What do gold, oil and copper all have in common, aside, of course, from being commodities? They are three of the worst performing commodities over the last year or so … and they’re Freeport McMoRan’s (FCX) main businesses.
With that in mind, it’s no wonder why shares of FCX stock sank a staggering 71% in 2015. But the hits keep coming.
With only a few trading days into this year, FCX is down nearly 12% to $5.95 — that’s less than the cost of a burger and fries at the golden arches.
With that cheap price, some investors have begun to wonder if shares of the multi-commodity firm are a value in the making.
Nope. There could be a lot more pain coming Freeport’s way in the New Year, making FCX one stock to toss in the “don’t buy” camp.
FCX’s Three Crashing Commodities
When FCX could be had for $60 per share, the world was a vastly different place: Gold prices were still riding high as investors continued to plow big bucks into the precious metal after the end of the recession and credit crisis. China was going ahead with its massive stimulus efforts — that meant loads of infrastructure and manufacturing spending and activity. And copper prices rebounded from their credit crisis lows.
Then the bottom fell out.
Gold prices plunged as the global economy stabilized and high inflation expectations never came to fruition. China slowed, copper supplies outstripped demand and prices for the red metal plummeted to new lows.
In an effort to reverse its fortunes, FCX decided to move into the oil and gas business and bail-out its former subsidiaries — Plains Exploration & Production and McMoRan Exploration — as well as other energy assets in the deepwater Gulf of Mexico.
The move seemed like a good idea at the time. Higher oil and natural gas prices should have, in theory, helped turn the tide of falling gold and copper. But as we’ve fracked, fracked and fracked some more, we all know how what has happened to oil prices. At $35 per barrel, the sort of assets that FCX has aren’t exactly cash flow positive.
With all three of its business lines crashing and mounting losses, FCX was forced to cut then suspend its dividend.
Still Plenty of Warts at FCX
The problem for Freeport (and why the stock may not be a screaming buy after a 70%-plus drop) is that a lot needs to happen for it to recover. As the days go on, that seems more and more unlikely.
For starters, prices for commodities aren’t surging upward anytime soon. The continued decline in global manufacturing activity and rising recession risks in China, Europe and even the United States have cooled rebounding copper prices. Prices for crude oil continue to fall as OPEC keeps on pumping amid the rising glut. Only recently has gold begun to rise in the wake of market volatility. But with the dollar still rising — thanks to the Fed’s recent rate hike and the flight to safety — gold’s price jump should be contained.
Then there is its debt to consider.
FCX went all in on its oil and gas bets. That meant taking on some debt. A lot of debt, actually. Freeport paid just over $20 billion to acquire McMoRan Exploration and Plains. As of the end of last quarter, that long term debt pretty much stands at the same amount.
With oil, copper and even gold prices expected to stay low throughout 2016, FCX is going to have a hard time deleveraging that balance sheet. Ratings agency Moody’s certainly thinks so, and recently put Freeport under reviews for further credit downgrades.
Unless there is a real sharp increase in prices, FCX is going to have a hard time getting the cash it needs to operate properly, let alone reduce its debt.
With its share price cratering, equity raises are pretty much out of the question as well. And while FCX most likely won’t file any sort of bankruptcy protection plan, there have been other miners — Alpha Natural Resources (ANRZQ) for example — that voluntarily pulled the BK trigger.
Just Walk Away From FCX
At the end of the day, FCX is caught between a rock and a hard place.
Its debt load continues to be high and profits/cash flows are pretty non-existent. And it doesn’t look like it’s going to get any help on the commodity front anytime soon. With gluts still growing and the global economy slowing, 2016 could be another year of terrible year for natural resources.
None of this makes FCX a screaming buy — even at $6 bucks a share.
While it’s not a short, there’s not upside over the near- to medium-term either. Freeport could and will continue suffer throughout the year. If we actually do get that recession and global slowdown, things could turn from ugly to even worse.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
