Freeport McMoRan: What Is Going On Here?

| About: Freeport-McMoRan Inc. (FCX)


We've come a long way from the near death of FCX.

Ignore the illogical rally in copper over the last week, it is temporary.

Hone in on and focus on performance.

You may recall that in a controversial piece earlier this year I discussed the slow death of Freeport-McMoRan (NYSE:FCX). Copper prices were at six-year lows. Oil was at ten-year lows. Gold had meandered lower from its highs four years ago. Produced by-product prices were at multi-year lows. Following my calls, the stock hit multi-decade lows touching $3.52 a share. About a month later I upgraded the name from certain death to on life support. Then I said the company was in recovery mode. In the last two weeks, and following the elections, copper and FCX have surged in the anticipation of a construction boom. I don't think the rally is sustainable. It is a bit out of whack, and is illogical. Enjoy it while it lasts. I still prefer to look at FCX from a long-term view. Independent of this outrageous rally, commodity prices were turning higher, and over the last two years the miner pulled out all the stops to fight for survival. The result? Shares were on the mend. In this regard, I wanted to check in with how the miner was performing and it just recently reported earnings.

The report had some causes for concern, but definitely was reflective of a company trying to right the ship. The company swung from a reported a net loss of $479 million or $0.38 per share, to see net income of $217 million or $0.16 per share. After making some adjustments, Q3 2016 adjusted income per share was $0.13. It is interesting to note that this was still a miss of $0.06 against analyst estimates. Despite losing credit ratings and investors having abandoned ship the whole way down, the company is indeed doing what needed to be done by cutting costs, while maintaining a strong level of sales to keep cash flows going, and even managed a profit.

So how were sales? Well they were actually up from last year thanks to planned cost savings and better commodity pricing, in addition to higher sales. Consolidated sales totaled 1.2 billion pounds of copper, 317 thousand ounces of gold, 16 million pounds of molybdenum and 12.0 million barrels of oil equivalents. This is mostly up from Q2 2016. Of course, average realized prices were still somewhat weak. They were flat from last quarter to $2.18 per pound for copper, but up over $35 per ounce of gold to $1,327 per ounce and down $0.50 per barrel of oil to $40.63.

Remember I mentioned cost cutting? Well, consolidated unit net cash costs declined quarter-over-quarter and averaged $1.14 per pound of copper for mining operations and $15.0 per barrel of oil equivalents for oil and gas operations. These are strong sequential declines in production costs for copper and flat for oil. Operating cash flows were actually up quarter-over-quarter and totaled $980 million, up from $874 million. Of course, compared to year's past, the prices of commodities are far lower, though costs are lower as well to produce. Still, production costs cannot be cut enough to offset the decline in prices. The company has long since trimmed the fat. It is a balancing act as cutting too much can hurt production and that can offset revenues to the point where the cost cutting was simply futile. We saw a bit of that this quarter. Severe labor cuts, meaningful management compensation reductions, selling of equipment and property are all still on the table here.

Looking ahead, sales are expected to be 5.0 billion pounds of copper, 1.85 million ounces of gold, 71 million pounds of molybdenum and 54.4 million barrels of oil equivalents in 2016. Consolidated unit net cash costs are expected to decline thanks to cost reduction efforts. The average consolidated unit net cash costs will be $1.05 per pound of copper for mining operations and $15 per barrel of oil equivalent for oil and gas operations for the year 2016. Capital expenditures were revised downward slightly for the year 2016 and are expected to approximate $2.8 billion, including $1.2billion for major projects at mining operations and $1.1 billion for oil and gas operations.

After this strong rebound, I wouldn't dive in just yet. Let the name pull back, I would argue to under $10 before taking a shot here again. The debt is still a major concern for the company. Although it is working on debt reduction, we are still talking $18-$19 billion in debt. To those who have held, I would continue to do so. The company is no longer on the brink of extinction, but is not out of the woods yet. It is still in survival mode.

What do you think? Are you buying? Are you short? Do you think the company will survive? Let me and the community know below.

Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "follow." He also writes a lot of "breaking" articles that are time sensitive. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."

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.