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Jonathan Poland
Jonathan Poland
Articles (225)  | Author's Website |

Is Carl Icahn Completely Wrong With Freeport-McMoRan?

With 8.65% of the company, the question is whether Icahn will be on the wrong side of this turnaround

December 30, 2015 | About:

Carl Icahn is the largest shareholder in Freeport-McMoRan (NYSE:FCX) with his recent purchase of around 100 million shares.

He spent close to $1 billion, got two board seats and is down over $290 million on the trade. “Go big or go home” is a phrase that comes to mind with Icahn, which is why I like him so much.

Freeport’s global footprint is massive. The company has an estimated consolidated recoverable proven and possible mineral reserves totaling 103.5 billion pounds in copper, 28.5 million ounces in gold, 3.11 billion pounds in molybdenum, 282.9 million ounces in silver and 0.85 billion pounds in cobalt and estimated proved oil and gas reserves totaled 390 million barrels of oil equivalents. Oh, if we still had $100 per barrel oil … but we don’t.

Going back a decade, this stock has added absolutely no real value to shareholders, which suggests that, for Icahn, this is just a bet on a 2016-2017 recovery in the commodities markets. He may trade in and out if it works out. Trust me, he’s doing all he can to ensure it does.

With Icahn behind the company, there are going to be changes. One has already happened; chairman James Moffett, 77, resigned two days ago. Call it early retirement, but it was no doubt due to pressure from Icahn, who has criticized the miner's spending, capital structure and executive compensation at a time of weak commodity prices. The company went on to say it would reduce the number of directors to nine from 16 and separate its oil and gas business from its mining operations. Under Moffett, the stock has gone from a high of $60 down to $7.

Reduction: A dividend cut will go a long way to helping reduce spending in 2016 by roughly $200 million.

Recovery: Copper accounts for 60% of the company's revenue. Any uptick or stabilization in the market would stop the bleeding stock price, but copper prices have been cut in half since 2010.

Spinoffs: The bad decision to diversify into the oil and gas business cost shareholders dearly. Since then, Freeport has had to write down $15 billion in this segment, thanks to goodwill impairments.

Copper is key

Freeport has a massive stronghold on this market. While Southern Copper (NYSE:SCCO) and Newmont Mining (NYSE:NEM) both produce positive earnings, Freeport dwarfs them in size, revenue and EBITDA with negative net results. The company just raised $1 billion in gross proceeds via the sale of 96.7 million Freeport common shares, and it filed a prospectus with the SEC to sell up to $1 billion in common stock through another offering. Finally, a registration statement was filed with the SEC for an IPO of common stock representing a minority interest in the oil and gas business. The shares would be listed on the NYSE under the symbol FMOG. This helps the company get back to its main business copper.

With Icahn as activist and largest shareholder, the company probably will shed problematic assets and get back to profitability and high dividend yield. If Icahn is successful, investors could see a 50% to 100% increase in the price by 2018.

About the author:

Jonathan Poland
Thanks for reading! I'm a former money manager and financial publisher that has helped investors produce market beating results since 2001. Today, I turn 40,000 hours of work analyzing and forecasting the world's leading investments into models for better business development.

Visit Jonathan Poland's Website

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