Freeport-McMoRan: The Company Is Proving Its Mettle

| About: Freeport-McMoRan Inc. (FCX)

Summary

Freeport-McMoRan reported mixed Q1 results.

The copper miner made huge strides toward becoming free cash flow positive as the oil and gas division becomes less of a drag.

The stock is likely heading higher as the cash flow position turns very positive heading into 2017.

The investment theme at the lows in the stock was that Freeport-McMoRan (NYSE:FCX) was in a substantially better cash flow position than predicted by the stock price. The solid Q1 results confirm the simple path to reach positive free cash flow this year.

Source: Freeport-McMoRan presentation

The stock no longer trades near the lows after the massive rally off the bottom around $3.50 only three months ago. Now the question is whether one wants to chase the rally after the market has caught on to the better cash flow position.

Cash Flows

Q1 results were generally a mixed bag, if not downright negative. Despite beating EPS estimates, Freeport-McMoRan reported a loss and missed the revenue goal. The positive news was the progress on the cash flows.

For the quarter, the copper miner generated operating cash flows of $740 million while only spending $982 million on capital expenditures. The numbers were a complete shift from last Q1 where operating cash flows were slightly lower though the company spent roughly double on capex.

Even if this improvement doesn't dissuade the bears, the projection due to further ongoing cuts is that operating cash flows reach $4.8 billion for the year and capex drops to $3.3 billion. The capex forecast for the last three quarters of 2016 is to average only $766 million per quarter. The goal is for a drop in capex to only $2.2 billion in 2017 for an average quarterly spend of $550 million.

The capex amount for the rest of 2016 is noticeably close to the current operating cash flows highlighting the positive upside. Freeport-McMoRan expects operating cash flows to reach over $1.3 billion per quarter going forward this year and the Q1 results provide confidence that the copper miner can reach that target.

Further cost cuts and operational improvements set the copper miner up for some sweet cash flows in 2017 to help service the $20 billion debt load.

Copper Is Always Key

The whole cash flow plan is highly dependent on the price of copper. Unlike most other commodities like oil or potash, copper hasn't seen a fundamental shift in mining techniques or reserve discoveries. The recent pullback in copper prices has stalled mine developments needed to meet future demand requirements in the emerging world.

As an example, copper prices recently hit multi-year lows of $2/lb while LME inventories hit multi-year lows. Most other commodities have seen inventory levels skyrocket that led to the substantial price declines.

At current prices of around $2.25/lb, Freeport-McMoRan will generate well over $4 billion in cash flows this year from the copper mining division.

As one can see from the slide, copper prices pushing up to $2.50/lb will generate over $5 billion in cash flow from the mining operation alone.

Takeaway

The key investor takeaway is that the company has made significant progress towards the cash flow targets outlined during 2015. The market had a ton of skepticism regarding the ability to generate positive cash flows because of the focus on the negatives of the oil and gas division.

With the ability to produce billions in free cash flow, Freeport-McMoRan appears cheap even after the big rally. The stock is only worth $16 billion and likely headed higher as the company continues to prove its mettle.

Disclosure: I am/we are long FCX.

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: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.