unemployed | Andrew Phillip Chernoff

By Mark O’Hara

On November 13, 2015, Freeport-McMoRan (FCX) closed at $8.68. Although Freeport’s stock is down more than 25% so far in November, it is still trading ~12% above its 2015 lows. The year has been nothing short of a roller coaster ride for Freeport investors.

part 1

Stocks have been falling

The entire base metals space (XLB) has seen heightened volatility over the last six months or so. However, companies including Freeport-McMoRan, Teck Resources (TCK), and Glencore (GLNCY) have been more volatile as compared to some of their peers in this sector.

Teck Resources has seen its share price dwindle more than 65% this year. Teck Resources is the world’s second largest exporter of steelmaking coal. It is also North America’s largest coal producer, with the annual capacity to produce 28 million tons. Along with falling copper prices, Teck Resources has been hit by the reduced Chinese coal demand.

Freeport is not far behind, and its stock has fallen more than 62% this year. Southern Copper (SCCO) has not fallen much, as can be seen in the graph above. Please read Southern Copper: A Business Overview of a Copper Giant to learn more about SCCO.

Key drivers

There are several factors that would determine how Freeport-McMoRan could trade over the next few months. As Freeport is also involved in the energy exploration business, its stock price could also be guided by movement in energy prices. However, Freeport has announced that the company is looking at several “strategic alternatives” for the energy business, and a final decision has yet to be made.

The key driver, however, would be how copper prices play out in the coming months. In the next part of this series, we’ll explore what analysts think about copper prices.

Copper prices

Copper prices resumed their downside in November after remaining relatively strong in October. On November 13, 2015, the LME (London Metals Exchange) three-month copper contract closed at $4,810 per metric ton, losing more than 1% from the previous day’s closing.

So far in November, the LME three-month copper contract has lost ~6% and joined the ranks of other metals, including steel and aluminum, to hit fresh 2015 lows. The graph below shows the recent movement in copper prices.

How low can it get?

Goldman Sachs had earlier given a target of $4,800 per ton for copper by the end of December 2015. However, according to an October 8 Reuters report citing Max Layton, the head of European commodities research for Goldman Sachs, copper could even fall below $4,000 per metric ton.

A November 12, 2015, Reuters’ article, cited Axel Rudolph, technical analyst at London-based Commerzbank, who noted, “Copper is likely to extend losses in coming weeks to $4,397.”

Bears are back

Bears, it seems, are back full throttle in copper. The bearish sentiments surrounding copper faded somewhat a few weeks ago on supply cuts from Freeport-McMoRan (FCX) and Glencore (GLNCY). However, the goodwill failed to last beyond a month, and copper prices have resumed their downside.

While FCX and GLNCY have announced production cutbacks, diversified miners such as Rio Tinto (RIO) and BHP Billiton (BHP) don’t plan to cut their copper production. Both companies are among the low-cost copper producers, so it would make economic sense for these companies to keep mining copper from their mines.

Meanwhile, the concern has again shifted to the demand side of the equation. In the last week or so, there has been quite a bit of negative data from China, whether it is monthly trade data or credit activity. Pessimistic Chinese data is weighing heavily on copper prices. A stronger US dollar (UUP), on expectations of a possible Federal rate hike in December, is not helping copper’s cause, either.

Falling copper prices

As seen in the previous part of this series, copper prices have crashed to a fresh six-and-a-half-year low on concerns over the Chinese economy and a stronger US dollar. However, unlike other pure-play copper producers like Turquoise Hill Resources (TRQ) and Southern Copper (SCCO), Freeport-McMoRan’s (FCX) worries extend beyond falling copper prices. Together, Freeport and Newmont Mining (NEM) form ~4.1% of the Materials Select Sector SPDR ETF (XLB).

Lower energy prices

Freeport-McMoRan is also involved in the energy exploration business. In 3Q15, the company sold 1.0 billion pounds of copper, 23 million pounds of molybdenum, 13.8 MMBOE (or million barrels of oil equivalent), and 294,000 ounces of gold. Freeport has given a guidance of 13.3 MMBOE for 4Q15.

Energy exposure makes Freeport’s earnings sensitive to falling crude oil prices as well. The company’s energy operations generated an EBITDA (earnings before interest, taxes, depreciation, and amortization) of $0.3 billion in 3Q15. This is roughly one-third of Freeport’s 3Q15 consolidated EBITDA.

Sensitivity

According to Freeport-McMoRan, the company expects its 2016 EBITDA to fall by $215 million for every $5 per barrel fall in Brent oil prices. The company also expects its operating cash flows to be lower by $170 million for every $5 per barrel fall in Brent. Please note that the sensitivity is based only on the energy operations and does not account for diesel costs in Freeport’s copper operations.

Brent oil prices have fallen in the last couple of weeks, as can be seen in the graph above. Falling energy prices could weigh heavily on Freeport’s 4Q15 earnings.

Freeport noted that it is looking at “strategic alternatives” for its energy business. However, falling crude oil prices have only made things worse for Freeport’s plans.

Icahn lift

Freeport-McMoRan (FCX) jumped smartly in August after activist investor Carl Icahn disclosed his 8.5% stake in the company. Known as the “Icahn lift,” this phenomenon sometimes occurs after Icahn buys a stake in a company. The activist investor has a reputation for encouraging company management to make decisions that he perceives to be in the investors’ best interests.

part 3

Recent developments

The graph above shows some of the recent developments in Freeport-McMoRan after Icahn disclosed his stake. Currently, the activist investor holds two seats on Freeport’s board. In his statement following his representation on Freeport’s board, Icahn cited examples of companies like eBay (EBAY), Mentor Graphics (MENT), and Herbalife, whose “shareholder value has been greatly enhanced” after he won board representation.

