Despite Strong 3Q17, Grasberg Mine Issues Continue to Haunt Freeport

Mine worker points out the features in Grasberg - photo - November 2017Gold and copper mining company Freeport-McMoRan Inc. (NYSE: FCX) reported better than anticipated fiscal 2017 third-quarter results in the last week of October. The owner of the world’s second largest copper mine reported a $314 million y-o-y increase in non-GAAP earnings, compared with last year. Still, the stock has remained bearish so far. The reason behind the bearishness is discussed below. Further, we do not foresee any change in the prevailing downtrend as of now.

The Arizona-based mining company posted Q3 2017 revenues of $4.310 billion, compared with $3.877 billion in Q3 2016. The Thomson Reuters Consensus estimate was $4.08 billion. During the third-quarter of 2017, Freeport-McMoran recorded a net income of $280 million, or $0.19 per share, against $217 million, or $0.16 per share, in the same period 0f fiscal 2016. Excluding the net adjustments to environmental obligations, gain on sale of assets, Cerro Verde royalty dispute, among others, non-GAAP net income almost tripled to $492 million, or $0.34 per share, from $178 million, or $0.13 per share, last year. The Wall Street analysts had expected Freeport to report adjusted earnings of $0.31 per share.

During the June-September quarter, the company sold 932 million pounds of copper, 22 million pounds of molybdenum, and 355 thousand ounces of gold. The company realised a price of $1,290 per ounce for gold, $2.94 per pound for copper, and $9.22 per pound for molybdenum in third-quarter 2017.

In September, Freeport redeemed $543 million of senior notes, resulting in an interest savings of approximately $35 million per year. The company ended September quarter with a cash of $5 billion and a debt of $14.8 billion. That compares with $4.20 billion of cash and $16 billion of debt at the end of December 2016. The company also has $3.50 billion available under its revolving credit facility.

Freeport anticipates to sell 3.70 billion pounds of copper, 94 million pounds of molybdenum and 1.6 million ounces of gold in fiscal 2017. In the current quarter, the company hopes to sell 1 billion pounds of copper, 625 thousand ounces of gold, and 23 million pounds of molybdenum. Despite an impressive outlook, the stock is bearish due to the issues faced by the company with the Indonesian government.

Earlier this year, the government of Indonesia asked Freeport to divest its majority stake in the Grasberg mine in order to continue with the export of copper concentrates. The Indonesian government also banned exports for a while.

In August, the management of Freeport-McMoran, which owns a 91% stake in the Grasberg mine, was allowed to resume exports after it agreed to divest its majority stake. According to the agreement, the government will buy the majority stake, while allowing Freeport to run the operations. However, the value of the equity, which is going to be divested, is yet to be agreed on. That is a matter of concern for the investors. Thus, unless the issue gets resolved completely, the stock price will not move up.

The stock has broken the support at 14.80. Further, the RSI indicator is moving below the reading of 50. That indicates bearishness in the stock. On the downside, the next major support exists at 12.20.

Freeport McMoran - Technical Analysis - 6th November 2017

As a binary trader, we believe that a put option would be a suitable vehicle for investment at this point in time. A strike price of about $14.0 will be advantageous for the trade. Likewise, a date around November 14 would be our choice of option expiry date.

Disclaimer: The trading analysis offered here is our opinion. It is not provided as trading advice, merely an indication of our trading plan. We cannot guarantee success and we encourage traders to incorporate a strong money management strategy to limit losses. Please use this article as part of your own research before formulating strategies prior to trading.