The last five years have been rough for shareholders in Freeport-McMoRan Inc (NYSE:FCX). FCX stock is down 68% over that period, and down 70% from highs reached in September 2012.
Freeport-McMoRan found itself the victim of investing in oil and gas properties just prior to the bottom falling out of oil prices. Oil prices peaked in 2013 at close to $110 per barrel, and bottomed out in early 2016 at close to $30 per barrel.
During the last three years, FCX has written off $19.4 billion in its oil and gas properties. During that time, it has sold mines and other oil and gas properties for roughly $8.8 billion. So, not a great overall return, to say the least. But it’s water under the bridge at this point.
What remains looks to be an appealing mix of copper, gold (which competes with Barrick Gold Corp (USA) (NYSE:ABX), and molybdenum (a metal used for aircraft and the nuclear power industry) mines. Freeport-McMoRan owns seven copper mines in North America, another two in South America and a copper/gold mine in Indonesia. Indonesia is an important discussion, which we will get to below.
Its collection of mining assets qualifies FCX as the largest publicly traded miner of copper. Only Codelco, a state-owned mining firm in Chile, is a larger global producer. Smaller rivals include Glencore, BHP Billiton Limited (ADR) (NYSE:BHP), Rio Tinto plc (ADR) (NYSE:RIO) and Vale SA (ADR) (NYSE:VALE).
Copper prices have also plummeted since 2012. Chinese demand for commodities has waned as its economic growth has slowed in recent years. It is still among the fastest in the world, but has fallen from 10% annually just a few years ago to closer to 7% a year currently. The fact that Freeport-McMoRan wanted to diversify out of mining into oil and gas also suggests its core business is challenging to excel at.
But it could also have been it was looking to boost into what was a booming oil and gas market.
Freeport-McMoRan’s Financial Overview
FCX just reported first-quarter results and sales that rose a respectable 3.1% to $3.3 billion. Net income came in at only $228 million ($0.13 per share), but was positive after a horrible $4.2 billion loss during last year’s quarter. Free cash flow was even better at $427 million.
For the year, analysts expect about a dollar in earnings per share, and for that to rise to $1.35 per share in 2018. Sales should hover around $15 billion in each of the next two years. Free cash flow looks robust and easily able to cover the interest expense on a still-hefty debt load.
Bottom Line of FCX Stock
Given Freeport-McMoRan’s dependence on copper, how copper prices perform will largely determine its profitability going forward. A couple of supply hiccups and an economic recovery in China are supportive of some stronger near-term trends. Longer-term, the outlook for FCX stock is less certain. Commodity prices are difficult to predict even under the most stable economic conditions. Low cost is key, but is always susceptible to supply and demand imbalances.
At least Freeport-McMoRan has survived and divested the bulk of its oil and gas properties. The share price plummet has certainly been painful for any shareholders that have held tight over the last five years. But for current shareholders, how the company performs going forward is obviously what is important.
Indonesia represents a current problem. The Indonesian government has changed its export regulations, and this is currently restricting FCX’s ability to sell from this mine globally. There also appears to be some pending changes on the percent of the mine it owes. From what I could gather from the latest press release and earnings call transcript, its ownership stake is currently 91%, and could fall to 60% within several years.
Management spoke of its willingness to invest in Indonesia, despite the regulatory uncertainty. But it adds another layer of uncertainty to Freeport-McMoRan. Where depressed copper prices go from here is anyone’s guess, but add it all up, and there doesn’t seem to be enough investment appeal in FCX stock right now.
As of this writing, Ryan Fuhrmann did not own any shares of any company mentioned.
