Freeport-McMoRan: Reasons to Buy

Shares of Freeport-McMoRan (FCX) have declined approximately 50% year-to-date. This, in my opinion, remains a good opportunity to buy more of the shares as the long-term copper outlook remains favorable. Also, the company is taking various strategic actions to reduce its operating costs and capital expenditure. Moreover, Freeport expects its operating cash flow to grow significantly in the coming years, which will possibly allow the company to reduce its net debt and return value to its shareholders and investors.

Strong operational metrics

Looking ahead, Freeport-McMoRan sees its copper sales growing by a whopping 27% in 2016, while unit cash costs are slated to decline more than 24% next year.
Also, it expects its capital expenditure to decline by over 37% in fiscal year 2016. More importantly, the company expects its operating cash flow to grow 106% to $6.8 billion in 2016 from $3.3 billion in fiscal year 2015.

This strong operating cash flow should help the company to pay off its rising debt and return it to its investors. Freeport-McMoRan has total net debt of $20.4 million as of September 30, 2015. It has $3.5 billion of revolver credit facility and approximately $338 million in cash.

Why an improvement in copper pricing is expected

Earlier this year, ICSG expected copper surplus to remain approximately 360,000 tonnes and 230,000 tonnes in 2015 and 2016, respectively. The group’s recent revisions reflect substantial changes in market conditions since April 2015. “Although a downward revision has been made to global usage in view of lower than anticipated growth in China, larger downward adjustments have been made to production as a result of recent announcements of production cuts,” said ICSG.

However, the report also mentioned that world mine production after adjusting for historical disruption factors is expected to increase 1.2% in 2015 (a similar growth to 2014) to reach 18.8 million tonnes. Nevertheless, this is certainly welcome news for copper producer Freeport-McMoRan, which is taking strategic initiatives to benefit from this turnaround.

Conclusion

In my opinion, Freeport is poised to benefit from better copper pricing. Its cash flow will pick up pace as costs decline and sales increase. So, in my opinion, it is a good idea to go long Freeport-McMoRan.
Published on Nov 9, 2015
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

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