Freeport-McMoRan: Wait Before a Turnaround Begins

Freeport-McMoRan [stock_market_widget type="inline" template="generic" color="default" assets="FCX" markup="(NYSE: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] stock has been in free-fall mode over the past six months, losing nearly 35% of its value and falling to three-year lows last month. The stock’s massive crash is not surprising as Freeport has been struggling on account of weak gold and copper output, as well as weakness in the copper pricing scenario.

Let’s take a look at what’s wrong at Freeport and if investors should buy the stock at current levels given its valuation.

Freeport’s Financials Are Not in the Best Shape

Freeport had delivered a quarterly net loss the last time it released results thanks to a plunge in its production of gold and copper in Indonesia. This was the first loss the company suffered since 2016.

More specifically, Freeport suffered a loss of $72 million in the second quarter as compared to a substantial profit of $869 million a year ago. This wasn’t surprising as Freeport’s copper output was down 24% year-over-year during the quarter. The decline in gold output was greater at 79% to 160 million pounds.

Meanwhile, Freeport’s costs saw a massive spike. Unit net cash costs per pound of copper increased from $0.96 in the prior-year period to $1.92 per pound in the second quarter. Freeport’s average realized price of copper also went in the opposite direction, dropping to $2.75 per pound from $3.08 a pound in the year-ago period.

Given these numbers, it was not surprising to see why Freeport swung to a loss last quarter. The bad news for investors is that Freeport might not be turning around in the near-term as the copper pricing scenario is not favourable and the trade war is hurting the metal’s prospects.

Weak Copper Prices Will Be a Headwind

A weak economic scenario in the wake of the U.S.-China trade war has wreaked havoc on copper prices. The recent U.S. manufacturing data suggests the consumption of copper could head lower in the U.S., adding to the woes already seen in China where copper consumption seems to be on the wane already.

In the month of August, China’s unwrought copper imports fell to 404,000 tonnes as compared to 420,000 tonnes in the year-ago period and also the month of July. So, if copper consumption around the world keeps going down, there’s a good chance that the price of the metal could also head lower and pose more headache for Freeport.

However, Freeport is promising a turnaround in its operational profile once its project in Indonesia is complete. As reported by Reuters, Richard Adkerson, Freeport’s chief executive, said the Grasberg expansion was “advancing according to plan. Copper production from Grasberg is expected to rebound to 200 million pounds per year by 2020 and 900 million pounds per year by 2021.”

Management also believes that Freeport will be able to take advantage of a copper supply deficit as demand could eventually grow and supplies will remain limited. But investors shouldn’t jump the gun as Freeport is still faced with headwinds and a turnaround seems some time away.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.

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