Copper producer Freeport-McMoRan Inc (NYSE:FCX) is set to report second-quarter fiscal 2017 earnings results ahead of Tuesday’s opening bell. Thanks to efforts to trim its massive debt, the company’s prospects look far better than they did a year ago. And FCX stock has been rewarded for it, adding about 10.6% in the past month.
But despite the recent gains, FCX stock is still down 1.36% year to date, trailing the 10.4% rise in the S&P 500 Index. FCX has also lagged the Global X Copper Miners ETF (NYSEARCA:COPX), which has risen almost more than 14% this year and is home to the likes of Southern Copper Corp (NYSE:SCCO), which has risen more than 18% year to date.
But FCX can make up ground with top- and bottom-line beats Tuesday.
Expectations for the Quarter
For the three months ending June, Wall Street expects the company to earn 21 cents per share on revenue of the $3.68 billion, reversing a year-ago loss of 2 cents, while revenue is forecast to rise 10% year over year. For the full year, ending in December, earnings are projected to surge 340% year over year to $1.01 per share, up from 23 cents a year earlier, while full-year revenue of $15.1 billion would be a 2% year over year increase.
The company’s fiscal 2017 volumes are expected to be roughly 3.9 billion pounds of copper, 1.9 million ounces of gold and 93 million pounds of molybdenum. Those figures assume average prices of $1,250 per ounce of gold and $9.00 per pound of molybdenum for the remainder of 2017. The assumptions would be above the management’s prior forecast when it reported fourth-quarter results.
As with other copper producers such as BHP Billiton Limited (ADR) (NYSE:BHP) and Rio Tinto plc (ADR) (NYSE:RIO), Freeport has been hurt by lingering uncertainties about copper prices. That caused the company to miss both top- and bottom-line estimates in the first quarter, when revenues grew just 3% year over year to $3.3 billion, missing Wall Street estimates by $130 million. Revenue was negatively affected by 25% drop in copper sales due to a combination of lower ore grades and mining rates.
With production falling almost 20% year over year to 392 million pounds, some are questioning whether Freeport can capitalize on any near-term boost that the White House’s proposed budget can provide.
Despite copper industry woes, Freeport resembles a new company — one that can better navigate any near-term headwinds. In the last 12 months FCX has focused on deleveraging its balance sheet and growing production.
A New FCX Has Emerged
The company now has net debt of around $11.8 billion, a significant reduction down from $20 billion in December 2015. Freeport last year divested assets whose combined value was more than $6 billion, including its Deepwater Gulf of Mexico assets sold to Anadarko Petroleum Corporation (NYSE:APC) for $2 billion.
Meanwhile, FCX also has $3.5 billion of its credit facility that adds to the overall liquidity buffer.
To be sure, while FCX did miss the Street’s revenue and profit forecast in Q1, the company continues to expect operating cash flow of $4.3 billion for fiscal 2017. This cash flow projection includes $1 billion in working capital and other tax payments. And when adjusting out the working capital changes, it can still grow operating cash flow to $3.3 billion.
This means that not only would FCX have more than enough cash to exceed its 2017 capex target, the company would generate enough to cash to meet the $1.2 billion in debt repayment due for fiscal 2017 and the $1.5 billion due for fiscal 2018.
Bottom Line for FCX Stock
With shares down about 24% from its 52-week high in January, it doesn’t appear as if the market has fully rewarded FCX stock for the improved capital position and balance sheet.
This could be why billionaire activist investor Carl Icahn has been increasing his stake in FCX, adding $4 million worth of shares, according to recent SEC filings. As such, FCX stock should be owned by investors who are looking for a contrarian metals play.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.