1: Introduction and commentary

Freeport McMoRan (NYSE:FCX) is a leading mining company specializing in copper and gold production. Like other stocks, I have successfully traded FCX for several years. In this article, I will share my insights on FCX's long-term potential and outline my trading strategy, which aims to minimize risk while maximizing returns.

The company announced its third-quarter results on October 22, 2024. Unlike many major gold and silver miners I've covered on Gurufocussuch as Agnico Eagle (NYSE:AEM), Newmont Corp. (NYSE:NEM), Barrick Gold (GOLD), Kinross (KGC), and Pan American Silver (PAAS)this is my first article focusing on a copper and gold miner.

I decided to write about Freeport McMoRan instead of Southern Copper (NYSE:SCCO) because FCX produces a substantial amount of gold in addition to copper. This is primarily attributed to the Grasberg mine in Papua, Indonesia, one of the largest gold and copper mines globally. Freeport McMoRan, as the operator, holds a 48.76% stake in the mine. The chart below shows the gold, copper, and molybdenum production per mine during the 3Q24.

Freeport McMoRan: Uncertainty at the Grasberg Mine.

Freeport McMoRan increased its stake in Cerro Verde from 53.6% to 55.08% during the third quarter for $210 million. The change in the chart will be implemented next quarter.

I am focusing on FCX because pure copper miners often experience greater volatility, making them more challenging to manage in the long term. FCX is inherently more reliable due to its significant gold production, which can help mitigate risks associated with various factors affecting the broader economic environment and industry dynamics. The chart below shows that copper prices have performed poorly compared to gold or silver.

Freeport McMoRan: Uncertainty at the Grasberg Mine.

Emerging economies heavily influence copper demand, especially the elephant in the room called China, which consumed approximately 6.75 million metric tons in 2023. This figure is projected to increase by 5.7% in 2024. Thus, changes in these economies' growth rates or policies can cause wide fluctuations in copper prices. The company appeared optimistic about its prospects for 2024 and 2025, but many analysts seem cautious.

CFO, Kathleen L. Quirk, said in the conference call:

Notably, China's demand for copper continues to grow despite a weak property sector. Recent announcements of economic stimulus in China to support the country's economic growth targets could further support metals demand as we move through 2024 and into 2025.

Freeport McMoRan's gold production plays indeniably a psychological buffer for investors. However, many of the benefits associated with this production have vanished since it depends solely on gold sourced from the Grasberg mine, located in a region facing recurring risks, issues, and challenges.

Incidently, the recent fire at the smelter has raised additional concerns that could become problematic in 2025, even if the repair costs are covered by construction insurance policy. However, this insurance is not covering "business interruption coverage" as specified in the conferencd call.

Kathleen Quirk could not specify how long the repairs to the smelter, a crucial part of the copper production process, would take. Her attempt to reassure analysts about the situation was not particularly convincing, and I anticipate this issue will lead to some disturbances in 2025. Stay tuned.

On the other hand, PT Indonesia Asahan Aluminium (Persero) (Inalum), a state-owned mining company in Indonesia, has held a majority ownership stake of 51.24% since December 21, 2018.

This partnership is strategically important for Indonesia's economy and contributes to enhancing the safety of the mine. The company released a gold and copper production outlook for the Grasberg mine in its 3Q24 presentation:

Freeport McMoRan: Uncertainty at the Grasberg Mine.

Finally, we all remember the company's costly strategic blunder, "attempts to diversify beyond metals into oil," about ten years ago.

The decision significantly strained the company's finances, resulting in an unsustainable increase in debt and a substantial drop in investor confidence in its management. This situation reached a turning point in 2015-2016 when Freeport-McMoRan decided to "refocus" on its core mining operations and divest from the oil and gas sector.

Consequently, the company sold its oil and gas assets, including those in the Gulf of Mexico, to oil companies such as Anadarko Petroleum, which is now part of Occidental Petroleum (OXY).

This self-inflicted nightmare cost the company an estimated $17 billion, and despite some significant recent stock gains, FCX continues to suffer from the consequences.

Freeport McMoRan: Uncertainty at the Grasberg Mine.

The most surprising aspect is that, despite facing criticism from shareholders and analysts, management chose not to impose any personal financial penalties on the executives responsible for their poor decisions. Consequently, the economic burden primarily fell on the company and, most importantly, its shareholders. Investors often overlook this factor, leading to negative consequences.

Thus, always prioritize your interests, and remember that what may be deemed good for the company is not necessarily good for you, shareholder. This is especially true during times of acquisition or merger.The optimal approach for investors is to diversify their investments and thoroughly analyze a company's fundamentals, ensuring that subjective biases do not sway their decisions. When considering Freeport McMoRan (NYSE:FCX), investors should be cautious of two key issues.

The first concern is that gold production is heavily concentrated in the Grasberg mine. Any technical glitches or political crises could negatively impact FCX's performance.

The second factor to consider is the price of copper, which appears to have limited potential for significant increases and lacks strong support on the downside. As a key industrial metal, copper prices will likely be more stable and unlikely to experience the same rallies as gold.

Identifying potential issues that could jeopardize the company before they arise is essential. Such problems can affect any stock, no matter how solid it appears.

