Freeport-McMoRan (FCX, Financial) has surged by 175% from lows of $3.74 on Jan. 13. The rally from oversold levels has been backed by the company’s intent to reduce leverage, copper prices trending higher and oil trending higher in the recent past. However, for the rally to sustain Freeport-McMoRan has to work further on the overall liquidity position.
As of December 2015, Freeport-McMoRan had cash and equivalents of $224 million. Further, on Feb. 15, Freeport-McMoRan announced an agreement to sell a 13% stake in its Morenci unincorporated joint venture to Sumitomo Metal Mining for $1 billion in cash. This transaction improves the total liquidity to $1.22 billion.
The important point to note here is that Freeport-McMoRan expects to incur capital expenditure of $3.4 billion for fiscal year 2016, and the company’s operating cash flow is also expected to be $3.4 billion. Therefore, there will be no additional liquidity buffer coming from the company’s operating cash flow.
This is important to note because Freeport-McMoRan intends to reduce debt in 2016 and beyond. Therefore $1.2 billion in cash buffer might not be enough if leverage has to be significantly reduced in the next 12 to 24 months.
While Freeport-McMoRan has no debt maturity in 2016, the company has $1.6 billion in debt maturity coming in 2017. In the next 12 months, Freeport-McMoRan would be looking to repay the debt maturing in 2017 instead of debt refinancing. Therefore, current cash buffer of $1.2 billion would not be sufficient.
In the company’s January presentation, it was mentioned that Freeport-McMoRan has agreed to offer a 20.64% stake in Grasberg; if this transaction goes through in the coming months, Freeport-McMoRan will have sufficient liquidity to repay 2017 debt maturity.
Oil has trended higher recently; if oil continues to trend higher on potential production freeze by major producing countries, some divestment in the oil and gas segment is likely as well. Freeport-McMoRan was considering divestment or joint venture in the oil and gas segment, but the significant decline in oil prices delayed that plan.
Among the positives, copper has trended to a four-month high, and Freeport-McMoRan expects that, with every 10 cents change in copper price, the positive impact on EBITDA is likely to be $550 million. Therefore, if sentiments remain relatively bullish for oil and copper, the company’s base case projection of $3.4 billion in OCF can be revised higher.
While Freeport-McMoRan looks well positioned to increase its liquidity buffer and reduce debt in the next 12 months, global economic slowdown is a point of concern. In particular, there is renewed slowdown in China and this can impact copper and oil prices.
Therefore, there are reasons to be positive, but economic concerns can still dominate sentiments. Remain cautiously optimistic on the stock. The critical factor to watch in the next few months would be asset sales and decline in leverage. The company has amended covenants, and I don’t see concern on that front.
From an investment perspective, I would wait for some correction before considering any exposure to the stock after a 175% rally in two months. However, investors who already own the stock can remain invested as further news on asset sale can provide renewed upside momentum.
Disclosure: No positions in the stock.
