Shares of This Copper Miner Could Stall at Current Levels

Several negative catalysts warn that Freeport-McMoRan's upside potential could be limited.

Jan 24, 2014 at 10:16AM

Freeport-McMoRan (NYSE:FCX) recently reported its fourth quarter earnings, which fell short of expectations. Investors' negative reaction to the earnings miss could be a one-time event. However, I believe there are several factors that could stall shares of Freeport-McMoRan at current levels.

Problems in Indonesia
The Indonesian government is focused on processing minerals within the country. As a result of this focus, the country has decided to impose a tax on copper concentrate exports. The tax starts at 25% in 2014 and grows to 60% in 2016. After 2016 the tax gives way to a complete ban on copper concentrate exports.

Freeport-McMoRan is operating a huge Grasberg mine in Indonesia. According to the company's latest reserve evaluations, 27% of its copper reserves are in Indonesia. Currently, Freeport-McMoRan processes 40% of output from Grasberg operations at the Indonesian smelter.

During the Q&A session of its earnings call, the company outlined the reasons why it will be hard to build another smelter to process the remaining 60% of copper concentrate. Freeport-McMoRan built the existing smelter in the mid 90's. Since then, the cost of building a similar smelter has tripled. At the same time, processing fees remained the same due to the fact that a lot of smelting capacity emerged in China. This makes the building of a new smelter economically difficult.

What does it mean for investors? In my view, it means that Freeport will be in a long round of negotiations with the Indonesian government. There is no reason to export copper concentrate while the tax is functioning. What's more, Freeport has an existing contract of work with the government which gives the company the right to export concentrates. I believe it will not be a short battle, and it could possibly hurt Freeport's results.

Warning signs from China
According to the latest issue of HSBC Flash China Manufacturing Purchasing Managers' Index, the Chinese manufacturing sector hit a six-month low in January. Several days earlier, the data on Chinese GDP showed that the growth was the lowest in 14 years.

Other copper producers like Rio Tinto (NYSE:RIO) and BHP Billiton (NYSE:BHP) could be worried as well. Both companies have recently been increasing their copper production. Rio Tinto's latest production update showed a 6% production gain in comparison with the previous quarter. BHP managed to produce 9% more copper in comparison with the third quarter.

So far, copper hasn't taking the worst beating of the metals because of its wide industrial utilization. However, if the data from China continues to disappoint, copper prices will be under significant pressure.

Dividend increase is unlikely
Freeport-McMoRan took significant debt to pursue the acquisition of oil and gas assets in 2013. The long-term debt stood at $20.4 billion at the end of the fourth quarter. The company is looking to reduce the debt to a level of approximately $12 billion in 2016.

At the same time, Freeport-McMoRan plans to spend $7 billion on capital expenditures in 2014, up from $5.3 billion in 2013. It is highly unlikely that the company will be able to find additional funding for the dividend while it works toward reducing its debt and funding its growth.

Bottom line
Freeport-McMoRan's shares have had a nice run since July, but now the company needs to show better performance to continue this trend. I don't think that the potential problems in Indonesia have been priced in. Therefore, if the situation unfolds in a negative scenario, the shares will find themselves under pressure.

It is still too early to call latest data points from China a new trend. However, one must not underestimate the impact that a potential slowdown in China could impose on the commodity markets. All in all, I believe that the upside for Freeport-McMoRan is limited.

Growth you can put your money behind -- our CTO did
Opportunities to get wealthy from a single investment don't come around often, but they do exist, and our chief technology officer believes he's found one. In this free report, Jeremy Phillips shares the single company that he believes could transform not only your portfolio, but your entire life. To learn the identity of this stock for free and see why Jeremy is putting more than $100,000 of his own money into it, all you have to do is click here now.

 

Vladimir Zernov has no position in any stocks mentioned. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers