FCX Stock Analysis: Freeport-McMoRan Billion Pounds Of Copper And Still Standing

reuben 2Reuben Bor is a Financial Analyst Intern at I Know First

 

FCX Stock Analysis

Freeport-McMoRan (NYSE: FCX) is the largest mining company in the U.S. by market capitalization. FCX started the year down over 70%, trading at around $6.50, and with $20 billion in debt-fueled heavily by the acquisition of the oil and gas companies McMoRan Exploration Co. and Plains Exploration and Production Company. FCX’s venture into the natural gas space leads to a $12.1 billion write down in 2015 as a result of the oil-price route.

FCX Stock Analysis

(Source: Bloomberg)

FCX closed under $4.00 on January 25th, and on January 26, 2016, the company released its 4Q15 earnings with an adjusted loss of $0.02 per share, a performance that was actually quite better than the consensus estimate of $0.11 per-share loss. The company’s $3.7 billion dollars of revenue generated in the 4Q15 represents a year-over-year decline of more than 27%. In the fourth quarter, Freeport-McMoRan sold 1.15 billion pounds of copper, 20 million pounds of molybdenum, 13.2 million barrels of oil equivalent and 338,000 ounces of gold. As a major player in the materials space, the company is heavily affected by the prices of commodities, which are determined by the market. Concerns over the slowdown of the economy in China, the world’s largest buyer of materials, have caused the prices of commodities to be extremely volatile. China has been especially problematic for Freeport-McMoRan because Chinese buyers had previously purchased over 50% of FCX’s copper. Over the past 5 years, commodity metals have lost nearly 80% of their value, according to the S&P SPDR Metals & Mining ETF (NYSE: XME). Nevertheless, Freeport-McMoRan’s guidance calls for a 25% year-over-year increase in copper shipments and a 9.5% increase in energy sales. The company further explained that they expect their unit production costs decline in 2016. On January 26th, FCX rose by 14% in the first hour of market activity, and it eventually closed up 6.6% from the previous days closing, at $4.20, still down over 30% for the year. During the five days between February 1st and 5th as the XME gained nearly 15%, and the prices of copper and gold began to rise as the dollar weakened. Demand for gold has been surging as investors are looking for a safer alternative to equities and bonds. All of these factors were good news for Freeport-McMoRan as the company began to rally, closing at $5.68 on February 5th.

Due to the company’s huge debt burden and negative free cash flow of $686 million in Q4, investors became particularly concerned as Moody’s cut FCX’s senior credit ratings from B1 to BAA3, making the company junk status. The activist investor, Carl Icahn, who last August, initially disclosed an 8.5% stake in the company, has been continuously increasing his stake throughout February. Icahn has been pressuring the company to make changes, including attempts to sell the oil and gas businesses, and CEO Richard Adkerson pledged to cut the companies debt in half. On February 17th, I Know First had a bullish short-term forecast for Freeport-McMoRan when the stock opened at $5.82. FCX has since the stock has since increased by over 40%, closing March 2nd at $8.97. Observing the Algorithmic bullish signal of 10.91 and predictability of 10.91 for the 14 day period.

FCX Stock Analysis

On February 16th, Freeport-McMoRan announced that they had reached a deal to sell part of its stake in the Arizona copper mine, Morenci. Even in the volatile commodities market, the Wall Street Journal explains that FCX’s mines are able to produce copper worth around $2 a pound for around $1.5, which makes their mines a valuable asset. The February 16th deal, valued at $1 billion dollars, will reduce the companies stake in the Morenci mine from 85% to 72%. Freeport CEO Anderson explained in a statement “This transaction represents an important initial step toward our objective to accelerate debt reduction and restore our balance sheet while retaining a portfolio of high-quality assets and resources.”

On February 17th, FCX stock was up more than 18% as Carl Icahn increased his position in the company by 4 million shares.  FCX continued to rally into the next week as copper futures rose to a three-month high. Futures for May deliveries increased to $2.125, the highest price since they were trading at $2.164 in mid-November. The increase in copper came as the Governor of the People’s Bank of China Zhou Xiaochuan gave a speech in Shanghai reassuring that the Chinese economy is still strong and that structure is improving. A note from RBC Capital Markets that was published in Bloomberg explained, “China overnight has given the market a sense of ease.”

FCX Stock Analysis

(Source: Bloomberg)

Conclusion

Despite the huge rally this month, Goldman Sachs  explains that they are still cautious about the mining industry, due to the fact that majority of costs are beyond an individual company’s control.