Should Freeport McMoRan Stock Be Bought on Weakness?

Anyone who can hold FCX stock for at least three years should buy the shares

Freeport McMoRan (NYSE:FCX) delivered first-quarter results April 25 before the markets opened. Investors didn’t like the news, so FCX stock plunged 10% on the day.

Freeport-McMoRan Reaches Agreement, But It’s Not What Investors Wanted

However, investors who bought Freeport McMoRan stock at the end of 2018 are still up by almost 20%, including dividends, in 2019.

Now many owners of FCX stock are wondering if the mediocre report means it’s time to take profits or buy more on weakness.

Here are my thoughts about both sides of the argument.

Cut and Run From FCX Stock

Freeport McMoRan’s first-quarter results are best described as mediocre.

On the top line, it delivered revenues of $3.79 billion, 0.66% lower than analysts’ consensus estimate. On the bottom line, Freeport McMoRan’s earnings per share came in at $0.05, three cents lower than analysts’ average outlook. It’s never good when a company misses the consensus estimate by more than 30%.  

What’s worse is that this is the second consecutive time that FCX’s results have missed badly. Its Q4 EPS came in at $0.11, 48% less than analysts’ consensus estimate.

As for the future, analysts, on average, expect Q2 earnings of $0.15 and revenue of $4.04 billion; for  fiscal 2019, they expect revenue of $15.01 billion and EPS of $0.50.

That’s not too bad until you realize that FCX had revenue of $18.6 billion and EPS of $1.78 in 2018. There’s a reason for the significant haircut in 2019.

Specifically, FCX is  beginning to tap a new, underground mine in its open-pit gold and copper district in Indonesia, one of the world’s largest deposits of copper and gold. Moving to the new mine will enable FCX to  continue to mine in the area until at least 2041.

As PT Freeport Indonesia (PTFI) president Tony Wenas said in December, the underground mine is critical to PTFI’s future success. As a result of the transition,the owners of FCX stock can expect lower revenues and earnings until at least 2021. Any owners of FCX stock who don’t have the patience to wait this out should sell their shares because FCX could experience more pain between now and when it announces its second-quarter results in July. 

Buy More FCX Stock 

On the surface, Freeport McMoRan’s earnings report looks terrible.

Its Q1 revenue tumbled 22% year-over-year, while its overall costs were $62 million higher. That led to operating income of just $321 million, 78% lower than a year earlier.

I get it. You can’t put lipstick on a pig.

However, its slump should be temporary. Once the underground mine is operating at full production and copper prices rise a little, Freeport McMoRan’s Indonesian business will once again become a big moneymaker for FCX.

In Q1 of 2018, the company’s Indonesian business reported an operating profit of $896 million.  Last quarter, its operating profit fell to $72 million, due to the transition. But the numbers will improve going forward.

“As PT-FI transitions mining from the open pit to underground, its production is expected to be significantly lower in 2019 and 2020, compared with 2018. Metal production is expected to improve significantly by 2021 following a ramp-up period,” FCX stated in a press release following its Q1 results.

Over the next five years, the company expects production to ramp up to 130,000 metric tons of ore per day. Since copper is a significant component of electric vehicles — the average electric vehicle uses three times as much copper as a conventional vehicle — the future is going to be brighter for copper producers such as Freeport McMoRan.

Citigroup predicts that electric cars will account for two-thirds of the increased demand for copper between 2018 and 2030.

Any further dip in the price of FCX stock is an opportunity to profitably bet on electric vehicles without buying Tesla (NASDAQ:TSLA) or one of the other electric-vehicle manufacturers.

The Bottom Line on FCX Stock

If you can afford to hold FCX stock for three to five years, the current dip in its price is a buying opportunity.

If Freeport-McMoRan stock falls below $10, where it’s traded only once in the past five years, it would be an absolute steal.

At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.


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