Freeport-McMoRan (FCX) stock continued its steep descent Wednesday, and it’s hard to see anything pulling the nation’s largest miner out of its slide.
Heck, even last week’s news that activist investor Carl Icahn bought a big chunk of FCX stock didn’t help for long.
In the most recent reason to sell FCX, the company said it would raise $1 billion by selling more shares — something Freeport-McMoRan had already done once, earlier this year. Investors dislike follow-on offerings such as this because it dilutes their stakes.
But FCX doesn’t have many options.
Prices for commodities like oil, gold, iron ore and copper are plummeting, and FCX is playing catch-up thanks to all the damage that has been doing to revenue and income. Last month, FCX said it will slash capital spending by nearly 30% in 2016. It also plans to cut 10% of its workforce and reduce output.
Those moves might be necessary, but they aren’t going to be sufficient to get FCX growing again — at least not anytime soon.
Global Problems Impact FCX Stock
More than anything, FCX’s troubles stem from China. It’s no longer driving global demand for copper. At the same time, miners have too much capacity, which they originally built up to take advantage of China’s once-voracious appetite.
In related bad news, giant emerging markets such as Brazil and Russia are in recession.
About all FCX can do in response to slowing demand is cut output, but that’s not going to make up for the surfeit of copper being dug up or in storage around the globe.
Prices for most commodities have been dropping for nearly four years now, and no company in the mining sector has been immune. Freeport-McMoRan, however, does have some particular problems.
When it became clear a few years ago that the commodities super-cycle had come to an end, FCX realized it needed to diversify away from copper. So what did it do?
It went into oil and gas.
FCX Steps In It
FCX paid $20 billion in 2013 to acquire Plains Exploration & Production Company and McMoRan Exploration Co. Prices for crude oil collapsed the following year, and there’s still no recovery in sight.
Oh, and Freeport-McMoRan funded the deal with debt.
To be fair, FCX isn’t the only company to step in the pile of crap known as bad timing. Caterpillar (CAT) paid more than $7 billion to expand into the mine-equipment business in 2011 — also known as the year that the commodities cycle peaked.
But back to FCX.
With a market cap of $11.4 billion, FCX is selling billions in additional stock to pay down debt. The company will spend some of its take on capital spending too, but it’s the balance sheet that needs the most attention.
FCX is in no danger of failing to pay its obligations, but it is highly leveraged. Indeed, FCX’s $20 billion in long-term debt puts its debt-to-equity ratio at 1.46. Additionally, cash flow is negative after servicing its debt.
Bottom Line
This is hardly the first time a company in the mining sector has had to live through a bust, and Carl Icahn certainly sees value in FCX shares.
But after falling 57% for the year to date amid an increasingly pessimistic view of the global economy, it’s hard to generate much enthusiasm.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
