Freeport-McMoRan’s Stock At Its Peak After 200% Rise

We believe there may be better opportunities than Freeport-McMoRan’s stock (NYSE: FCX) at the present time. FCX trades at $16 currently and it has gained more than 20% in value so far this year. It traded at a pre-Covid high of $13 in February, and it is above that level now. Also, FCX stock has gained around 200% from the low of slightly over $5 seen in March 2020, as gold prices have shot up significantly and remained elevated during the ongoing pandemic. Also, copper prices, which had dropped after the outbreak of coronavirus, have also recovered at a significant rate with the US government announcing a string of measures along with stimulus packages announced in other economies to keep businesses afloat. That said, as the crisis abates and lock downs are lifted, gold prices could see a marginal decline while copper prices do not have much upside left. Also, expectations of higher shipments in 2021 are already accounted for in the recent stock rally. In view of its rally since March, we believe that the stock is unlikely to rise significantly in the near future. Our conclusion is based on our detailed analysis of Freeport-McMoRan’s stock performance during the current crisis with that during the 2008 recession in an interactive dashboard analysis.

2020 Coronavirus Crisis

Timeline for 2020 Crisis So Far:

• 12/12/2019: Coronavirus cases first reported in China
• 1/31/2020: WHO declares a global health emergency.
• 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
• 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
• From 3/24/2020: S&P 500 recovers 47% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here is how FCX and the broader market performed during the 2007/2008 crisis.

Timeline for 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 1/1/2010: Initial recovery to levels before accelerated decline (around 9/1/2008)

Freeport-McMoRan vs S&P 500 Performance Over 2007-08 Financial Crisis

FCX stock declined from levels of around $42 in September 2007 (pre-crisis peak) to levels of around $12 in March 2009 (as the markets bottomed out), implying FCX stock lost 72% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of over $31 in early 2010, rising by 164% between March 2009 and January 2010. In comparison, the S&P 500 Index saw a decline of 51% and recovered 48%.

FCX’s Fundamentals In Recent Years Are A Mixed Bag

Freeport-McMoRan’s revenues grew from $14.6 billion in 2015 to $18.6 billion in 2018, but then dropped significantly to $14.4 billion in 2019. This was mainly due to mine transition work at the Grasberg facility, leading to a sharp drop in gold and copper output. Margins improved over recent years with adjusted EPS increasing from -$1.26 in 2016 to $1.25 in 2019. However, the company’s Q2 revenues saw a 14% y-o-y decline. Earnings came in at $0.03/share as against a loss of $0.04/share in the year-ago period, mainly due to higher commodity prices.

Does FCX Have A Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

FCX’s total debt decreased from $16 billion in 2016 to $10 billion at the end of Q2 2020, while its total cash decreased from $4.2 billion to $1.5 billion over the same period. The company also generated $0.5 billion in cash from its operations in the first half of 2020, and it appears to be in a reasonably good position to weather the crisis.

Conclusion

Phases of Covid-19 Crisis:

• Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
• Late-March 2020 onward: Social distancing measures + lockdowns
• April 2020:  Fed stimulus suppresses near-term survival anxiety
• May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
• July-September 2020: Poor Q2 results, but continued improvement in demand and a decline in the number of new cases and progress with vaccine development buoy expectations

Going by the historical performance and in view of the strong rally in FCX’s stock since late March, we believe that the stock has little room for growth in the near future. FCX’s valuation by Trefis works out to $15 per share.

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