Would it help?

To be fair, there’s not much that either Icahn or Freeport-McMoRan’s management can do when commodity prices are hovering at multiyear lows. For its part, the company has taken several aggressive measures, including mine closures and capital expenditure cuts. However, these can only help lessen the pain from falling commodity prices (COMT) (DBB).

Unfortunately for Freeport, even if it breaks off its energy assets, it would not be a smooth ride. Even Freeport’s core copper business is going through a rough patch on the back of a Chinese slowdown. To add to that, Freeport has a surging debt pile of $20.7 billion as of September 30, 2015. Freeport was looking to cut its debt next year. However, a continued slowdown in commodity prices could continue to pose challenges for Freeport’s optimistic 2016 plans.

Please read Freeport-McMoRan: Why the Current Rally Could be Unsustainable to learn more about the company’s outlook.

You can also visit Market Realist’s Copper page for the other recent developments in this industry.

Source: Freeport-McMoRan: A Roller Coaster Ride in November 2015 – Yahoo Finance

By Duncan Cameron August 20, 2013 http://rabble.ca

A new report from Citizens for Public Justice (CPJ) on job creation in Canada arrived just as the Prime Minister said Monday he intends the next election to be about jobs and the economy. As part of a study of poverty, CPJ has published a set of fact sheets on job creation in Canada since the 2008 recession. It looks at regional and generational differences, assesses job quality and measures newly created jobs against new job seekers.

Anyone who believes what Conservative cabinet ministers have been repeating about job creation in Canada should read the CPJ fact sheets.

Carol Goar of the Toronto Star identified the CPJ report as explaining why many Canadians are still experiencing the recession. The Canadian employment rate is down: the number of jobs created (950,000) has not increased as fast as the population (1.8 million). Unemployment is stuck at 1.4 million. When talking about the unemployed, the government does not include discouraged workers, people with part-time jobs looking for full-time work, temporary jobs, or the under-employed. Add them to the total, and the real unemployment rate is one out of ten out of work.

CPJ explain about 500,000 jobs are needed to get Canada back to where it was before the recession. Stronger job growth where resource prices are strong (Alberta, Saskatchewan, Manitoba) and in construction mask weaker job growth in services and manufacturing.

Employment trends are weakest for Aboriginal Canadians. Young Canadians suffer disproportionately from unemployment — about one in five is without work.

Sadly, paid work increasingly means precarious jobs: part-time, low-wage and unstable. Older workers are relying more and more on temporary work.

Policy analysts divide over what to do about a lackluster economy. Some want to leave the market alone, most think governments need to lead in order for it to recover.

Conservatives believe the marketplace works fine, and any problems can be fixed by allowing prices to adjust. Unemployment is explained by the failure of rates of pay to fall, because of minimum wages, unions, employment insurance, welfare and other market imperfections, which need to be eliminated or reduced.

The problem with this view is that rates of pay are falling — policies to reduce wages have been successful, increasing inequality as Stephen Gordon has shown in Maclean’s. For the Harper government, business-funded think-tanks, and other supporters of the market view, this just means wages have not fallen enough. More of the same is just what is needed.

Those unwilling to wait for the economy to correct itself will want to know how it can be improved.

In Canada the standard strategy for an underperforming economy is a currency devaluation, accompanied by fiscal tightening. Exports incomes increase, import increases are cut off, and the private sector leads the recovery.

Floating the Canadian dollar down used to only require lowering Canadian interest rates below U.S. rates. Unfortunately, the U.S. beat Canada to the interest rate bottom, with a “zero bound” rate, introduced to revive American capitalism.

Historically low rates do prevail at the Bank of Canada. This is supposed to encourage recovery, though without bringing a currency devaluation, it is hard to see how it is going to happen.

Former Bank of Canada Deputy Governor William White called low interest rates having one foot on the accelerator. With the Harper government curbing spending, White observed, Canada has the other foot on the brake.

This contradictory policy needs to be fixed. The obvious choice is for the government to take the foot off the brake and spend borrowed money for needed public investments in urban transit, retrofitting buildings to reduce energy use, recreation, culture, the arts, advanced education, child care, and straight job creation.

The Harper government is ideologically opposed to government spending, but expect it to consider taking its foot off the brake by lowering taxes. Another reduction in the GST would inject new money into the economy, for instance. And it would also be an excuse to reduce direct spending (and reduce wages) further down the road.

The Official Opposition have their work cut out for them just to expose the poor Canadian economic record, let alone engage Conservatives in a rational debate based on economic evidence.

Stephen Harper does not expect Canadians to discover that job performance has been poor and that the economy is not improving, while the standard of living for most Canadians is declining. He has announced plans to prorogue Parliament, cutting the fall session short. This will limit the time for parliamentary debate and the subjects raised by the opposition.

If the economy is going to be the ballot question in the next election, as Stephen Harper suggests, Citizens for Public Justice have afforded parliamentarians and all Canadians with what is needed to examine his government’s record.

Duncan Cameron is the president of rabble.ca and writes a weekly column on politics and current affairs.

Photo: Liam Richards/University of Saskatchewan/flickr

Andrew Phillip Chernoff

The Outer Limits To The Inner Depths

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Freeport-McMoRan: A Roller Coaster Ride in November 2015