Will Freeport-McMoRan Earnings Finally Hit Bottom This Quarter?

Grasberg mine. Image: Freeport-McMoRan.

With its dual focus on mined products like copper as well as oil and gas production, Freeport-McMoRan (FCX 2.85%) has endured the worst of both worlds in recent years. Prices of both crude oil and copper have plunged over the past year, and initial hopes for a quick rebound in commodities have largely evaporated. As investors prepare for Thursday's third-quarter financial report, the big question is whether the bear market in commodities is finally coming to an end -- and if so, how long it will take for positive effects to show up in Freeport's future results. Let's look more closely at what Freeport-McMoRan is likely to say later this week and whether the worst is finally behind the company.

Stats on Freeport-McMoRan

Source: Yahoo! Finance.

When will Freeport-McMoRan earnings bounce back? 
Investors have become increasingly uncomfortable with their views on Freeport-McMoran earnings going forward, having reversed initial calls for a quarterly profit in the third quarter and having slashed their views on full-year 2015 earnings by more than 80%. Even 2016 full-year projections have gotten cut almost in half, and the stock price hasn't behaved well either, falling another 25% since mid-July.

Freeport-McMoRan's second-quarter results were primarily responsible for most of the stock's losses during the quarter. Revenue plunged a greater-than-expected 23% in the second quarter, and the company took a huge oil-and-gas impairment charge that resulted in a massive net loss of $1.85 billion. Even after adjusting for the impairment, year-over-year earnings per share fell by more than three-quarters, and although that was actually slightly better than many had expected, it nevertheless put a negative spin on Freeport's prospects. Moreover, Freeport warned that if oil prices didn't rebound soon, further impairments might prove necessary in the quarters to come.

Indeed, the situation has gotten troubling enough for Freeport-McMoRan that the company has had to work hard at convincing investors that it can raise capital effectively. Decisions to sell new shares of Freeport stock at current low levels have been controversial, but the company nevertheless hasn't hesitated in offering $1 billion in shares and announcing plans that would allow it to continue selling shares into the open market. Moreover, Freeport is still looking at the prospects of doing a specialized capital raise that involves its oil and gas business in particular, although it's still not entirely certain whether that will result in an IPO of the energy unit or take some other form such as a further sale of particular assets within the oil and gas business.

The long-term question that plagues Freeport-McMoRan is whether the commodity markets on which it relies will turn around quickly enough. The stock has actually rebounded substantially from its worst levels as copper prices hit at least a temporary bottom and have started to move back up. Some investors are skeptical about copper's rebound, but bullish investors point to the metal's track record as a predictor of more general economic activity. If copper's rebound lasts, then at least that part of Freeport's business will be in a better position to start carrying its weight and moving the overall company forward.

In addition, Freeport is looking to the distant future to ensure that it will still be able to rely on its copper business in the years to come. The company is trying to get the Indonesian government to renew its contract, which is set to expire in 2021. Current rules limit the government's ability to renegotiated until within two years of its expiration date, but given Freeport's current woes, it's understandable that would-be creditors extending capital to the company want reassurances that the company will be able to rely on its Grasberg mine in Papua beyond the current expiration date. Reports have suggested that rule changes could allow an earlier renegotiation, but tensions between Freeport and Indonesia in the past have at least some political players involved trying to stand their ground.

In the Freeport-McMoRan report, look closely at whatever comments the company makes about the need to raise more capital and the terms under which it plans to do so. With so much speculation swirling around what could happen with the oil and gas unit, Freeport would benefit from a long-term strategic plan that makes it clear what it will do depending on which direction its key commodity prices go. Even if conditions in the market don't improve right away, just having clarity about how Freeport will respond going forward would give investors more comfort than they have now about the long-term viability of the business.