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Freeport-McMoRan: Rally Fading, But Downside Risk Minimum

Alpha World profile picture
Alpha World
568 Followers

Summary

  • Freeport-McMoRan has bounced back sharply after a disastrous start to 2016.
  • Year to date, the stock is up almost 40%.
  • In recent weeks, Freeport-McMoRan has seen a pullback, but I don't see significant downside from current levels due to a range of factors.

Freeport-McMoRan (NYSE:NYSE:FCX) is up almost 40% for this year. After bottoming out in late January, the shares have staged a remarkable comeback, driven mainly by a rebound in commodities. With the stock seeing a bit of a pullback in recent weeks, the question is whether FCX's rally is fading, and whether we will see the stock drop to levels seen in January.

The answer to the first question is "Yes." The rally is certainly fading, and given the company's near-term outlook, this is justified. FCX had dropped to multi-year low levels mainly due to fears over the company filing for bankruptcy. While FCX's high debt levels, mainly due to ill-timed acquisition of oil & gas assets, are a concern, its bankruptcy fears are certainly overblown. Remember that the company is sitting on some of the best copper assets out there. A recovery from the multi-year low levels was certainly warranted, and as commodities rebounded, FCX staged a remarkable recovery. It is not surprising to see a pullback now, as investors that entered at those multi-year low levels are taking profits, and rightly so.

As for the second question of whether FCX could potentially drop to the January levels, the answer is "No." And here is why. Freeport-McMoRan, because of the steps it has taken in the last six to eight months, expects its mining business to be free cash flow-positive, even if prices remain low. In a presentation in February, the company noted that it has stress-tested current operating plans at lower prices to ensure its adjusted mine plans are appropriate.

The second reason why I don't expect FCX to drop to January levels is the outlook for the copper market. While copper prices could remain under pressure in the near term, the mid- to long-term outlook for the red metal is one

This article was written by

Alpha World profile picture
568 Followers
While an equity research analyst by trade, I am using this platform to focus on macro and geopolitical events, and the interrelation between these events and the markets.

Analyst’s 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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