This article was written by Linda Luo, a Financial Analyst at I Know First.

FCX Stock Analysis: Copper Prices Buoy Freeport-McMoRan’s Growth

Summary:

• FCX consistently improves financial position and strengthens balance sheet, swinging from loss to profit
• Copper prices are on the rise, which is favorable to major copper producers like FCX
• I Know First’s algorithm indicates a bullish signal

Freeport-McMoran, Inc. (FCX) is a mining company based in Phoenix, Arizona. It operates through an extensive portfolio of geographical assets that span four continents: Asia, North America, South America, and Africa. These assets include proven and probable reserves of copper, gold, and molybdenum. FCX currently stands as the world’s largest publicly traded copper producer.

Improving Financial Position

FCX released Q2 earnings results on July 25, 2017. The company kicked off the presentation with positive news and outlook on its future performance. FCX reported adjusted net income attributable to common stock for the second quarter of 2017 to total $241 million. This puts its adjusted earnings per share at $0.17, up from its EPS of $0.15 in the previous quarter. This statistic falls in tandem with the company’s continued trend of earnings growth.  On a year-over-year basis, FCX’s second quarter EPS is a significant improvement from a $0.02 loss in the same period last year. FCX’s EPS missed estimates by $0.04. Yet, the company’s revenue of $3.7 billion surpassed expectations by $40 million for this quarter. Its revenues increased 11.3% from a year ago.

FCX’s commitment to shareholder interest and improving its financial position bodes well for the company’s future growth potential. The company has displayed strong execution of strengthening its capital position and deleveraging its balance sheet through effective cost management and ongoing capital discipline. For instance, as of June 30, 2017, the company’s net debt stood at $10.7 billion. This is a significant $9.5 billion reduction from $20 billion at the end of 2015. FCX had incurred significant debt in recent years since diversifying into the oil and gas industries. However, the company has since taken deliberate debt reduction efforts. It has done so through divesting numerous oil and gas assets valued at over $6 billion in 2016. It has adhered to its promise from 2016 to half its net debt over the two-year period ending year-end 2017.

In addition to increasing efficiency and lowering costs, FCX is also focusing on its copper projects to account for much of its future growth. FCX is well on its progress towards achieving this target.  This is reflected in its reduced unit net cash cost reduction this quarter, down 89% compared to last year. FCX’s non-core asset sales has also put the company in a better position in posting higher levels of cash flow. Its free cash flow has increased to $1 billion over its capital expenditures, up from $448 million reported in Q1.

One of FCX’s biggest weaknesses is its balance sheet and debt load. The company has already made significant progress in improving its financial position within a two year span. This is marked by its debt reduction and swing from loss to profit.

Copper Market Recovery

Now that FCX has shifted its focus towards copper as its main commodity business, one should expect the company’s share price to wax and wane with the prosperity of the copper market and commodity prices. Copper, like most commodities, has experienced many uncertainties over the last few years. However, things are starting to turn around for this commodity in particular given recent developments.

On July 26, copper prices on the London Metal Exchange soared to its highest level in two years $6,400/tonne, a number unwitnessed since May 2015. This jump was boosted by optimism of accelerating growth in demand for copper from China and Europe as well as supply-side deficits in the industry. In particular, China has shown indicators of stronger future demand upon reports that the recycling branch of the China Nonferrous Metals Industry Association had received notice that China may issue a regulation to ban certain scrap metal imports by the end of 2018, according to Reuters. This potential scrap metal ban could up the demand for higher refined copper imports and boost the commodity’s price.

The shift in China’s import policy will have a significant impact on the copper industry. China is the world’s largest consumer of refined copper, accounting for around 45% of global demand.  In addition, the International Monetary Fund recently revised its growth outlook for China, increasing its expected GDP growth rate up 0.1 percentage point to 6.7%. Optimism regarding China GDP forecasts also bolsters positive sentiment and support for copper prices.

