Freeport-McMoRan: A Worthy Investment?

Freeport-McMoRan (FCX) is keen on optimizing its liquidity position by controlling the non-core expenses and postponing the key capital expenditures which is impressively converging with its commitment to sustain healthy balance sheet while delivering notable shareholder returns.

What next?

Freeport is observed to be extremely well-positioned for delivering significant free cash flow and margin expansion with continued year-over-year deteriorating mining capital expenditure profile and falling unit net cash cost profile while expanding copper sales profile over the quarters.

Importantly, the Board of Directors at Freeport recently declared a standard quarterly cash dividend of $0.12 per share of its common stock to be paid to the key stakeholders on February 2nd, 2016 as of January 19th, 2016 and representing the company’s 205th successive quarterly dividend.

The ongoing commitment of Freeport to maintain a healthy cash position by minimizing the non-core expenditures and delaying any major investments has primarily allowed it to deliver superior quarterly dividend to its key stakeholders.

The forecasted superior performance of the global copper market has not materialized with China sliding into an economic recession marked by significantly visible slowing expansion rate in the country and needing notable economic stimulus to revive.
The U.S. economy is expanding only moderately with economic stimulus being leveraged in Japan and Europe. The supply side conditions continue to be challenging with short-term price volatility and robust long-term fundamentals.

Although, the near-term company fundamentals remain somewhat fragile still its long-term growth prospects seems extremely well-placed being supported by an attractive balance sheet and delivering sustainable lasting shareholder returns.

Strategic areas in focus

Freeport is strategically placed in deepwater Gulf of Mexico with notable existing oil production having robust cash margins including, the oil producing assets of Lucius, Holstein, Horn Mountain and Marlin. These combined growth assets have significant capacity to sustain growth. The financially strong growth activities at the mentioned key assets are believed to drive notable company growth. Moving ahead, Freeport has well-positioned Acreage near current development facilities and having excess capacity. In addition, there are significant short-term Subsea Tieback growth prospects including, Dorado, KOQV and King.

The strategic copper mining and oil drilling projects of Freeport are believed to be strongly positioned for delivering sustainable long-term growth as the global commodity demand and pricing environment recovers gradually.

Deutsche Bank’s Jorge Beristain has downgraded Freeport-McMoRan to “Hold” from “Buy” primarily driven by the ongoing economic recession in China which has notably devalued the key currencies including, the Brazilian currency and the Yuan, thus making it difficult for the investors to achieve profitability amid uncertain global commodity pricing scenario.

Weak sentiments

TheStreet Ratings Team rates Freeport-McMoRan Inc. as a “Sell” with a ratings score of ‘D’ and primarily driven by several of the company’s weaknesses which are believed to outweigh any of its strengths and thus making it difficult for the investors to record profitability. Freeport’s major weaknesses are observed in several areas, like its declining net income, usually elevated debt management risk, poor return on equity, disappointing operating cash flows and weaker historical stock price performance.

The consensus estimate among 18 polled investment analysts evaluating Freeport-McMoRan Inc. suggests that the company would outperform the market. This consensus estimate is maintained since the investment analyst’s sentiments got better on Aug 06, 2009. The earlier consensus estimate suggested investors to “Hold” their position in the company.

There’s a mix of investor’s sentiments about the growth prospects of Freeport some indicating strengths while other weaknesses and thus making it difficult for investors to record profits.

Conclusion

Overall, the investors are advised to “Sell” any equity held in Freeport-McMoRan Inc. looking at its debt-burdened balance sheet with significant total debt of $20.70 billion against weaker total cash position of $338.00 million only, restricting the company to make future growth investments. The profit margin of -63.56% also indicate no profit but loss. However, the PEG ratio of 2.18 seems satisfactory, indicating healthy company growth.
Published on Feb 3, 2016
By Vinay Singh

Copyrighted 2016. Content published with author's permission.

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