Lastly, the quarterly dividend decreased from $0.3125 in 1Q15 to $0.05 per share in the next quarter and has struggled to recover. Currently, the company is paying a low quarterly dividend of $0.075 per share or a yield of 1.4%.

2: What insights can we gain from the third quarter results?

Freeport McMoRan reported that its third-quarter earnings per share fell short of expectations. The company's net income was $526 million, or $0.36 per share, compared to $454 million in the same quarter last year. Adjusted earnings were $0.38 per share. The CFO, Kathleen L. Quirk, said in the conference call:

Our operating performance was supported by sales volumes exceeding guidance for copper and gold and favorable unit cash cost performance compared to our guidance and the year-ago quarter.

Revenues increased by 16.6% year-over-year, reaching a record of $6,790 million in the third quarter, compared to $5,824 million in the previous year's quarter. See the chart below for historical data:

Freeport McMoRan: Uncertainty at the Grasberg Mine.

The market anticipated a stronger quarter, as the price of gold has risen over the past few months. Copper also performed well. FCX sold its gold at an average price of $2,568 per troy ounce, compared to $1,898 the previous year.

Freeport McMoRan: Uncertainty at the Grasberg Mine.

The copper price averaged $4.30 per pound, while molybdenum reached $22.88.Rising gold and copper prices influenced the results in 3Q24, although the copper price slightly declined compared to the previous quarter.

Freeport McMoRan: Uncertainty at the Grasberg Mine.

In the third quarter, free cash flow reached $673 million, a significant increase from the $58 million reported in 3Q23. For the last nine months of 2024, FCX generated a total free cash flow of $2,155 million.

Freeport McMoRan: Uncertainty at the Grasberg Mine.

However, despite these impressive figures, management maintained the quarterly dividend at $0.075 per share. We did not get any information about dividends in the conference call besides the all-too-familiar:

We reiterate the financial policy priorities centered on a strong balance sheet, shareholder cash returns, and investments in value-enhancing growth projects.

Cash flow from operations reached $1.872 billion, while capital expenditures totaled $1.199 billion.

Finally, cash, cash equivalents, and marketable securities at the end of the quarter were $5,000 million, down from $5,273 million the prior quarter. The company's total debt was $9,679 million, up around 2.9% year over year.

Freeport McMoRan: Uncertainty at the Grasberg Mine.3: A quick look at gold and copper production. The Grasberg Mine is a strong component.Freeport McMoRan: Uncertainty at the Grasberg Mine.

I want to share my key observations regarding the company's production reports. They maintain two types of metal production reports: total gross production, referred to as "consolidated," and net production, which deducts "non-controlling interests" from the gross output. The chart above presents consolidated production figures, significantly higher than FCX's net amounts. For example, in the third quarter, FCX reported consolidated copper production of 1,051 million pounds, but the net production was only 687 million. Similarly, gold consolidated production was reported as 456 thousand ounces, whereas the net production stood at 225 thousand ounces (FCX owns 48.76% of the Grasberg mine).

Lastly, molybdenum consolidated production was 20 million pounds, with a net production of 17 million pounds.

The CFO, Kathleen L. Quirk, said:

Our operating performance was supported by sales volumes exceeding guidance for copper and gold and favorable unit cash cost performance compared to our guidance and the year-ago quarter.

Consolidated copper production declined by approximately 3.1% year over year, while consolidated gold production decreased by about 14.3%. This decline was primarily attributed to lower ore grades and reduced operating rates in North American mines. Those figures aligned with analysts' expectations.

One positive aspect is that the consolidated average copper net cash costs decreased to $1.39 per pound, down from $1.73 a year ago, which reflects a significant achievement.

4: Technical Analysis: A descending Channel Pattern.Freeport McMoRan: Uncertainty at the Grasberg Mine.

Note: The stockcharts chart has been adjusted for dividends.

Freeport McMoRan trades within a descending channel pattern, with resistance at $44 and support at $40. The relative strength index (RSI) stands at 33, indicating a weak bearish trend with a potential oversold situation indicating a buy signal. While a descending channel is typically seen as a bearish patternsuggesting that the stock price is making new lowsit can also set the stage for a bullish breakout.

The stock may have established support at approximately $40 unless the global geopolitical uncertainty continues to deteriorate. Consider adding to your position or buying more shares, starting at $40.5 and potentially going as low as $38.75. You could spread your purchases across several lots within this wide range.

Furthermore, it is advisable to gradually sell a portion of your position once the stock price rises above $43.80 using your 70% profit sale target. Please pay special attention to the Grassberg mine and the technical issues related to the smelter fire.

Also, if the price of gold declines from its all-time highs, FCX could drop below $38, possibly revisiting the previous lower support level. The same logic applies if the outlook for copper turns bearish. Please refer to the accompanying chart for more information.

Taking partial short-term profits using the LIFO (Last In, First Out) method is essential for stocks similar to FCX. Consider using about 70% of your position for short-term trading while maintaining a core long-term investment with the hope of a dividend increase.

Warning: The technical analysis chart should be updated regularly.

This article first appeared on GuruFocus.