Freeport-McMoRan Inc.(NYSE: FCX) ended 2017 with a bang, rocketing higher by 36% in December. That massive one-month move left the stock up 44% for the year. Enthused investors might be wondering if they should pick up some shares in the copper and gold miner. I wouldn’t, but the price spike isn’t the main reason I’d avoid Freeport-McMoRan.
The price of copper
The big share-price move in December had very little to do with the fundamentals of Freeport’s business. Instead, the advance tracked along with a swift rise in the price of copper, which brings front and center the fact that Freeport’s business is inherently tied to commodity prices — which can be volatile, often dramatically so.
Image source: Getty Images.
But that’s not unique to this miner. In fact, if you want exposure to copper, Freeport is a reasonable way to get it, since the company is one of the largest copper miners in the world. And, for the most part, it does a decent job of running its copper mines profitably. For example, it expects to produce copper for roughly $1.20 per pound (after byproduct credits) in 2017, compared to a low spot price of around $2.50 per pound for the metal in 2017 and a high of over $3.30.
The miner also has notable development projects in its pipeline that could help increase production over time, assuming copper prices and demand remain strong. So far, it appears Freeport is a worthwhile investment — but don’t jump just yet, as there’s some bad news mixed in with the good here.
Mistakes and overhangs
The first big negative was Freeport’s ill-timed foray into the oil and natural gas business. Shortly before oil prices peaked in mid-2014, the miner spent $20 billion to acquire two energy companies — the idea was to diversify its asset base. However, that proved a costly mistake when oil prices began to crater. Freeport has since extracted itself from the energy space.
Freeport’s 2017 outlook as of the third-quarter earnings release. Image source: Freeport-McMoRan Inc.
But there’s a lingering problem. Freeport’s long-term debt stood at roughly $3.5 billion before the oil acquisitions and at about $20 billion afterward. Despite a huge amount of time and effort to get out from under the oil business and trim its hefty debt load, Freeport’s long-term debt was still a heavy $12.5 billion at the end of the third quarter.
So despite the fact that the oil business is, effectively, gone, Freeport still has over three times as much debt as it did before its failed attempt to broaden its business. And shareholders are still paying for that, in hindsight, ill-advised investment. In particular, it worries me that long-term debt makes up 55% of the capital structure (including non-controlling interests) and that interest expenses ate up roughly 30% of EBITDA through the first three quarters of 2017.
Freeport’s mine portfolio. Image source: Freeport-McMoRan Inc.
Then there’s the not-so-subtle issue of the ongoing dispute with Indonesia over the Grasberg mine that took center stage in 2017. Indonesia wants to get more financial benefit from the mine, which implies Freeport’s take will be reduced. It’s a big deal since this asset makes up about 30% of Freeport’s copper reserves and virtually all of its gold reserves. There’s a broad understanding between the two parties at this point, but no final resolution. Until there’s something more concrete, this issue is a serious wild card. That’s a risk I’d rather avoid.
Not the time for Freeport
There’s no question that Freeport-McMoRan will provide exposure to copper, if that’s what you’re after. However, I can’t forget the big oil misstep — largely because the aftereffects are still taking a toll on the company’s finances despite the fact that it has largely jettisoned the oil businesses it acquired. And when you add in the uncertainty surrounding the key Grasberg mine, the picture gets even less desirable. I don’t think the risks are worth the price at Freeport-McMoRan for most investors.
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