Why I'd Fade This Freeport-McMoRan Rally

Jan.22.13 | About: Freeport-McMoRan Inc. (FCX)

By Tim Seymour

In short, Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) is great company that delivered great numbers this quarter and guided well for 2013. All of this makes me feel pretty good about the world it operates in, as it is very bullish on growth and end-demand recovery, or possibly even saying that it was never was lost.

But all of this tells me little about the next two to three years with Freeport-McMoRan and how it will execute on a clear change in its strategy. FCX's stock is not expensive at 7x 2013 P/E and approximately 4.5x 2013 EBITDA, but it has rallied 17% off the December M/A lows, including today's earnings pop.

I’m bullish on FCX's view of the copper market, with global auto, Sandy rebuilding, U.S. housing, and China. I'm bullish on emerging markets overall, not just China, and that they will continue to add incremental copper demand that will support demand -- and even lead to cyclical supply shortages of "Dr. Copper."

Freeport's management is clearly is not bullish on copper or emerging markets. Otherwise, it wouldn't be making the acquisitions it has announced, such as today's announcement to buy OM Cobalt in Finland. Last month's M/A is a move into oil and gas, which is a move away from a sole focus on copper. With that sole focus on copper came capital discipline investors had come to expect and always have respected.

These purchases are diversifying into U.S. assets and a notable change for the company. To me, it is a historically great "emerging market company," despite calling Phoenix, Ariz., home. Freeport had been a global pioneer in places like Indonesia and Peru. Some of the most impressive assets for Freeport are in emerging markets. Two obvious ones are the Grasberg and Tenke mines.

Freeport is saying emerging markets are too volatile, with labor issues and government conditions that are growing more difficult the more success it has. In short, the stock has popped off the lows and had a great run. You now have an extended period of uncertainty for the shares.

The bottom line from the M/A is that synergies are not great, its balance sheet is weaker, and the deal seems to be confirming the top of the metals super cycle as a move into oil and gas defines Freeport's "next phase."