Stressed Out: Even Ailing Freeport-McMoRan Gets a Mild Reprieve

 | Feb 04, 2016 | 1:26 PM EST
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This article is part of a Real Money series on 20 distressed companies investors should consider adding to their distressed watch list.

On Thursday, Real Money's Bruce Kamich wrote that shares of Freeport-McMoRan (FCX) could double. As shares of the company were above 20% in early Thursday trading, Kamich could very well be right. The question about whether or not to invest depends on an investor's time horizon and capacity for risk. 

Freeport, the Phoenix-based natural resources company, earned a spot in Real Money's "Stressed Out" index due largely to the company's hefty debt burden. The company also deals in an unfortunate mix of commodities: copper, gold, molybdenum, and some oil and gas interests, all of which have been subject to steep price declines in recent months. 

With respect to the recent rally in Freeport, and its potential to double, Kamich examined the iPath Bloomberg Copper Subindex Total Return ETN (JJC) chart along with Freeport's chart. The JJC has been steadily declining but Kamich noticed a shift in behavior since November and the price of JJC just crossed above the 50-day simple moving average while the on-balance-volume line has based, which Kamich called "encouraging." Meanwhile, Freeport's chart shows that the stock is poised to cross above its 50-day moving average and that the OBV is ticking upward, suggesting more aggressive buyers.

The recent movement could be attributed to short covering, as Freeport is one of the most shorted names trading on the New York Stock Exchange, with short interest representing 15.6% of its float.

While recent activity in Freeport could represent a trading opportunity, it so far may not represent a solid investment opportunity. 

Freeport reported losses of $11.31 per share for 2015 amid a challenging commodity cycle, which it characterized as the worst of possible scenarios in its capital planning. The company has a debt load of $20.4 billion, of which $14.8 billion is in senior notes, many of which are quoted below $50, according to data compiled by Thomson Reuters. Equity investors may feel positive, but creditors are still cautious.

In its earnings release, the company planned to accelerate its debt reduction plans through asset sales and joint ventures. Freeport specified during its earnings call that it is aiming to shave $5 billion to $10 billion of its debt load but doing so would take time and multiple transactions. It is also worth noting that Freeport isn't the only ailing natural resources company so finding buyers and partners could be difficult in this climate. 

Near the end of Freeport's earnings call, CEO Richard Adkerson lamented that he cannot wish the company's debt away or wish away a weak market. While his wish for a better market may have been realized today, it will take a lot more for the company's debts to go away.

For more on Real Money's 20 distressed companies to watch:

Stressed Out: Introducing Real Money's Distressed Index

Stressed Out & Thanks for Nothing: J.P. Morgan Says 'No Más' to Petrobras

Stressed Out: 3 Best and Worst Steel Stocks to Watch as Metal Prices Rally

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