Freeport-McMoRan Inc. Is Too Dangerous Right Now

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Freeport-McMoRan Inc (NYSE:FCX) can’t seem to catch a break. The past few years have characterized by multiple turnarounds that were only met by good deals gone bad, terrible situations and deteriorating fundamentals. If you hold FCX stock, you’re familiar with trouble.

Freeport-McMoRan FCX stock

And this cycle of boom and bust, recovery and heartbreak, looks likely to continue.

Just as Freeport-McMoRan is recovering from one deal that nearly sank FCX stock and put the company at great risk of bankruptcy, another major issue looms. And just like the previous issues, this one looks grave.

Freeport stock continues to be bound by the eternal cycle of turnarounds and setbacks. Which is why how you handle FCX will ultimately depend on who you are.

Freeport’s Crazy Ride

The Freeport-McMoRan coaster started just after the credit crisis and global economic slowdown. After the recession, gold and copper prices fell into the abyss. As one of the largest producers of both those metals, FCX’s profits understandably dipped, and hard.

But at the time, oil was surging and on its way to over $100 per barrel. So in a move meant to diversify away from copper and gold, Freeport-McMoRan in 2013 bought out McMoRan Exploration Co. and Plains Exploration. The deal cost $9 billion in cash and the assumption of $11 billion of debt.

Oil prices tanked the very next year.

Freeport found itself between a rock and a hard place. Debt was piled high, and the three commodities that determined FCX’s fate were tanking. Analysts questioned Freeport’s ability to continue, and FCX stock sank into penny-stock territory.

Things began to turn around as gold and copper prices started to rebound — so much so that FCX started recording some serious cash flows and reversed its massive losses. In the fourth quarter, Freeport posted a profit of $292 million vs. a loss of $4.08 billion for the same period a year ago.

Freeport also started to pay down a whopping $19 million debt load. In less than a year, FCX paid off $3 billion. Higher commodity prices also allowed FCX to sell plenty of its non-core assets to bolster its balance sheet further.

FCX now estimates that it can generate $4.7 billion in cumulative free cash flow this year and next.

The Big “If” for FCX Stock

Freeport shares nearly doubled in 2016, but unfortunately, all those gains might be short-lived.

FCX has gotten into a scuffle with the Indonesian government. Changes to Indonesia’s mining laws — which now call for higher royalty payments and more local control — could potentially throw Freeport’s debt plans into a death spiral.

Why is Indonesia the straw that could break the camel’s back? Because that’s where Freeport’s crown jewel is located.

Freeport’s Grasberg facility is the world’s second largest copper mine and one of the lowest-cost to operate, thanks to the gold it also produces. Grasberg accounts for about a third of Freeport’s copper production and accounts for about 50% of the value of its assets. Strikes have already erupted at the mine in protest of the mining rates, and FCX is giving the Indonesian government 120 days to resolve the issues before suing them.

If things don’t work out in Freeport’s favor, it will suffer a heavy hit to its profits and won’t be able to make as much progress on the debt. FCX has invested nearly $12 billion in the Grasberg mine so far, and planned on investing another $15 billion. Revenue from Freeport’s Indonesia operations came in at $3.3 billion in 2016. This year, FCX expects to generate more than $5.9 billion from Indonesia.

Without that, FCX stock is in serious trouble.

Freeport Is Simply a Trade

The latest bout of issues with the Indonesian government is just the latest in a line of ups and downs for Freeport-McMoRan. Negotiations that go in Freeport’s favor will cause FCX stock to skyrocket. If 120 days pass without a positive resolution, it’s back to the doghouse.

If that doesn’t classify FCX as a trade, I don’t know what does.

The key is to know what you’re getting into. Options traders can make some directional plays without plunking down a ton of capital. But investors hoping to extract deep value in FCX stock still could set themselves up for disaster, because when Freeport moves, it moves.

Long-term investors should stay away from Freeport and look elsewhere if they’re dying to buy battered commodity plays. FCX stock is nothing more than a coin flip.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

Aaron Levitt is an investment journalist living in Ohio. With nearly two decades of experience, his work appears in several high-profile publications in both print and on the web. Also likes a good Reuben sandwich. Follow his picks and pans on Twitter at @AaronLevitt.


Article printed from InvestorPlace Media, https://investorplace.com/2017/02/freeport-mcmoran-inc-fcx-stock-too-dangerous/.

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