Freeport Cut To Strong Sell: Should You Dump It?

On Jan 2, Zacks Investment Research downgraded mining giant Freeport-McMoRan FCX to a Zacks Rank #5 (Strong Sell).

 

Why the Downgrade?

 

Freeport's profit slid year over year in the third quarter of 2014, reported on Oct 28, hit by hefty charges. Sales also fell in the quarter, impacted by lower gold and copper pricing. The company saw its copper sales decline across all operations barring North America in the quarter. Freeport reduced its copper and gold production forecasts for 2014.

 

Freeport has seen downward estimate revisions for both 2014 and 2015. The Zacks Consensus Estimate for earnings for 2014 has gone down 6.7% over the last 60 days to $2.10 per share. Similarly, the Zacks Consensus Estimate for 2015 has declined 13.9% to $2.23 per share over the same period.

 

Freeport's copper business remains affected by the sluggish global economy and supply related issues. The recent slowdown in China (a major market for copper) and difficult market conditions in Europe are affecting copper markets.

 

The uncertain gold and copper pricing environment represents another concern. Uncertainty regarding inventory levels may cause fluctuations in copper pricing. Adding to the problem is the recent slump in oil prices. 

 

Freeport, in Jul 2014, received approval of the Indonesian government for copper export for 2014, allowing it to resume its shipment from the Grasberg mine. However, despite this positive development, lingering uncertainties surrounding the mine (with regards to royalties, duties, operating costs and worker strikes) may weigh on Freeport's stock. The mine remains susceptible to strikes, which could affect production as a result of reduced capacity. 

 

While Freeport is aggressive managing its costs of late, high production cost still remains a concern for the company. Unit costs remain higher in South America partly due to lower volumes. 

 

Other Stocks to Consider

 

Other companies in  the mining space with a favorable Zacks Rank include Energy Fuels Inc. UUUU, Thompson Creek Metals Company Inc. TC and Orbite Aluminae Inc (EORBF), all with a Zacks Rank #2 (Buy).