In a recent meeting with Freeport (NYSE:FCX) management, I had the opportunity to get an update on the company with the completion of the $4.2b asset sale. Overall, I think the company is starting to turn the corner, particularly when valuation appears to be reasonable at the moment. Although I acknowledge that there are still several milestones for the company to hit in the next twelve to eighteen months, I believe that the management can execute and this should be accretive to the stock price. In the medium to long-term, the attractive copper price (ie. $2.70-$2.80 consensus vs. current $2.05/lb) provides a favorable backdrop for FCX. That said, I remain bullish on the stock and recommend investors to accumulate on weakness.
Much of the conversation is centered around Indonesia, which could potentially be a near-term catalyst. I note that 28% of the copper production comes from the country and near-term resolution will be the key determinant for the stock performance. There are several arrangements that FCX could have with Indonesia including taxes, royalties, sell-down of ownership, smelter constructions and so forth. These conversations involve a great deal of compromise between the local stakeholders and the company. Although some progress has been made, I think investors want to see more to be done but it is important to note that there are simply too many variables to consider and a quick resolution may not materialize immediately. This has been the biggest pushback on the stock but I am quite confident post my meeting that the situation in the country is likely to be mitigated which is why I believe that now is the time to accumulate.
Upon a resolution being made in Indonesia, I believe that the shares will likely rebound aggressively although I do note that equity issuance may occur to address the company's debt and leverage. Overtime, it appears that the energy asset could be up for sale which may draw interest on the shares but I sense from my conversation that the Indonesia resolution is enough to draw investor interest on the shares.
In short, I would accumulate FCX on weakness. There is certainly a macro tailwind on the stock with the renewed optimism on the global copper demand and improving energy prices, which is a positive to the stock. Although there are also near-term risks such as high inventory level in China and a potential supply increase.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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