Freeport-McMoRan Copper & Gold Inc. (FCX): Should You Catch This Falling Knife?

The precious metals sector has had a rough week, as commodity prices for metals went into a free fall after negative economic news out of China. Gold prices led the way with a drop of over 15% from April 11th to April 15th.  Copper similarly experienced a large price move, dropping from $342.5 to around $315 per pound.

Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) is often thought of by the market as a pure-play proxy for copper, and was similarly hit by the bad economic news and experienced a sell-off.   In addition, the Company also recently released its first quarter earnings report.  The question for investors is whether now may be a good entry point for initiating a position in the Company, or whether the share price has further to fall.  The trading adage goes that you shouldn’t try to catch a falling knife.  With Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX)’s recent expansion into the oil and gas field, along with a reasonable dividend yield for the stock, the Company deserves a closer look by investors.

Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX)

The financials

Freeport-McMoRan is a copper, gold and molybdenum mining company.  The Company has large open-pit and underground mining operations in North America, South America and Africa. Freeport-McMoRan released its Q1 earnings for 2013 on April 17th.  The Company announcing that net income attributable to common stock was $640 million, or $0.68 per share, compared to net income of $764 million, or $0.80 per share, for Q1 of 2012.

Operation net cash flows were estimated to be $5.5 billion for 2013.  The Company had sales of 954 million pounds of copper, 214,000 ounces of gold, and 25 million pounds of molybdenum, representing an increase in the sale of copper and molybendum versus Q1 of 2012, but a reduction in the amount of gold sold.  Net cash costs increased to $1.57 per pound of copper, versus $1.26 for Q1 of 2012.

Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) anticipates that its proposed acquisitions of Plains Exploration & Production Company (NYSE:PXP) and Mcmoran Exploration Co (NYSE:MMR) will be completed in the second quarter of 2013.  The Company stated it had completed $10.5 billion in debt financing for these acquisitions, with a weighted average interest rate of 3.1%.  These acquisitions would expand Freeport-McMoRan’s activities into oil and gas exploration and development.  It is uncertain how the newly diversified focus on both mineral extraction and oil and gas will impact the operation of the Company, and what the ultimate impact on the bottom line will be.

How’s the stock price action been lately?

Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) has had a rough ride in the market as of late, down over 14% in the past week, and down over 28.44% in the past six months.  The share price is trading well below the 50 and 200 day SMA, with the daily RSI indicator showing the stock is oversold.  The price reached a multi-year low of $7.85 in December of 2008.   There appeared to be longer term support around $30, but the recent break below that level could be bearish.  The Company has a P/E ratio of 8.64, and a reasonable dividend yield of 4.46%.

There is some short interest in the stock, with a short ratio of 4.13%, and a short ratio of 2.28.  Over 36 million shares were being shorted as of March 28th.  It appears that the short interest increased after the announcement of the Company’s proposed acquisitions, whereby the short interest may be driven by merger arbitrage trading.

How are the hedgies trading it?

Some hedge funds were betting on the company in accordance to the most recent 13F SEC filings.  John Paulson of Paulson & Co. bought 9 million shares in Q4 of 2012 according to our database, representing 1.89% of his total portfolio. Click here to read about how Paulson has been hit by the drop in the price of gold.

Investors may want to look at other companies in the sector if they believe that precious metal prices will eventually bounce back. Newmont Mining Corp (NYSE:NEM) is a gold producer, and has been also hit recently by the gold price drop.  The Company’s share price is down over 15% on the week, and down 39% in the past six months.  Newmont still carries a dividend yield of over 5%. Barrick Gold Corporation (USA) (NYSE:ABX) is another gold and mining development company with additional oil and gas activities.  Barrick is down a punishing 27% on the week, and is trading at $17.91, a level not seen since October of 2008. Goldcorp Inc. (USA) (NYSE:GG) is another gold miner that has fallen 10% in the past week.

What’s the play?

Investors may want to wait on investing in Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) and the other companies discussed above until a solid bottom has set in in the precious metals markets.  It may be difficult to time the bottom though.  The dramatic price drop in metals appeared to catch a lot of people off guard.

Gold bugs were still long gold as of late, but this needs to be re-examined in the wake of the recent drop.  Investors may want to continue to monitor whether hedge funds cut their positions in the stocks mentioned herein; click to hear to read why you may want to drop your hedge fund. Still, the story in the precious metal sector is still unfolding. Although the dividend yields on some of the companies mentioned here look somewhat attractive, the sector as a whole may be in for further turbulent times.

The Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) -falling knife may still be dropping, whereby investors may want to stay out of it for the time being.  A well-timed trade on the turnaround could be fruitful, but timing this trade is the difficulty.

Disclosure: I am long FCX.