It’s no secret that several commodities and mining stocks had a stellar year in 2016. Thanks to a surge in technical sentiment, as well as optimism for the political transition, commodities were granted a reprieve. Several firms on the brink could now live for another day. While Freeport-McMoRan Inc (NYSE:FCX) wasn’t that desperate, the tide couldn’t have shifted any sooner.
If FCX stock could erase a year from the calendar, it would most likely be 2015. At the beginning of that fateful period, shares of Freeport-McMoRan were firmly in double-digit territory at $22.66. By the end of the year, FCX was gasping for breath in single-digit perdition at $6.77. This was a remarkably horrific loss in the markets of 70%.
Of course, when you’re the world’s second-biggest copper mine, your business tends to be levered towards a few key commodities. And unfortunately, neither the precious nor the base metals wanted to play along at the time. In 2015, gold bullion lost nearly 11% in the spot market. Copper, on the other hand, lost more than 25%. Thus, there was nothing that investors of FCX stock could do but pray that the carnage could be mitigated.
But now that Freeport-McMoRan is seemingly back on track — FCX is now in double-digits again — is now the time to get in on the action?
FCX Stock Troubled by Failing Indonesia Deal
When I look at what’s going on, I have to say that this is a golden opportunity, and literally so. Much of the commodity markets are back from the dead. We have a President who is obsessed with gold. He has also made big promises of restoring American manufacturing might. That has to translate to huge returns for FCX stock.
Of course, nothing is ever that simple on Wall Street. And InvestorPlace writers Dana Blankenhorn and James Brumley are quick to cast doubt on Freeport-McMoRan. Both have cited Indonesia as a critical problem, and it’s not hard to see why.
In the mountainous jungles of West Papua lies the “Macau of the mining industry”: the world’s largest gold mine and the third-largest copper mine. Right now, it sits idle because of a nasty squabble. The government of Indonesia wants “more equity in the mine, higher taxes and more of the metal smelted in domestically.” On the other hand, Freeport-McMoRan insists it can’t make a profit unless the two parties stick to the original contract.
Someone’s going to get the short end of the stick, and Brumley argues that it will be FCX. In terms of the conflict itself, I agree. As he wrote, Indonesia “has nothing to lose. If FCX throws in the towel, a different player willing to play by the new rules will step up to the plate and pay what regulators are asking … which includes selling more of its copper concentrates to Indonesian buyers.”
To further accentuate the pessimism for FCX stock, Rio Tinto plc (ADR) (NYSE:RIO) — Freeport’s mining partner — wants to back out of the Indonesia project.
Freeport-McMoRan Isn’t a One-Deal Pony
Admittedly, these are serious headwinds for Freeport-McMoRan. I understand if investors who have already profited from the metals really want to exit with something. After all, FCX stock did lose more than 19% in February. You also have bearish consensus with some of InvestorPlace’s top contributors.
That said, I think there’s still room for Freeport-McMoRan to grow. The Indonesia deal is big but there’s no point in getting forced in to a bad deal. Also, I suspect that FCX is suffering recent volatility as part of an industry-wide correction. For instance, Southern Copper Corp (NYSE:SCCO) and Copper Mountain Mining Corp (OTCMKTS:CPPMF) both suffered significant market losses in February.
There’s no doubt that Freeport-McMoRan is in a tough pickle, but it still has cards it can play.
Finally, I love the political picture for FCX stock and the entire mining complex. President Donald Trump articulated the importance of his economic policy in his recent Congressional address. Never mind that it’s the usual fluff piece.
One thing I know is that our President is a man of action. If he wants to boost the economy, that surely means inflation. Not surprisingly, we saw a sharp rise in inflation expectation from December 2016 to January 2017.
If you haven’t advantaged the commodities rally, don’t worry! Consider the current slowdown in FCX stock as a second chance.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.