It's been a hard year for Freeport-McMoRan Inc.'s (FCX -1.92%) stock, which is down by a massive 36% since Jan. 1. That decline increases to 40% if you track the stock from its early January highs.
If you own the copper and gold miner or are thinking of buying it, you need to ask yourself if something is disastrously wrong after such a painful and swift stock decline. Here are some key facts to help you figure out the answer.
The most important thing
The first big issue here is copper, which makes up the lion's share of Freeport's business. It is, at its core, a miner selling commodities that can't control the prices it gets. Copper prices have been weak so far this year, down around 13% through October. And while gold has held up better, it's been a loser so far this year, too, down around 7%. That's a pretty big headwind to deal with for a miner.
Image source: Getty Images
In fact, Freeport's precipitous decline isn't out of line with copper-focused peer Southern Copper Corporation (SCCO -0.68%), which is down by 33% from its early January highs. From a price perspective, then, there's no major warning signs flashing today at Freeport-McMoRan.
Another key distinction between the two companies is on their balance sheets. Southern Copper's debt-to-equity ratio at 0.9 times is notably lower than Freeport's roughly 1.2 times. The debt-to-EBITDA ratio also is high at Freeport, which sits at 1.8 times compared to Southern Copper's 1.6 times. These aren't huge differences, but they are enough to help push the stock-price needle a bit lower at Freeport.
A sign of the times
While Freeport is slightly more leveraged than Southern Copper today, it's in a vastly better place than it was just a few years ago. For example, the copper miner's debt-to-equity spiked to nearly six times in 2016. The steep decline in leverage is clearly a positive and deserves a closer look.
FCX Debt-to-Equity Ratio (Quarterly) data by YCharts.
Back in 2013, the copper and gold miner spent roughly $20 billion on an ill-fated move into the oil industry. That attempt at diversification basically crashed and burned when oil prices hit a wall in mid-2014, falling from over $100 a barrel to less than $30 at the worst of the downturn. It took Freeport years to dig out of the hole it had created, selling off the oil business and paying down debt. It's finally on a much more solid financial footing. Basically, it's in a far better position to weather copper and gold price volatility than it was just a few years ago.
That said, one of the biggest issues in 2017 was the flare-up of the company's relationship with Indonesia over the massive Grasberg copper and gold mine. It's a complex issue, but Indonesia essentially wanted to wrest control of the mine from Freeport so it could reap greater financial rewards from the asset. In order for that to happen, Freeport's take would need to fall, which didn't make it or its investors very happy.
The ups and downs in the complicated negotiations were a big contributor to the volatility in Freeport's stock over the past couple of years. This is completely reasonable, given that Grasberg accounts for basically all of the company's gold production and around one-third of the copper it produces.
The two sides finally came to an agreement in September of 2018. Freeport won't benefit from Grasberg as much in the future as it might have under the old arrangement. However, the outcome is much better than it would have been if Freeport and Indonesia had failed to come to terms. And while there's still more to be done here, the agreement finally settles a big overhang, adding some much-needed clarity to the company's long-term outlook. This, then, is another net positive for Freeport-McMoRan, even if the political ups and downs leading to the September agreement added to the stock's volatility this year.
Copper rules the day
At this point, Freeport-McMoRan has gotten its corporate house in order: a once heavy debt load has been reduced to reasonable levels, the oil business is largely gone, and the Grasberg mess is nearly cleaned up. The big driver of the stock price from here will be commodity prices -- which are out of the company's control -- and the results from its mines.
While copper and gold prices aren't exactly great today, Freeport should easily survive the headwind -- something that couldn't be as confidently said just a year ago. More important for the future, the miner will benefit when prices pick up again. If you have a positive outlook for copper, Freeport is finally a good investment option, again.
