Freeport-McMoRan Inc (NYSE:FCX) stock has struggled since the company found itself caught in a sharp commodity price decline. The Phoenix-based mining company has only partially recovered from the time (in early 2016) when the FCX stock price briefly fell below $4 per share.
Now, however, after a brief period of stagnation, conditions have improved to the point that FCX stock could again resume its price growth.
With its mining presence in the U.S., Freeport-McMoRan retains a moat, despite competition from producers such as Southern Copper Corp (NYSE:SCCO), Anglo American plc Unsponsored ADR (OTCMKTS:NGLOY), and First Quantum Minerals Limited (OTCMKTS:FQVLF). FCX remains the largest producer of molybdenum and the second-largest producer of copper in the world.
However, molybdenum only accounts for a small percentage of the company’s revenue. FCX earns the overwhelming majority of its revenue from copper, and it also produces gold and petroleum. The majority of its mines operate in the southwestern United States, though it also operates mines in Chile, Peru, Indonesia and Spain.
Its origins go back to 1834, when it was known as Phelps, Dodge & Company. The present form of FCX took shape in 1988 when the former parent company formed Freeport-McMoRan following the discovery of the Grasberg copper and gold deposit in Papua, Indonesia. In its nearly 175 years of existence, FCX has survived numerous boom and bust cycles. Its latest cycle, and the main market driver today, is the industrialization of China and India. While the 2014-16 commodities bust hit the company hard, signs of recovery have emerged.
In its last earnings report on Oct. 25, FCX stock earned 34 cents per share — 3 cents higher than expected. It also brought in $4.3 billion in revenue that quarter, an increase of nearly 11%. Analysts expect the company to earn $1.07 per share in fiscal 2017, its first annual profit since 2013. They predict the yearly profit to rise to $1.63 per share in 2018, a figure that places the price-earnings ratio at around 7.5 at current prices.
Higher copper prices served as the main driver for the improved bottom line. Copper now trades above $3 per pound for the first time since the commodities bust. A year ago, copper traded around $2.60 per pound. Gold trades at around $1,280 per ounce, over 8% higher from year-ago prices. While prices are off about $60 per ounce from their September peak, both trends have helped revenues for FCX stock.
The company also has struggled with debt. FCX has around $16 billion in combined short- and long-term debt, dangerously close to the level of its market cap of just under $21 billion. However, higher copper and gold prices will bring in cash that will help reduce the debt to a more manageable level.
The stock has also suffered due to turmoil in Indonesia. First, labor unrest occurred over the summer near the location of the Grasberg mine in Papua. The company laid off about 3,000 workers — and they responded by closing off access to the mine. This labor unrest caused some short-term production stoppages. However, no sustained slowdown in operation has been evident.
FCX has also battled the Indonesian government regarding ownership issues related to the mine. The government will not allow an IPO of the company on the Indonesian Stock Exchange until the various governments in Papua own at least a 51% stake in the mine. FCX is willing to sell, but only after the IPO. This remains a point of contention between the two parties. The company has made other concessions to retain the right to operate the mine through 2041.
FCX stock struggles to gain long-term traction, despite a recovery in copper and gold prices. However, I think the stock will start moving up again soon.
Regarding Indonesia, labor unrest has slowed and the regulatory issues look to be near a resolution. Moreover, both copper and gold prices have steadily risen over the last year. This improved pricing has led to better-than-expected revenues and earnings. This should also bode well for both the stock price and the heavy levels of debt carried by FCX stock.
With conditions improving on multiple stocks, buyers will likely mine their own profits by opening a stake in Freeport-McMoRan.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.