Freeport-McMoRan: Heading In The Right Direction

| About: Freeport-McMoRan Inc. (FCX)

Summary

Freeport-McMoRan’s Q1 results once again highlighted the challenges the company is facing.

However, the company remains on the right track.

Copper’s long-term fundamentals are solid and the outlook for the oil market has also improved.

Since reporting Q1 results on April 26th, Freeport-McMoRan (NYSE:FCX) shares have surged more than 15%. The company's loss for the quarter was less than forecast although revenue fell slightly short of expectations. FCX's quarterly performance once again highlighted the challenging environment the company has been operating in. The rally though has been sparked by the fact that FCX remains in the right direction.

Q1 Results

Freeport's loss widened in the first quarter, primarily because of the reduction of the carrying value of the oil and gas assets. The ill-timed acquisition of the oil and gas assets continue to weigh on FCX's financial performance. In the first quarter, FCX registered a loss of $4.2 million, compared to $2.5 billion reported for the same period in the previous year. After adjustments, FCX's net loss for the quarter was $197 million, or $0.16 per share. The consensus forecast was for a net loss of $0.18 per share.

FCX sold 1.1 billion pounds of copper in the quarter, up from 960 million reported in the same period last year. Average realized prices were $2.17 per pound for copper. Consolidated unit net cash costs were $1.38 per pound. Costs are expected to drop to $1.05 per pound for the year.

On The Right Track

At the start of this year, there were fears of bankruptcy but as I said in my earlier article, these fears were overblown. FCX is highly geared, with more than $20 billion in debt on its balance sheet. But as CEO Richard Adkerson noted in the conference call this week, FCX has a very manageable near-term debt maturity schedule. Adkerson also noted that the company's near-term liquidity is very strong.

Importantly, Freeport has been taking steps to strengthen its balance sheet. Last year, the company announced capital spending cuts and also suspended its dividend payments. FCX also completed a secondary offering but given the weakness in its share price and the current market environment, the company will be focusing more on asset sales than tapping the capital market. Earlier this year, FCX entered into agreements to sell an additional 13% ownership in Morenci. FCX also sold some oil and gas royalty interests in April, which fetched the company $100 million. These sales are likely to continue as the company is in advanced discussions for certain interests in its mining and oil and gas assets. As I had noted in my previous article, FCX has some of the best copper assets that might be of interest to companies such as Rio Tinto (NYSE:RIO), which has been looking to reduce its reliance on iron ore.

In addition, FCX also announced job cuts in its oil and gas business.

Copper's Fundamentals

Commodities such as iron ore and copper have been helped by robust demand from China lately. However, Chinese demand has been driven by the effect of stimulus measures announced by policymakers in the wake of a sharp slowdown in the world's second-largest economy. This is one of the reasons I am not bullish on iron ore in the near-term. China's demand is certainly helping right now but the seaborne iron ore market remains oversupplied. That is not the case with the copper market though. Indeed, the copper market could turn into a deficit sooner-than-anticipated.

Adkerson noted in the conference call this week that the large anticipated surplus in the copper market have not materialized. Also, the pipeline of new supply projects has been declining, noted Adkerson. In its earnings presentation, FCX noted that there could be a shortfall of 7 million tons by 2025. This is based on FCX's projection that there will be an 18% decline in base production over the next decade, while demand will increase at a CAGR of 1.7%.

Oil Fundamentals Also Improving

As I noted earlier, FCX's weak financial performance over the past couple of years stem from the ill-timed acquisition of oil and gas assets. Shortly after the company acquired these assets and took on significant debt on its balance sheet, the oil market collapsed. However, the fundamentals of the oil market are finally improving. Indeed, when the deal between major producers to freeze production collapsed earlier this month, the impact on prices was not very significant. This was partly due to the supply disruptions in Kuwait. But analysts believe that the improving fundamentals are also expected to provide support to prices. This means that FCX will be in a better position to offload its oil and gas assets.

Disclosure: I am/we are long FCX, RIO.

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.