Stay FAR Away From Freeport-McMoRan Inc (FCX) Stock
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The problem is that the country where its metal is located wants a bigger piece of the action and, so far, Freeport is unwilling (management claims it's unable) to satisfy the demands.
Thus, the largest gold mine and the third-largest copper mine in the world, located in the high mountain jungles of West Papua, Indonesia, sit idle while the two sides hash out a new agreement. Heading into earnings next month, FCX stock, which doubled in value during 2016 and is up another 30% so far this year, has now stalled.
If the two sides can come together, both will make money. If they can't, Freeport-McMoRan shareholders certainly won't. Instead of speculating on what may happen on the ground, or under it, investors in both metals and FCX stock are left wondering what might happen in a board room halfway around the world.
Freeport insists it can't make a profit on its mine unless it's able to export most of the ore and maintain the low tax and royalty rates it had in its original deal. However, Indonesia says it wants more equity in the mine, higher taxes and more of the metal smelted in domestically, otherwise it won't issue Freeport a new five-year export deal.
Freeport's partner in the mine, Rio Tinto plc (ADR) (NYSE:RIO), says it is already getting cold feet and might exit the joint venture. Freeport-McMoRan is threatening to slash production and lay off many of its 30,000 employees there if it can't get a satisfactory deal.
Rising prices had finally allowed Freeport's balance sheet to recover from past mistakes, and the oil glut, late in 2016. While FCX lost $4.154 billion, or $2.96 per share, for all of 2016, it earned $508 million, or 40 cents per share, during the last half of the year, allowing it to sell some assets, repair its balance sheet and pay down debt.
All of those gains are at risk now, but if the two sides can kiss and make up this Valentine's Day, production can resume and recent gains in metal prices can be captured.
Other Moving Parts
FCX stock investors needed last year's good news to make up for some of the dumbest deals in oil history, Freeport's 2012 acquisition of oil producer McMoran and subsequent doubling-down on high cost Gulf of Mexico assets.
The financial implosion that followed killed the FCX stock dividend and created a string of losses totaling more than $17 billion over three years. Investors who didn't pay attention and rode FCX stock down lost more than three-quarters of their money, and Freeport-McMoRan eventually sold its Gulf assets last August to Anadarko Petroleum Corporation (NYSE:APC) for $2 billion.
Now, the metal gains are at risk, too.
Should You Keep FCX Stock?
InvestorPlace's Joseph Hargett notes that analysts are divided on Freeport stock and suggests you can capture some gains - if you're willing to speculate with options.
Gold prices, which had been rallying since December, have stalled at $1,229 per ounce. But, if the dispute drags on, they could take out the three-year highs of last August, when prices hit $1,364 per ounce. A pair trade of Freeport-McMoRan options against gold could let traders capture the volatility, no matter which way the dispute goes.
As an investor, I would stay as far as possible from FCX stock. Time and again, management has proven itself to be overly bullish, the Indonesian government is perfectly capable of playing hardball and the metals themselves offer a better speculation.
Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.
This article was written by Dana Blankenhorn, InvestorPlace Contributor for InvestorPlace on Feb 14, 2017.
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