Freeport-McMoRan (NYSE:FCX) has hedged oil prices for the 4th quarter and for a substantial part of 2015. Since the conference I used to build the model for predicting EBITDA, the company might have increased their hedges on oil prices. I have no insider information, so I don't know for sure. However, given their recent aggressive use of hedges on oil prices, I suspect their next presentation will show an increased in hedged values. That's just my personal expectation after covering the company for a while. I went pretty in depth on those hedges.
I'll keep this fairly short since many of you have probably read my earlier work on EBITDA projections for FCX.
Over the last two weeks the stock price has climbed up quite a bit. I predicted that the climb would occur as long as the commodity prices stabilized at the levels they were at currently because the selling in FCX couldn't be justified by the change in commodity prices. Over the next week I was vindicated as commodity prices remained flat and FCX climbed.
In my opinion, the correction impacts are largely done. While I'm bullish on Freeport-McMoRan, I'm primarily bullish on it when the company trades down significantly without a major weakness in commodities.
I prepared the following charts to show the new levels I'm projecting. Before introducing the charts, I'd like to point out that I have specifically excluded the impact of exchange rate adjustments. According to management commentary on the impacts of exchange rates, the strengthening dollar should have a positive impact for the company.
Using management's predictions during a major presentation, I was able to build a model to reflect the projected EBITDA after adjusting for commodity price changes. However, it is very important to recognize that these are projections for the average value over 2015 and 2016. To predict future prices of commodities, I use the spot price. I believe the spot price is generally the most accurate and unbiased predictor of future prices.
Here are my projections for EBITDA from each date I ran the analysis.
As you can see, the trend is towards lower values for EBITDA because commodity prices have continued to slide.
I use the closing prices for comparison to see how the slide in EBITDA relates to the closing price of the stock. The chart below shows the closing value for each of those days:
Comparing the two
I built another chart that compares the relative movements in both. Since I began tracking on November 26th, I use those values as my baseline values for measuring against. Of course, the market is not perfect so any date I choose as my starting to point is liable to be poorly priced.
After the December 15th analysis, I was staunchly bullish. However, the case for my bullishness has been substantially weakened as share prices have gone up while projected EBITDA has changed.
Difficulty with EBITDA
Investors should remember that EBITDA is excluding the very important and very real cost of depletion. The cost of depletion is how FCX slowly writes off the value of the assets (such as mines) they are using to produce commodities (such as copper). Therefore, I believe the decline in share price should generally exceed the decline in EBITDA.
BHP Billiton (NYSE:BHP) and Rio Tinto (NYSE:RIO) have both announced plans (over the last several weeks) to substantially increase copper production with, apparently, no regard for their impact on prices. I haven't completed a full analysis on either company, but I have started working on BHP. My opinion, so far, is that this is a very significant headwind for the copper industry.
The Indonesian government isn't being too nice
The Indonesian government made some absurd demands. I think FCX can handle them, but the situation reinforces one of the significant risks to the company.
I am now in the neutral to very slightly bullish camp. The price of oil has dipped below the price collars FCX set and the decline in projected EBITDA should be viewed as a major concern that is further complicated by the presence of increased competition. I don't like to give Contrarian Advisor his due, but his case against FCX has more merit on the current numbers than it did a few weeks ago. If FCX was including the impact of price collars in their initial assessment of their vulnerability to oil price weakness, then the real drop may be larger because the price of oil has dipped below the collars. As always, my opinion is subject to change as the share prices and commodity prices change. If we see another share dip that dramatically exceeds the commodity change, I would immediately jump back into the bullish camp.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis. The analyst holds a diversified portfolio including mutual funds or index funds which may include a small long exposure to the stock.