The Death Of Freeport-McMoRan


  • Prices have gotten worse in just about every commodity the company mines/works in.
  • The stock is at a 15-year low.
  • I discuss what the company can do, what it should do, and what you should not do.

Copper prices are at six-year lows. Oil is at ten-year lows. Gold has meandered lower from its highs four years ago. And what about Freeport-McMoRan (NYSE:NYSE:FCX)? Well, isn't this company fortunate enough to be a miner that engages in the exploration, mining and production of copper, gold, molybdenum, cobalt hydroxide, silver and other metals, such as rhenium and magnetite. Of course, it also has massive exposure to energy. The stock? Well, it is at a near 15-year low! You haven't wanted to be anywhere near these sectors for the last few years, but it has gotten awful and the company's very survival is at stake. It has a 16.5x net debt-to-EBITDA ratio, and I fear it is only going to get worse. It is dying a slow death. But can it be saved?

The answer is yes, but things will get worse before they get better when it comes to the numbers. I mean just look at the company's recently reported quarter, which was awful. With commodities having plunged, it is no surprise that the company suffered a huge top- and bottom-line miss. Revenues were down 35% year over year to $3.7 billion, and this missed estimates by $260 million. It is only going to get worse. Prices have gotten worse in just about every commodity the company mines/works in.

With declining revenues, you can only imagine what that means for earnings. That is right, the company reported a massive net loss of $3.8 billion, or $3.58 per share, in the most recent quarter. For all of 2015, the company has lost $8.2 billion, or $7.77 per share. My friends, 2016 could be even worse. The company is fighting for its survival, and it's a race to downgrade the name. It's losing credit ratings and investors have abandoned ship the whole way down. If this company is to survive, it MUST FOCUS ON CONTAINING COSTS.

It is not like the company isn't aware of this. It continues to review its capital projects and costs to maximize cash flow to hold it over until markets improve. But it has gotten worse. Bottom line is that the company has long since trimmed the fat. There is still wiggle room, but this is becoming more surgical now. Where can the company starve itself but survive? It is a balancing act. Cutting too much can hurt production and that can offset revenues to the point where the cost cutting was simply futile. Severe labor cuts, meaningful management compensation reductions, selling of equipment and property; all of this needs to be on the table. Taking an axe to capex followed by a scalpel to the rest. Spending at any and all levels needs to be closely monitored. It's urgency time.

The dividend should have been gone a long time ago when this mess started instead of waiting until the end of the year. No dividend saves $240 million a year. I see sales of assets coming in the near future. Management is fleeing. I still see that happening. Minority interests can go. It can take more actions to provide additional proceeds for debt reduction. FCX has a broad set of natural resource assets to hold the tide for a few quarters. I would expect further reductions to capex. Most recently, the numbers were reduced at the end of 2015 from $2.0 billion per year in 2016 and 2017 to $1.8 billion in 2016 and $1.2 billion in 2017, including idle rig costs. I think it comes lower. The ultimate goal here is for the company to be able to achieve funding for oil and gas capital spending within its cash flows and resources.

The problem here is that its oil and gas reviews were done assuming $45 a barrel for Brent crude in 2017. While I think that is realistic, it may be too conservative because there are no sign of positive catalysts any time soon for oil. Expect to see more mines closed and other operations brought to the bare minimum. Further production cuts are likely. It is not a name to be near at all. It is straight gambling to consider buying here. The company is in survival mode. This is a long battle and the question is whether or not the company becomes a casualty in this commodity selloff. I'm urging you don't try to bottom fish on this one. Don't try and catch a rebound trade. Powerball is at $1.3 billion, you might want to invest there if you are thinking of buying this name here. Wait for the sector to truly rebound, and there will be opportunity to make a lot of money in this stock, but it needs to survive. What do you think? Are you buying? Are you short? Do you think the company will survive? Let 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."

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