The commodities route has been painfully brutal on Freeport-McMoRan (FCX) stock. But during the past week, there has been some much needed relief. Since the end of September, FCX stock is up about 50% to $13, which is still woefully below the 52-week high of $32.
The question on everyone’s mind is whether it’s safe to buy FCX stock, or are there still red flags surrounding it?
FCX management doesn’t exactly exude confidence: It seems that the company has blundered from one mega decision to another.
The most notable example, no doubt, was its transition into the oil business. In 2013, FCX shelled out $9 billion for McMoRan Exploration and Plains Exploration & Production (consider that the total market value of FCX stock is now about $15 billion).
The wager was that oil prices would continue to increase. In fact, management redirected substantial resources to expensive, risky deepwater drilling. So yes, when oil prices did collapse, this strategy turned into an expensive disaster.
In the meantime, Freeport-McMoRan doubled down on the copper business as well. For the most part, FCX ramped up of spending to boost production across the globe, and copper prices eventually plunged.
Is it any wonder that FCX stock has been an utter disaster?
But that’s not to say FCX stock isn’t without a silver lining: FCX has large reserves of copper, from its mines in the Grasberg minerals district in Indonesia (which has one of the largest deposits of copper in the world) to the Cerro Verde area in South America, as well as various properties in the Congo and substantial holdings in the Morenci minerals district in North America.
More importantly, Freeport has already been taking swift actions to restructure operations. To this end, the company plans to substantially cut its 2016 capital spending budget by 29% and reduce the U.S. workforce by 10% to 1,500 jobs. FCX has also indicated it wants to offload its oil business, either by a spinoff, joint venture or sale.
This is likely just the beginning. After all, activist billionaire investor Carl Icahn has recently taken an 8.8% stake in FCX stock, earning himself two seats on its board.
A recent filing from Icahn states:
“The reporting persons intend to have discussions with representatives of the issuer’s management and board of directors relating to the issuer’s capital expenditures, executive compensation practices and capital structure as well as curtailment of the issuer’s high-cost production operations.”
Actually, it would not be surprising to see a wave of mergers and acquisitions in the industry — the sale of Freeport-McMoRan may be the ultimate endgame. Even though mega operators like Rio Tinto (RIO) and BHP Billiton (BHP) have also seen free falls in their stock prices, these companies still have enormous resources for dealmaking.
Yet this does not mean that the situation is now suddenly less risky for FCX stock. Keep in mind that the International Monetary Fund has again indicated that there is a higher risk of global recession. The slowdown in China is a major driver, as China accounts for 45% of the world’s demand for copper.
It’s also important to note that the recent rally in commodities stocks came at the end of the quarter, where there was likely lots of short covering as investors notched their returns. In other words, the bounce may be mostly temporary.
So for investors looking for an entry point on FCX stock, it’s probably best to wait for now. In light of all the volatility lately, there will probably be a chance to get a better valuation.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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