Freeport-McMoRan (NYSE: FCX) is set to report its fourth-quarter earnings on January 26. The report will come at a time when Freeport's stock has already more than 40% of value since the beginning of the year, copper trades around $2 and oil stays very low despite the recent rebound. So, what we will be looking for in the company's fourth-quarter report?
The question of the so-called "strategic alternatives" is, perhaps, the most important one. I've recently argued that there is little the company can do, but it's much more interesting to hear the thoughts on the topic directly from the company.
From a long-term point of view, it makes little sense to sell the assets that were bought when oil was above $100 per barrel at times when oil is around $30 per barrel. At the same time, the company may feel that it is obliged to do something, and the sale of the oil segment is a natural candidate in this case. Indonesian asset sale is also interesting, but we'll get to this in the part dedicated to Indonesia.
As for the oil segment, I've been thinking about this topic over and over again. The view on this possible asset sale greatly depends on your long-term view on oil prices. If you believe in a quick rebound in oil, then you must view Freeport's willingness to divest the oil segment as a very negative development.
With sub-$20 cash costs, Freeport's assets are competitive in the world of a more expensive oil. However, if you think that the technological shift will continue to push shale breakeven prices lower month after month, then holding on to Gulf of Mexico assets at any cost does not look like a good choice.
I must admit that I am still in doubt whether low oil is with us for a sustained period of time. I published my bearish thoughts on oil multiple times, with the recent pieces being "OPEC Is Dead And Oil Could Fall To $25" and "Oil - The $25 Per Barrel Thesis In Progress".
Now that my target was almost reached, I'm considering whether this oil price environment could last for a long time. Currently, my thinking is that Freeport should not sell its oil and gas operations through an auction right now as it will get awful prices.
Problems in Indonesia already look like a soap opera. In a new episode, Indonesia decided that Freeport should set aside a further $530 million for the smelter. The timing is of course unfortunate for Freeport, but one can expect that political pressure to get more money from every company working in Indonesia will rise as resources' prices fall.
Freeport is in a stalemate situation, because Grasberg is such an important asset for the company. If the company wants to stay in Indonesia, it must find some kind of a solution with the government.
So far, Freeport offered to sell a 10.6% stake in its Indonesian unit to the government and valued it at $1.7 billion. This means that Freeport values its Indonesian unit at $16 billion. Current Freeport's market capitalization is $4.55 billion. If we factor in the company's debt, we will arrive at a $25.2 billion valuation for the whole company. Given this, I don't think that the $1.7 billion offer will be taken by the Indonesian government, especially in the light of their recent actions.
Indonesia remains a headache for the company, and I look forward to hearing what Freeport plans to do in order to maintain its Indonesian assets.
What can the company do to raise money? The first target will be capex, and I'm looking to see whether capex will be cut to sustaining levels. I believe that spending money on development is a dangerous game in the current environment. The dividend has already been eliminated.
Raising more debt does not look like a probable option given the market sentiment. Another round of equity raises may be an option, which is surely detrimental to existing shareholders. Equity issue should be approved, but any hint that the company is just thinking about raising money this way will push the stock lower.
How dire is Freeport's situation?
The company's internal view of cash flow and production targets is of special interest. Last time the company presented its calculations it used a Brent oil price assumption of $50 per barrel. I would like to see the company's targets at $30 oil.
The last time I wrote about Freeport-McMoRan I stated that it was not a good idea to catch a falling knife. Since then, the company's shares traded in a see-saw pattern. I expect that this nervousness will continue until the earnings report is released.
I don't think there's any need to rush here. There are too many factors that depend on management's decisions, so those who evaluate a possibility of initiating a position in Freeport's shares must listen to their view before making a final decision.
So far, there are a number of negative catalysts weighing on Freeport's shares, including the latest blow from Indonesia. I know that a significant number of investors views Freeport's shares as a "steal" at current prices, but I remain cautious until there's evidence that the management knows what to do with the company's problems.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I may trade FCX.