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FINANCIALS

Freeport-McMoRan Inc (FCX): Rally in Shares to End Soon

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The Country Caller explains why the rally in Freeport shares would end soon

Freeport-McMoRan Inc. (NYSE:FCX) stock has shown impressive performance, as it has surged over 86% year-to-date. The positive momentum in shares is attributed mainly to recovering oil and improving copper prices. The company has also taken certain appreciable measures to respond to difficult operational conditions.

The $17 billion company has made several asset divestitures and lowered its cost base in order to achieve the improved investor confidence it enjoys now. Still, The Country Caller believes that the ongoing rally in shares would end after the company would report its 1QFY16 results next week, as the performance is expected to turn out as unsatisfactory.

In fiscal year 2015, Freeport incurred about $6.35 billion worth of capital expenditure. It said that it aims to reduce this figure to $3.4 billion this year, and to $2.3 billion next year, in an investor presentation. The company is apparently making effort to overcome negative future cash flows.

However, the company would not be able to reap benefits soon after making these cuts, as it would need time to see the results; given that it has been suffering under a huge debt burden, it would be desperate to get relief. By March 2015, the company had lowered its dividend by 80%, and in December, it announced a complete halt in order to save about $240 million annually.

This is how difficult operational conditions have gotten for the company. Freeport has also made asset divestments which investors anticipate would provide much-needed liquidity. However, these asset divestitures are like a double-edged sword, as even though they would provide some cash, once commodity prices recover, the company would be poised to any increased revenue and profitability opportunities.

Additionally, these divestments mean that the company’s future output would be lower, leading to bleak future performance. Asset sales would also not be immediately beneficial for the company, which investors are likely to see in its 1Q earnings, and hence shares would be more likely to decline.

For instance, Freeport announced disposal of its stake in Morenci mine, which is expected to provide it around $1 billion, but might not reflect in first quarter results, as the deal is expected to close later this year. Also, Freeport is expected to benefit by around $263 million by selling its stake in Lundin Mining, but the deal is still not closed and wouldn’t have any impact on its upcoming earnings.

Moreover, the company expected oil prices to be around $37 barrel for the past quarter, while West Texas Intermediate (WTI) benchmark for crude oil averaged around $33 per barrel. This means that its performance from the oil segment would not be satisfactory either.

All in all, Freeport has taken some good steps to restore its financial health, but these steps would take time to reflect on its sheets. Hence, we expect the positive rally in shares would soon be over after the company would miss its earnings estimates next week.

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