On a smaller scale than China’s impact, President Trump’s infrastructure plan is also expected to be a boon to the copper industry. Trump had vowed to spend about $1 trillion over a decade on improving infrastructure and creating new jobs in construction and related sectors. His infrastructure plan could provide potential economic catalysts to further support copper prices over the next few years as analysts anticipate higher infrastructure spending and tax cuts.

Moreover, supply disruptions in the copper industry has also pushed copper prices higher. Worker absenteeism and strikes in two of the world’s largest mines, Antofagasta PLC’s Zaldivar copper mine in Chile and the Grasberg copper and gold mine in Indonesia has fueled concerns of supply disruptions that could lead to a global deficit. This prospect has also been buoying copper prices. In a report released in February 2017, Goldman Sachs Group Inc. analysts including Max Layton and Jeff Currie stated, “We expect copper will move into deficit in the coming months, driving the next leg higher in prices.”

Thus, analysts see copper producers like FCX as strong candidates for long term growth over the next few years as these developments bolster copper prices.

Optimism for Progress in Negotiations with Grasberg Mine

The Grasberg mine, located in Indonesia, is the largest gold mine and third largest copper mine in the world. It is valued at almost $100 billion. The mine also has some of the lowest unit costs out of FCX’s entire asset portfolio. As one of FCX’s most valuable geographical asset, the Grasberg mine has been the center of investor worries amidst a long-running, costly dispute over mining permits with the Indonesian government that threatened to limit FCX’s copper production. The dispute concerns revised rules by the Indonesian government requiring miners to divest a 51% stake in addition to paying new taxes and royalties. Freeport intends to stay with terms of its current contract. To cut costs, Freeport had laid off 10% of its workforce in Indonesia earlier this year. This led to a miners strike that extended for 4 months from April to August.

Negative impact of the Grasberg dispute has already been priced into FCX’s stock, its stock price has been pushed down from its early year highs. However, the situation is starting to look up for FCX. In the company’s recent Q2 earnings conference call, CEO Richard Adkerson expressed confidence in reaching a new mining agreement with Indonesia by October this year, encouraged by recent progress in the negotiation talks.  It is likely that the Grasberg situation will blow over as both sides stand to financially benefit from working out a resolution. FCX has contributed over $60 billion to Indonesia’s national GDP since 1992 and is current one of the largest taxpayers in the country. The company has also served as a significant economic engine for development in Papua province.

Conclusion

Despite problems with its Grasberg mine, FCX still reported improved financials with a resolution looming in the horizon. In addition, amid soaring copper prices and progress made in talks with Indonesia, FCX’s share price reached a 16-month high on July 25. It rose 15%, an indication of investor confidence. Given these developments, FCX’s stock indicates high potential growth prospects in the long term. We are maintaining a bullish forecast of the stock.

I Know First Algorithm Bullish Forecast For FCX

I Know First currently maintains a bullish stance on FCX with signal strength 27.62 and predictability 0.58 for the 1-year forecast. The predictability increases in the long term, indicating that FCX is a strong investment in the long term.

Past I Know First Forecast Successes With FCX:

On February 23, 2016, I Know First algorithm issued a bullish signal for FCX.  In a 3 month time span, the stock rose steadily by 60.12%.

This bullish forecast on FCX was sent to I Know First subscribers on February 23, 2016.
I Know First Algorithm Heatmap Explanation

The sign of the signal tells in which direction the asset price is expected to go. (positive = to go up = Long, negative = to drop = Short position). The signal strength relates to the magnitude of the expected return. We use the signal strength for ranking purposes of the investment opportunities.

Predictability is the actual fitness function being optimized every day and can be simplified explained as the correlation based quality measure of the signal. This is a unique indicator of the I Know First algorithm. It allows the user to separate and focus on the most predictable assets according to the algorithm. Ranging between -1 and 1, one should focus on predictability levels significantly above 0 in order to fill confident about/trust the signal.