Freeport-McMoRan: The Weakness Will Persist

Freeport-McMoRan (FCX) has faced a lot of difficulty this year as the stock is down over 40%. This is a result of a weak financial performance since Freeport’s revenue in the previous quarter was down 23%. Additionally, Freeport-McMoRan had posted a second-quarter net loss of $1.85 billion as compared to net income of $482 million last year.

The mining company saw a substantial decline in both its top and bottom lines, primarily due to lower production for the quarter and weak pricing in the end market. But, Freeport is recording sequential growth in the business, which is a sign of better things to come.

Focusing on the positives

Freeport is seeing sequential growth in sales volumes, cash operating margin and adjusted EBITDA, primarily driven by healthy growth momentum in deepwater GOM with the company basically focused on smaller risk drilling and tieback prospects.
Freeport has achieved significant drilling success since 2014 with 10 fully-owned wells in producing fields, including 3 put on production during 2014 and the first half of 2015.

The Lucius play is believed to be producing at maximum rates with Heidelberg estimated to start production in the middle of 2016. Freeport has also dug deep in Atwater valley region after being encouraged by solid results at Power Nap.

Beyond oil, the sales trend of copper, gold, and molybdenum over the quarters is also improving. Freeport delivered 13.1 million barrels of oil equivalents (MMBOE), 23 million pounds of molybdenum, 352 thousand ounces of gold and 964 million pounds of consolidated copper in the second quarter of 2015 as against 16.0 MMBOE of oil. The company has also produced 25 million pounds of molybdenum, 159 thousand ounces of gold, and 968 million pounds of copper for the second quarter of 2014.

The company is expected to be focused on increasingly growing the production of key metals over the years while maintaining a healthy balance sheet to support the mining operations and offer attractive shareholder returns through strategic cost-optimization initiatives.

Going forward, Freeport has also provided production guidance for the complete fiscal year 2015 and forecasts to achieve total copper sales of 4.2 billion lbs, 1.3 million ozs of consolidated gold sales, 93 million lbs of molybdenum and about 52.3 MMBOE of oil equivalents, comprising of 67% oil.  The company reported average realized prices for the second quarter of 2015 of $1,174 per ounce for gold, $2.71 per pound for copper and $67.61 per barrel for oil.


But, according to me, investors should stay away from Freeport-McMoRan due to its hugely debt-burdened balance sheet with significant total debt of $20.90 billion as against a weaker total cash position of $466 million. This will restrict the company from investing in its infrastructure. The PEG ratio of a negative 2.19 also depicts weak valuation. Hence, I think that it will be a good idea to ignore Freeport-McMoRan since its financials will remain in the short run.
Published on Oct 19, 2015
By Vinay Singh

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