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Freeport (FCX) Skyrockets As Icahn Snaps Up an 8.5% Stake

Shares of Freeport-McMoRan FCX flew higher after Carl Icahn took a major stake in the mining company that is reeling under the effects of commodity rout. The famed activist investor disclosed an 8.5% stake in the company after the closing bell yesterday, owning 88 million shares.

Icahn, in a filing with the U.S. Securities and Exchange Commission (SEC), said that it plans to speak with Freeport management about its capital structure, executive compensation practices, capital expenditures and possible curtailment of high-cost production operations. Icahn noted that Freeport’s shares are undervalued and some of the company’s management and capital issues need to be addressed. The billionaire activist investor might also seek a position on the company’s board.

Freeport stated that it maintains an open dialogue with its stakeholders and welcomes their constructive input for enhancing shareholder value. The parties are, however, yet to engage in talks.

Freeport’s shares, which skyrocketed roughly 29% to close at $10.19 yesterday, further shot up as much as around 21% in extended trading on the Icahn stake purchase news. Its shares are, however, still down around 54% this year.

Freeport posted a big loss of $1.85 billion in second-quarter 2015 as depressed copper and gold prices dented its bottom line. In addition to weak commodity prices, the company also took a huge impairment charge (of around $2.7 billion) related to its oil and gas properties, hurting its second-quarter results. Freeport’s sales tumbled 23% in the quarter on lower metals pricing.

Freeport’s copper business remains hobbled by a sluggish Chinese economy and supply related issues. The slowdown in China (a major market for copper) and difficult market conditions in Europe are affecting copper markets. The depressed copper and gold pricing environment also remains a major concern for Freeport.
Copper prices plummeted to their lowest level in six years on Monday after a plunge in Chinese stock markets raised concern over demand of the metal in this major market. Copper prices on the London Metal Exchange (LME) have slid from an average of $3.11 per pound in 2014 to a six-year low of around $2.25 a pound.

Decelerating demand in China is weighing on copper prices. The world’s second-largest economy holds the largest share by far of global copper consumption (roughly 46%), and also has a significant share in the total production of pure copper.

Adding to the problem is the slump in oil prices which is hurting Freeport’s oil and gas business. The company may also see further impairment charges related to this business, thereby affecting its profitability in the future reporting periods.

Freeport, however, is taking aggressive actions to manage costs and capital expenditures amid a difficult pricing backdrop in a bid to strengthen its balance sheet. The company, yesterday, tweaked its capital and operating plans in response to the recent slump in commodity prices which is hurting miners across the board.

Freeport said that it is slashing its capital spending for 2016 by roughly 29% (to $4 billion from $5.6 billion expected earlier), lowering exploration costs and trimming its U.S. mining workforce by 10%. It also expects lower copper production both in 2016 and 2017 on reduced operating rates across a number of mines in the Americas. Earlier this month, the company said that it is deferring investment in a number of long-term projects amid the prevailing weak oil and gas market environment and also reducing its oil and gas capital spending for 2016 and 2017.

Freeport is also looking to sell a part of its oil and gas assets. Its fully-owned subsidiary – Freeport-McMoRan Oil & Gas Inc. (FM O&G) – filed a registration with the SEC in June for a potential initial public offering (IPO) of common stock. The company, which is also saddled with heavy debt (around $20.9 billion at the end of the June quarter), may also consider further asset sales in an effort to cope with descending commodity prices.

Freeport is a Zacks Rank #5 (Strong Sell).

Better-ranked stocks in the mining space include Pretium Resources Inc. PVG, Denison Mines Corp. DNN and OCI Resources LP OCIR, with all sporting a Zacks Rank #2 (Buy).

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