Capitulation In Freeport McMoran

December 3, 2008 at 8:48 am  ·  Category: Commodities, Market Commentary, Stocks

We are responding aggressively to the current market conditions which have weakened dramatically in recent weeks.  These revisions to our plans will allow us to reduce operating costs and capital spending, adjust our production profile to better match market requirements and preserve our valuable resources for anticipated improved market conditions.

James Moffett, Chairman, and Richard Adkerson, CEO, Freeport McMoran

This morning giant copper producer Freeport McMoran (FCX) announced significant near term strategy changes in response to the collapse of the global copper market:

  • They will be cutting 2009 copper production by 200 million pounds and 2010 copper production by 500 million pounds. 
  • They will be cutting back 2009 capital expenditures by $1.2 billion from $2.3 billion to $1.1 billion. 
  • They are suspending their annual $2.00 per share dividend. 
  • As a result of these production cutbacks which are focused on their higher cost North American mines, unit costs per pound are expected to decrease 18% from 2008 to 89 cents a pound next year (FCX Press Release).

Predictably, the stock market is crushing Freeport shares on the news, sending them down almost 20%, below $18 a share, on heavy volume this morning.

But, really, this is a welcome development for long term Freeport investors.  Why continue to sell their valuable copper at $1.60 a pound when the longer term intrinsic value is much higher?  It makes tremendous sense to scale back production and reduce costs and capital expenditures in the face of a weakening demand environment.

If you can look past what will be a bad 2009, Freeport represents enormous long term value.  And today just might be capitulation, marking an intermediate term low.

Disclosure: Top Gun is long Freeport McMoran (FCX) shares.

Posted by Greg Feirman  ·  Trackback URL  ·  Link
 

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