FCX Shares Boosted by Drooping Dollar but Questions Linger
The dollar was down 0.4% Wednesday morning, providing fuel for a number of mining and metals shares, including Freeport-McMoran (FCX) - Get Report , which was among the most heavily traded stocks in pre-market trading.
Freeport-McMoran then surged about 6.5% to above $11.50 per share by mid-morning Wednesday. FCX shares have been trending up the past few days since news broke that the company had sold its 56% stake in the Tenke copper project to China Molybdenum on Monday for $2.65 billion in cash.
These are certainly among the most significant catalysts affecting Freeport shares this week, according to BB&T Capital Markets analyst Garrett Nelson.
A 0.4% dip is a "pretty decent" intraday movement for the dollar, said Nelson, who suspects this along with a positive movement in gold and copper prices, are playing a hand in Freeport's continued ascent Wednesday. Copper and gold both saw prices improve by greater than 1% Wednesday morning.
Freeport shares also may be benefiting as investors feel relief that the company is finally making headway with some of its long-promised asset sales, Nelson opined.
Meanwhile, the company follower was not overly concerned with potentially troubling Reuters' reports yesterday citing the Democratic Republic of Congo state miner Gecamines. Gecamines holds a 20 percent stake in Tenke, one of the world's largest copper mines, and reportedly told Reuters on Tuesday that it was not informed of Freeport-McMoRan Inc's majority stake sale and "will assert its rights."
Nelson said Wednesday he doesn't believe Gecamines' rights included being informed prior to a sale by Freeport, as Lundin Mining, which holds the remaining 24 percent of the project, has the right of first refusal.
But investors should note that even with the successful close of the Tenke sale, Freeport still has a long way to go before this analyst joins the small minority of company watchers with a positive outlook on the stock.
"Looking pro forma for the asset sales, there's still going to about $16.5 billion of net debt on the balance sheet," Nelson explained. "Our concern is [Freeport] will have to sell some of their best assets."
Tenke, which he said was the second lowest cost mine in 2015 and really a core asset for FCX, is a perfect example of how Freeport will be forced to look outside of noncore operations as options to deleverage.
"They are mortgaging the future of the company and really have no other option in order to make a dent in that significant debt load," Nelson said.
Additionally, Freeport's exposure to the copper market presents another obstacle to righting the ship, the analyst explained.
"We think copper has swung to a surplus, and we're concerned about the new capacity scheduled to come online this year," Nelson said. "We expect that capacity will keep the market oversupplied for at least the next few quarters."
As copper has been one of the worst performing metals this year and demand has been "pretty tepid," especially from China, BB&T sees copper prices moving lower.
"About 90% of copper miners are still generating positive cash margins," Nelson said. "Something has to give, prices have to move lower for their to be a production cut, which will help balance supply demand."
