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Freeport Stock Nearly Doubled in 2016 - What Lies Ahead?

Zacks Equity Research

Freeport-McMoRan Inc. FCX saw its share price almost double in 2016, being the third highest gainer in S&P 500 during the year. The company has outperformed the S&P 500 index by a significant margin, with the company’s shares gaining 94.8% compared to the index’s 9% growth.

Moreover, Freeport has also outperformed the Zacks categorized ‘Mining-Non Ferrous’ industry in the same time frame. In the past year, the gain recorded by the industry was 19.5%. The company gained from its strategic actions including aggressive cost management and debt reductions.

Freeport is committed to reducing its costs even in a challenging operating environment. The company reported lower consolidated production and delivery costs in the first 9 months of 2016 as compared to 2015, as a result of the reduction initiatives.

The consolidated net unit cash costs of copper during this time frame decreased 20.5%. The company’s copper cost guidance for 2016 reflects a considerable year-over-year decline in consolidated unit net cash costs. In its oil and gas business, the company also reduced production cost to $15 a barrel from around $19 a barrel in the last reported quarter.

Freeport also remains focused on reducing debt and enhancing shareholder value through divestitures. The company concluded the sale of the assets of its Deepwater Gulf of Mexico (GOM) in Dec 2016 to Anadarko Petroleum Corporation APC for $2 billion in cash. The sale is expected to help the company to cut debt and allocate resources to its core copper business.

In late Dec 2016, the company also completed the sale of assets of its onshore California oil and gas properties to Sentinel Peak Resources California LLC for $592 million cash and contingent consideration of up to $150 million. Freeport continues to assess its portfolio for potential future actions and aims to maintain a strong financial position.

The company had announced $6.6 billion in asset sale transactions in 2016 till the end of the third quarter and expects to receive $5.2 billion in gross proceeds during fourth-quarter 2016. The company also plans to use the proceeds from its recently completed $1.5 billion equity offering to retire outstanding debt. Proceeds from the stake sale in Morenci have also allowed the company to deleverage its balance sheet.

Per the International Copper Association, the demand for copper is expected to increase significantly primarily due to higher demand in China. Rise in the government’s investment in areas such as transportation, building infrastructure and energy are expected to boost copper consumption as these sectors use the metal extensively. Moreover, the country is also one of the biggest buyers of electric vehicles, which are more dependent on copper as compared to gas-powered vehicles.

Freeport would be able to take advantage of this surge in demand through its focus on conducting exploration activities near its existing mines. Also the company remains focused on finding opportunities to expand reserves for future production capacity in the large minerals districts where it currently operates. A number of the company’s projects are aimed at increasing annual copper production.

As a further probable advantage to the company, the World Bank has indicated an expected rise in the price of copper. Per the report, the price of copper has been forecast at $4,866 per metric ton in 2017. The price is expected to continue increasing through 2025.

Overall, the stock is expected to continue performing well in 2017 as well. The company is also expected to be supported by an overall growth in the industry. Further, the company’s own initiatives are expected to boost this growth for higher returns.

Zacks Rank & Key Picks

Freeport carries a Zacks Rank #2 (Buy).

Other equally well ranked companies in the same space include Denison Mines Corp. DNN and Vale S.A. VALE, both holding a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Denison Mines posted a positive earnings surprise of 100% in the last reported quarter. (Looking for the Best Stocks for 2017? Be among the first to see our Top Ten Stocks for 2017 portfolio here.)

Vale has a long-term expected growth rate of 22.4%.

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