Freeport-McMoran Copper & Gold Inc (NYSE:FCX) is one of the stocks affected by the steep drop in commodity prices. The stock is down about 45% from its one-year peak price. However, the stock is up more than 50% in the current year triggering interest in the stock among the investors. Billionaire and activist investor, Carl Icahn, has added further color to it by betting big on it though he could not do much with the commodity price and force the company to do what he wants. However, he could do what is best for the company by forcing actions as the stock is gaining traction for one or other reasons. Let’s look at three reasons that Icahn is betting on the company’s stock.
- Asset Sales Help Balance Sheet
One of the options available before Freeport-McMoRan Inc (NYSE:FCX) was the divestment of some of its assets when the market is not going in the expected direction and the outlook is also not so bright. The other thing is to cut down the capital expenditures when the existing facilities did not provide the expected yield. When the market is down, the price realization for such divestment is also bound to be weak only. However, that helps the company in more than one way to cleanse the balance sheet. The maintaining of such assets could itself be a herculean task as there would be only fewer buyers during the crisis time or when the market is trending downwards.
In the current year alone, Freeport-McMoRan Inc (NYSE:FCX) divested assets worth $4.2 billion. This included the divestment of the Tenke copper Mine for over $2.65 billion in Africa. That does not mean that macro risks have vanished. It is still there and the selling made some of the analysts to be more positive on the stock now than they were earlier in the current year. One of the reasons for it was making accretive asset sales. Also, the sale of assets meant that it returns to the period of a strong free cash flow probably for the first time after the steep drop in the commodity prices. The lower capex and costs also contributed to the favorable sentiments. Last year, the company burnt about $3.1 billion and the expectation for the current year is that it might close with positive cash flow of $1 billion.
- Managing the Debt
It is quite natural that companies like Freeport-McMoRan Inc (NYSE:FCX) would think about divesting assets only when they don’t make profit overall to offset any weakness in any of the divisions. Therefore, there is nothing surprise that the company has suffered a loss of $12.30 a share in the trailing twelve-month period. There is little hope that the company might turn to profit anytime soon. Sale of assets resorted by enterprises mainly to cut down their debts. The company has close to $20.8 billion of debt whereas its market cap is only approximately $14.24 billion. The current year selling of assets represented about 20% of its total debt.
Carl Icahn might not remain silent on this and would force Freeport-McMoRan Inc (NYSE:FCX) to come out with a clear-cut plan to reduce the debt and the associated interest costs. Its debt exploded because of McMoRan and Plains buyouts due to the bad timing. While there could be no immediate solution to the debt problem, servicing of it would be a main focus. The company might gain from cost cutting measures, as well as, capex reductions to manage its debt and servicing of it. As the biggest miner, it would stand to gain from any improvements in the copper, gold, and oil prices. There has been a sense of belief that the prices of these commodities have bottomed out and the time is now for stabilization. Also, there is less fear of a downfall in the prices, which should help the company. One of the reasons for it is that the sector is witnessing recovery in prices as the market would shift to deficit later in the current decade. Also, the company stands to gain in Peru, Indonesia, and China despite political risk.
- Growth At The Cost Of Shrinking
Freeport-McMoRan Inc (NYSE:FCX)’s move to sell assets meant that it would have to grow at the cost of shrinking. The company had no alternatives but to follow its rivals like Glenscore to sell assets to raise cash. Now that the billionaire investor, Icahn, entered the scene, certain things would not be easy for its board. Currently, Icahn owns 9% and was activist since August last year. He played a big role in getting the founder removed. It is also quite likely that his role could have been there in getting FCX to look into selling assets to pay down debt. This included its plan to IPO the oil and gas business, which was later shelved. It is not clear whether it is temporary decision or a permanent one. In a nutshell, the company is settling for growth even as their business would shrink.
For Freeport-McMoRan Inc (NYSE:FCX), the oil and gas unit was an overhand because it overpaid for McMoRan Exploration and Plains Exploration four years ago. Therefore, poorly timed IPOs, as well as, asset sales could be detrimental. There is every chance that the abandoned IPO could be revived once the market improves to realize better value. Following the asset sales and the cancellation of the IPO, some of the analysts have boosted their price target to $15 from around $12.
Conclusion
There is no alternative for Freeport-McMoRan Inc (NYSE:FCX) but to resort to divestment of assets, which were welcomed by investors and analysts. Now that Icahn entered the scene, there would be more progress on reducing the costs. He has representation on the board to ensure that there would be favorable results for investors to cheer.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.