Copper producer Freeport-McMoRan Inc (NYSE:FCX) might be on better footing today, thanks to the company’s massive debt reduction efforts, but it doesn’t appear as if the market is ready to reward FCX stock for its improved capital position.
Currently trading at around $12 per share, FCX stock has declined 7% year-to-date, while falling some 4.6% over the last three months.
Not only has Freeport-McMoRan trailed the more than 7% rise in the S&P 500 index during both spans, it has also lagged the Global X Copper Miners ETF (NYSEARCA:COPX), which has risen almost 11% this year and is home to the likes of Southern Copper Corp (NYSE:SCCO), which has risen more than 14% year-to-date. In other words, FCX has tons of ground to make up.
Reasons to Bet on Freeport-McMoRan
The copper industry has faced some massive supply disruptions this year, which has also impacted the likes of BHP Billiton Limited (ADR) (NYSE:BHP) and Rio Tinto plc (ADR) (NYSE:RIO). But neither company has been impacted to the extent of FCX stock. But the Arizona-based natural resources company, which reported first-quarter earnings results that missed Wall Street’s expectations on both the top and bottom lines, also has a plan to navigate the copper industry’s supply-side-driven deficits.
In the first quarter, FCX grew revenues just 3% year-over-year to $3.3 billion, missing Wall Street estimates by $130 million. Revenue was impacted by 25% decline in copper sales, which suffered from a combination of lower ore grades and mining rates. And with production falling almost 20% year-over-year to 392 million pounds, investors weren’t convinced that Freeport-McMoRan could capitalize on any near-term boost that the White House’s proposed budget can provide.
But here the thing: While Q1 net income of 15 cents per share didn’t woo its doubters, the measure significantly reversed the year-ago loss of $3.35 per share. At the same time, FCX, which last year pledged to cut its debt in half, is well on that target. Its debt load, which once ballooned to $20.1 billion at the end of 2015, owing to two big oil and natural gas acquisitions, is now around $11 billion, according to Chief Financial Officer Kathleen Quirk.
To reduce the debt, Freeport-McMoRan has divested numerous assets valued at more than $6 billion in 2016, including its Deepwater Gulf of Mexico assets sold to Anadarko Petroleum Corporation (NYSE:APC) for $2 billion. It could be the company’s improved capital position that has compelled billionaire activist investors Carl Icahn to increase his take in FCX stock.
According to recent U.S. Securities and Exchange Commission filings, Icahn bought $4 million worth of FCX stock. Meanwhile, entities affiliated with Icahn also picked up more than 350,000 shares at an average price of $11.41 each on the open market.
As it stands, Icahn now has an overall stake of around 91.6 Freeport-McMoRan shares, which amounts to 6.5% of shares outstanding, making Icahn FCX’s third-largest shareholder, according to S&P Capital IQ. Based on Freeport’s closing stock price of $12, Icahn’s holding, which is closely followed by investors, is worth roughly $1.10 billion.
Bottom Line for FCX Stock
FCX will report second-quarter earnings results on July 25. Wall Street expect the company to earn 21 cents per share on revenue of the $3.8 billion, reversing a year-ago loss of 2 cents, while revenue would rise 14% year-over-year. The company estimates fiscal 2017 volumes to be roughly 3.9 billion pounds of copper, 1.9 million ounces of gold and 93 million pounds of molybdenum. The company assumes average prices of $1,250 per ounce of gold and $9 per pound of molybdenum for the remainder of 2017.
These figures would be above the management’s prior forecast when it reported fourth-quarter results.
And with the FCX stock down 30% from its 52-week high of $17.06, FCX shares should be owned by investors who are looking for a contrarian metals play. Copper producers, in particularly, are seen as a strong growth candidates for the next several years, thanks to the potential economic catalysts under President Donald Trump’s infrastructure plans.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.