Freeport: What's Carl Icahn Up To

| About: Freeport-McMoRan Inc. (FCX)

Summary

As FCX gets closer to single digits, I’ve become more interested.

But don't focus on oil or gold, it’s still a copper play.

With its various exposures it's still an interesting commodity play.

I've talked shop about Freeport McMoRan (NYSE:FCX) in the recent past. I sold off the majority of my stake after the toward $15 a share. However I'm interested in owning shares again in the single digits. Shares have come in a bit since I last talked about the mining company. FCX traded briefly below $10 a share within the last month, which got the stock back on my radar.

Recall that Carl Icahn got involved in FCX in 2015, which initially appeared to be just another questionable commodity-related invested by Icahn, i.e. Chesapeake Energy (NYSE:CHK). Then there was the breakup thesis, where the oil and gas assets might be spun off, but that didn't panned out and was abandoned earlier this year.

The bright side

Commodity prices have improved, and FCX's balance sheet is making some headway. Further improvement on that front, however, doesn't come without asset sales - which is always a conundrum in a distressed market. Asset sales, which includes copper mines, should still be value accretive to the company.

Looking out, revenues should still be higher in 2016 year-over-year, and then up again in 2017 as gold, copper and oil prices all appear to have found a floor. Who knows what happens to the oil assets at this point - as mentioned th idea was to spin or sell that business, but they've since retreated on that thesis. Yet, that's not a negative - as selling those assets in the current environment is less than ideal.

Thus, Icahn's thesis of breaking up companies to unlock value doesn't work here. FCX is a commodity play, but a very interesting one at that. It's a bit misunderstood, where it is beholden to oil and gold, but not to the degree the market likes to focus. Rather, FCX is much more of a copper play. Gold made up ~10% of revenues last year, with oil and gas coming in similarly, while copper was nearly 70%.

The Worry

The big overhang shouldn't be oil, rather, it's copper and the possibility of a material slowdown in China. I've said before that this type of slowdown would be especially detrimental for a debt-loaded commodity company. And essentially, copper is an economy driven commodity, where the end markets are roughly 30% construction related and 30% consumer products related. But getting a beat on the black box economy that is China has been tough. China is already producing its own copper these days and storing the copper it's importing. So, with real estate market being overbuilt and questionable growth going forward, it's not unfathomable for copper prices to go lower. Of note, China makes up about 40% of the world's copper demand.

At the same time, there are things FCX can do, which include operational overhaul within the company, which would be a positive when it comes to margins and reigning in costs. Along those lines, Icahn played his part in helping get the founder and CEO fired. Hopefully, addressing some corporate governance issues. At the same time, everything is a buy at a certain price.

In the end

The key is to keep an eye on China. If they hold up, copper should hold up, which will be a big positive for FCX. Especially as oil and gold looks to have found a bottom. Of course, the debt is an overhang, but that's something you have to get comfortable with as a shareholder. There is the potential for an aggressive work down of debt, however. The cutting of debt in half within the next two years would certainly attract investors that were previously staying away given the debt load.

The keys for FCX include, operational cost cuts and portfolio optimization in terms of assets. There again, I'm interested in FCX and would be an owner at the $10 a share price level. Icahn has two board seats, so ideally, he's watching closely. I know I will be. If FCX is trading at my accumulation target ($10) it has to be because of an overreaction to a broader move in oil prices, or gold, and not because China is fritz.

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.