Freeport-McMoRan Inc. (FCX) is an industry leading natural resources company that specializes in the gathering of mineral assets, natural gas and oil resources. The company has operations in North America, South America, Indonesia and Africa. Copper accounts for over 60% of the company’s revenues with seven copper mines in the United States alone. As of December 31, 2014, Freeport-McMoRan’s natural resource assets included 103.5 billion pounds of copper, 28.5 million ounces of gold, 282.9 ounces of silver of proven and probable mineral reserves and 390 million BOE of proven oil and gas reserves.
On August 3, 2015, Freeport-McMoRan paid a second quarter (Q2) regular dividend of $0.05 per share and a special dividend of $0.1105 per share. The special dividend was a result of stockholder derivative litigation from April 2015. The dividend was the same as in the prior quarter (Q1) but down 84% year-over-year on management’s commitment to position the company for long-term growth. Several of Freeport-McMoRan’s competitors have also cut their dividends to weather the storm of volatile commodity prices. Since resuming dividend payments to shareholders in January 2010, the company has paid over 20 consecutive quarterly dividends with several special dividends. Freeport-McMoRan has an annualized dividend of $0.20 per share, which gives it a dividend yield of 1.90%.
As of market close on 8/28/2015, Freeport-McMoRan shares were trading at $10.50, down 55% year-to-date and down 70% over the last twelve months (LTM) as the drop in commodity prices, since mid-2014, continues to crimp profits. At $10.50, the company has a market capitalization of $10.92 billion.
Swiss investment bank UBS is confident that better capital allocation for commodity investments will push the company’s stock up to around $19, representing upside potential of about 81%, and UBS has a Buy rating for Freeport-McMoRan. With a book value of $13.27 per share, FCX shares are currently trading at a 21% discount to Book Value.
Activist investor Carl Icahn also expressed confidence in the company and recently announced that he’d acquired an 8.5% stake, or 88 million shares, on August 27, 2015. Shares climbed as much as 29% after Icahn’s stake was made public. Analysts expect Icahn to join Freeport-McMoRan’s Board and start to implement positive changes, which he recently did with Cheniere Energy (LNG) earlier this month. Icahn plans to address high-cost production and deleveraging the company’s balance sheet to unlock value.
Freeport-McMoRan has a Current Ratio of 1.84x, well below some of its top competitors such as Newmont Mining Corporation (NEM) at 2.78x, Southern Copper Co. (SCCO) at 3.8x, Nucor Corporation (NUE) at 3.64x. Typically, investors look for a current ratio of around 2.0x so Freeport-McMoRan is not far off but liquidity and the company’s growing debt is a concern.
For the second quarter ended June 30, 2015, Freeport-McMoRan reported revenues of $4.25 billion, down 23% from the previous year. The dip in revenue is largely tied to a decrease in commodity prices despite an increase in production. Cost of sales climbed 57% as the company incurred $2.69 billion in impairment costs for its oil and gas properties. Freeport-McMoRan reported a net loss of $1.85 billion, or $1.78 per share, for the Q2 2015.
Management revised the company’s capital and operating plans from estimates previously announced in July 2015 in response to worsening market conditions in the mineral, and oil and gas sectors. Management now projects total capital expenditures for its Mining and Gas segment to be around $4.0 billion, 29% lower than previous estimates, with a reduction of $700 million in mining expenditures in 2016. The company also expects copper sales to be reduced by 150 million pounds per year in 2016 and 2017. Management estimates oil and gas capital expenditures to total $2.0 billion per year in 2016 and 2017, down from $2.9 billion per year in previous estimates. Freeport-McMoRan hopes these updated plans will increase free cash flow generation despite lower commodity prices. Analysts have been critical of the company as it reported negative free cash flow of $1.6 billion for 1H15 and that number could worsen if commodity prices continue to drop in the short term with capital expenditure costs already in place.
Oil and natural gas industry experts expect an upcycle in prices as several countries continue to introduce stricter laws on pollution to counteract global warming. Natural gas exports to countries with high pollution levels, such as China, are also expected to climb during 2H15 and FY2016. Deeper cuts in oil production by OPEC from instability in the Middle East and South America have contributed to increased demand for energy alternatives such as natural gas according to a recent report by the Energy Information Administration. However, in the short term, natural gas production is expected to decline.
As the largest copper company in the world, Freeport-McMoRan has significant upside if export issues at its Grasberg mine can be resolved and the automobile and housing industries in the United States continue to show growth. Freeport-McMoRan is in talks with the Indonesian government to acquire an exemption from recent legislation regarding copper exports. The United States automobile industry is a large customer for Freeport-McMoRan since car powertrains use some form of copper. Automobile sales are up over 4% year-to-date and industry analysts expect this uptrend to continue. Additionally, copper is a significant input in the construction of houses, especially heating components. With the winter approaching, copper demand in the Midwest and East Coast regions should spike.
Earlier this month, Freeport-McMoRan filed a prospectus with the SEC to potentially offer common stock at market price for gross proceeds of $1 billion, to be used for general corporate purposes. The company also recently filed a registration statement with the SEC for a potential initial public offering of Class A common shares representing minority interest in Freeport-McMoRan Oil & Gas Inc. (FM O&G). FM O&G is expected to apply for the listing of its common shares on the NYSE and will trade under the ticker symbol ‘FMOG’.
Freeport-McMoRan announced several leadership changes. Harry Conger was named COO of the Americas and Africa Mining segment, Mark Johnson was named COO of the Indonesia Mining segment and Doss Bourgeois was named COO of the Oil & Gas segment. Organizational changes are part of management’s plan to adjust focus and turn the company around.
Freeport-McMoRan’s management is actively addressing the volatility in commodity prices, which is a good sign for shareholders. A reduction in capex and better focus on core operations is expected to help the company address its excessive debt burden from its foray into the oil and gas industry a few years ago. Icahn has a history of picking stocks right before they climb so investors should consider buying the stock while it is still at a discount and before it has a big rally in 2H15 through 2017.