Will Freeport-McMoRan Shares Hold At Current Levels?

| About: Freeport-McMoRan Inc. (FCX)

Summary

Freeport-McMoRan publishes mediocre earnings, but the stock rebounds.

Bankruptcy fears are gone and this causes demand for the stock.

However, potential catalysts may not play out in the near term.

Freeport-McMoRan (NYSE: FCX) shares enjoyed strong upside since February and are up 83% year to date. At the beginning of the year, the stock was under significant pressure as falling commodity prices put the company's ability to deal with its debt under question. However, copper rebounded, oil rebounded, and even gold rallied, so Freeport-McMoRan had a chance to execute against its strategy to reduce debt.

The company was able to achieve strong valuations for its copper asset sales, which surely provided significant support for the stock. Freeport-McMoRan announced its intentions to do something with its oil and gas assets and some investors expected that the entire segment will be sold. This sale did not materialize, and the company remains somewhat dependent on the price of oil.

Interestingly, Freeport-McMoRan shares have been leading the life of its own now. Copper went from $2.30 per pound to almost $2.00 per pound without putting any significant pressure on the company's shares. Copper's rebound also went unnoticed. The same is true for oil and gold price fluctuations. Why this happened and what catalysts wait the company in the future?

Bankruptcy fears are gone

Commodity market rebound gave Freeport-McMoRan enough time to perform assets sales. The company continues to target further debt reduction and plans to issue $1.5 billion of equity. Judging by the market reaction to the announcement, there is demand for Freeport-McMoRan stock.

Anyone wanting to short Freeport-McMoRan stock at current levels should consider the fact that company's shares did not lose ground on dilution announcement. In my view, this is a sign of continuous strength. The company was successful with equity sales in the past, and I expect that this equity offering will go as planned.

Next year will be unique for the company as Grasberg is at the final year of the open pit mining. Gold sales are expected to rally from 1.7 million ounces this year to as much as 2.5 million ounces in 2017.

Thus, gold price in 2017 becomes an important factor for Freeport-McMoRan. So far, gold marched steadily to new highs, and, although the whole gold space appears overbought, demand for anything gold-related remains vivid.

Copper also holds well. In my view, while copper stays above $2.00, there will be no worries that Freeport-McMoRan will be buried by its own debt. Despite copper asset sales, the metal becomes the main driver for the company's performance - a 10 cent change in the price of copper leads to a change of $325 million in the company's EBITDA.

Oil and gas remains the weakest point of Freeport-McMoRan. The company cut its presence in the field by terminating rig contracts with Noble Corp. (NYSE: NE) and Rowan (NYSE: RDC) (I discussed these deals here and here).

This was obviously not a great outcome for Freeport-McMoRan, as it had to pay drillers in order to terminate the work. However, the company expects that its actions will help it keep its oil and gas segment expenditures within the cash flows that it generates.

All in all, Freeport-McMoRan used the commodity price recovery to put bankruptcy fears away. However, the stock cannot rally on "no bankruptcy" forever. Let's look at potential catalysts.

Copper price increase

I cannot remember when I first read the copper bull story: good copper mines are rare, investment in new projects is falling, and deficit is around the corner.

Nevertheless, copper is in a downtrend since 2011. There may be a bottom somewhere around $2 per pound, but I don't see what will quickly bring copper to higher levels. The real strength/weakness of the Chinese economy remains a bit of a mystery.

Frankly, I don't expect major positive surprises on this front and I don't see another potential leader which could substitute China on the market. The copper bull thesis is likely valid in the long term, but one will have to wait for years before any copper supply shock actually happens.

Oil and gas segment sale

In my view, if Freeport-McMoRan sold its oil and gas segment instead of Tenke Fungurume and the sale of a stake in Morenci, its shares would have been higher.

However, such a sale is now unlikely given the recent oil price dynamics. Freeport-McMoRan's asset sales show that the company is not going to sell its assets for pennies.

What worked with copper where Freeport-McMoRan is a clear leader won't work in the oil space where the company is a small newbie. Nobody is going to pay any premium above current valuation for the company's oil and gas assets. In my view, this catalyst won't be in play this year.

Indonesian contract

Freeport-McMoRan has a massive headache with its operations in Indonesia. The company needs to invest in underground operations but can't do this with any guarantees for the current contract past 2021. In addition, it has to continuously renew its export permits.

Freeport-McMoRan stated multiple times that it was not going to commit fully to the project if it does not receive legal assurance that it will work in the country after 2021.

Indonesia recently responded, saying that Freeport-McMoRan should not push for the contract extension. The story with Grasberg has long turned into a soap opera and continues to develop as such.

In my view, there are little chances that Freeport-McMoRan will get anything out of the Indonesian government this year if history is any guide. However, I'm almost certain of the final outcome - the company will continue to work in Indonesia.

Another company, Newmont Mining (NYSE: NEM), recently bailed out of Indonesia and committed to sell its 48.5% stake in Batu Hijau for $1.3 billion. Newmont Mining suffered from the same issues that bothered Freeport-McMoRan. Unfortunately, Freeport-McMoRan cannot do the same and leave the gigantic Grasberg mine, so the company's adventures in Indonesia will continue.

Bottom line

Freeport-McMoRan shares showed significant strength in recent months, and the demand for them is obvious. However, the company needs a catalyst to continue rally, and I don't see it coming in the near term. In my view, the company's shares will continue to trade in a wide $10-$14, potentially offering an entry for the long trade at the low end of this range.

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.

Additional disclosure: I may trade any of the abovementioned stocks.