Shares of Freeport-McMoRan (NYSE:FCX), an oil & gas producer and miner of precious metals, plunged 21% during the month of August, according to data from S&P Global Market Intelligence. The source of Freeport-McMoRan's weak performance can be traced to one simple catalyst: a rough month for many of its underlying commodities.
Freeport-McMoRan is one of the largest producers of copper in the world and, unfortunately, weakness in the copper market doomed the company to a dismal August performance. Copper prices hit their lowest levels in two months during August, which appears to be based on continued weakness in import demand from China, the largest importer of copper in the world.
Of course, it wasn't just copper that pushed Freeport-McMoRan lower. After hitting $1,364 an ounce on Aug. 1, gold prices retreated to as low as $1,307 by Aug. 30.
The reason for the tumble in gold prices? Improving jobs data and manufacturing data is signaling to the Federal Reserve that the U.S. economy may be on stronger footing than many believe. The Fed has been seemingly itching to raise interest rates but has been looking for persuasive data to make the move. Recent economic data may be enough to make that happen. As interest rates rise, investors may opt to own interest-bearing assets as opposed to gold, which has no yield, putting pressure on the lustrous yellow metal.
On one hand, it would be a mistake for investors to read too much into Freeport's weak August given the short-term moves in the underlying metals it produces. Volatility is normal for the copper and gold markets, and it's not uncommon for Freeport to have months where its share price jumps or drops by a double-digit percentage.
What's worth keeping a close eye on are the company's efforts to reduce its high debt load. Freeport-McMoRan sold off an aggregate of $1.33 billion worth of assets during the quarter, and in May, it entered into an agreement to sell TF Holdings for $2.65 billion, with an additional contingent consideration of up to $120 million. Combined with its reduced capital expenditure outlook, Freeport has pushed its total debt down to $19.3 billion.
Though I would freely admit there are genuine concerns about Freeport's leverage and financial flexibility, it deserves credit for the $4 billion in asset sales it's coordinated year to date. Assuming we do indeed see oil prices rebound at a steady pace over the long term and Freeport is able to further reduce its mining costs, there's no reason to believe it can't head higher. All I would say is temper your near-term expectations while copper prices are under pressure and Freeport is still looking to sell non-core assets.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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