but since then, they have pulled back slightly.

FCX stock is now positioned just below the previous support of $11.40, which is now resistance, and given the recent weakness in copper — along with still onerous debt levels for Freeport — I expect shares to struggle at current levels.

Sure, FCX has a small oil and natural gas footprint, but at the end of the day, Freeport-McMoRan is all about copper, as the latest earnings report illuminates. As the world’s largest publicly traded copper producer, it makes sense that FCX would be highly correlated with copper prices.

Until late March, that was indeed the case, as seen in the chart below. Since March 24, however, FCX has diverged dramatically, with FCX stock heading 8.61% higher while copper prices have dropped 7.59%.

FCX stock chart 1
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The chart below shows the comparative price of FCX to copper over the past year, with the extremes highlighted.

FCX copper
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As the following chart shows, these periods when Freeport was extremely pricey compared to copper marked significant tops in FCX stock. With shares again at an extreme comparative, I look for Freeport stock to follow a similar pattern and underperform.

fcx2
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The recent divestiture of its interest in TF Holdings for $2.65 billion in cash will make a slight improvement in the overall capital structure. The fact remains, however, that Freeport-McMoRan is still a heavily indebted behemoth.

With $20.8 billion in debt prior to the sale, and a debt-to-equity ratio still well over 5 (nearly triple the industry average), FCX still has a long way to go to shore up the balance sheet. It was these large debt concerns that had bankruptcy rumors swirling and FCX trading at $3.53 less than 4 months ago. To a large extent, many of these concerns still linger.

So with ongoing debt issues and Freeport at a premium to copper (and copper at three month lows), I am positioning bearishly on FCX stock with an out-of-the money call credit spread.

Trade Idea on FCX

Sell the FCX June $12 call (expires 6/17/16) and buy the FCX June $14 call (expires 6/17/16) for 45 cents net credit.

The maximum gain on the trade is $45 per spread, with a maximum risk of $155 per spread. Return on risk is 29%. The short $12 strike price provides a 9% upside cushion to the $10.98 closing price of FCX stock.

I would look to close out the trade on a meaningful break above the $12 level, while hoping to have the spread expire worthless and keep the initial credit if FCX remains well-behaved.

As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.

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Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, four years as Lead Options Strategist at ThinkorSwim and three years as a Market Maker for First Options in Chicago. Tim makes weekly appearances on Bloomberg TV  “Options Insight”, Business First AM “Trader Talk”, TD Ameritade Network “Morning Trade Live” and CBOE-TV “Vol 411” to discuss everything from volatility and option related.


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