Freeport-McMoRan: On Life Support

| About: Freeport-McMoRan Inc. (FCX)

Summary

FCX is near death because prices have gotten worse in just about every commodity the company mines/works in.

A surprise Q4 showed an earnings beat, but more importantly 2016 projections are better than I expected.

The stock is now on life support, an upgrade from 'near-death'.

Freeport McMoRan In a recent controversial piece we discussed the slow death of Freeport-McMoRan (NYSE:FCX). Copper prices are at six-year lows. Oil is at ten-year lows. Gold has meandered lower from its highs four years ago. Copper prices and by-product prices are at multi-year lows. Doesn't bode well for miner that works primarily in the exploration, mining and production of copper, gold, molybdenum, cobalt hydroxide, silver and other metals, such as rhenium and magnetite. Of course, it also has massive exposure to energy, particularly oil and gas. The stock? Well, it is at a near 15-year low and is down another 10% from where I wrote the piece, HOWEVER, I am now slightly upgrading the name to say it is on life support. Why? I was very surprised by the earnings report this morning and the stock is popping heavily this morning. It is dying a slow death, but can it be saved?

The answer is yes, but prices have gotten worse in just about every commodity the company mines/works in. However, the report had some positives as well as some obvious items. With declining revenues, you can only imagine what that means for earnings. That is right, the company reported a massive net loss of $4.1 billion or $3.47 per share, which is greater than the loss in Q3 of $3.8 billion. For all of 2015, the company lost $12.2 billion, or $11.31 per share. My friends, 2016 has the potential to be worse, but the company is fighting for its survival. Despite losing credit ratings and investors having abandoned ship the whole way down, the company is indeed doing what needed to be done. That is, with its survival on the line, the company is cutting costs, while maintaining a strong level of sales to keep cash flows going.

Consolidated sales totaled 1.15 billion pounds of copper, 338 thousand ounces of gold, 20 million pounds of molybdenum and 13.2 million barrels of oil equivalents for fourth-quarter 2015. Of course, average realized prices were $2.18 per pound for copper, $1,067 per ounce for gold and $48.88 per barrel for oil. Consolidated unit net cash costs averaged $1.45 per pound of copper for mining operations and $16.17 per barrel of oil equivalents for oil and gas operations for fourth-quarter 2015. Operating cash flows totaled $612 million for fourth-quarter 2015 and $3.2 billion for the year 2015. Of course, compared to year's past, the prices of commodities are far lower, though costs are lower as well to produce.

The company continues to review its capital projects and costs to maximize cash flow to hold it over until markets improve. The company has long since trimmed the fat. It is a balancing act as cutting too much can hurt production and that can offset revenues to the point where the cost cutting was simply futile. Severe labor cuts, meaningful management compensation reductions, selling of equipment and property; all of this needs to be on the table. Taking an axe to capex followed by a scalpel to the rest. Spending at any and all levels needs to be closely monitored because it is urgency time. If there was one spot that I wish capex could be cut more, it would be oil and gas. That said, let's take a look at 2016 expectations.

In 2016 consolidated sales are expected to approximate 5.1 billion pounds of copper, 1.8 million ounces of gold, 73 million pounds of molybdenum and 57.6 million barrels of oil equivalents, including 1.1 billion pounds of copper, 200 thousand ounces of gold, 19 million pounds of molybdenum and 12.4 million barrels of oil equivalents in Q1 2016. That reflects some of the planned reduction on production and closing of certain mining operations. Here's the beauty of the projections that really has me 'upgrading' the name to life support. Consolidated unit net cash costs are expected to average $1.10 per pound of copper for mining operations and $15 per barrel of oil equivalent for oil and gas operations for the year 2016. Capital expenditures for the year 2016 are expected to approximate $3.4 billion, including $1.4 billion for major projects at mining operations and $1.5 billion for oil and gas operations, and $0.6 billion in idle rig costs. The one item that should keep investors extremely cautious is the debt. At December 31, 2015, consolidated debt totaled $20.4 billion and consolidated cash totaled $224 million. That said, at December 31, 2015, FCX had no amounts drawn under its $4.0 billion credit facility.

The speculative side of me is curious here, but I would wait. Those who have held, I wouldn't bail. The company is in survival mode and this is going to be a long battle and the question is whether or not the company becomes a casualty in this commodity sell-off. Look, if oil slides under $25 a barrel and gold under $1,000, I would be worried. You may miss the first 20%, but I'd rather you wait for the sector to truly rebound, and there will be opportunity to make a lot of money in this stock, but it needs to survive. What do you think? Are you buying? Are you short? Do you think the company will survive? Let men and the community know below.

Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "follow." He also writes a lot of "breaking" articles that are time sensitive. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."

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.