FCX and AA stock
Metal and mining shares have fallen sharply this year. Based on Thursday’s closing prices, Freeport-McMoRan has fallen 51%, while Alcoa has fallen 71% in 2020. FCX is a leading copper miner, while AA is a leading aluminum producer. Aluminum and copper prices have fallen to their lows in the first quarter of 2016. Back then, there were concerns about China’s slowdown, which triggered a massive sell-off in metal prices. There’s a broader market sell-off amid coronavirus fears. Currently, FCX stock is near its 2016 lows. We don’t have a comparable stock price for Alcoa. Notably, the stock split later in 2016.
Outlook for Freeport-McMoRan stock
Now, we’ll look at Freeport-McMoRan’s outlook after the crash. The company is a pure-play copper miner. Freeport-McMoRan would benefit from the projected deficit in global copper markets. In 2016, FCX was plagued by near-term debt maturities and a weak balance sheet. However, the company took several actions including asset sales to shore up its balance sheet. Currently, FCX is in a much better position compared to 2016. The company doesn’t have any near-term debt maturities. FCX had a net debt of only $7.8 billion at the end of 2019. To put that in perspective, the company had a net debt of more than $20 billion at the end of 2015. Also, Freeport-McMoRan had cash and cash equivalents of more than $2 billion at the end of 2019. The cash would help the company tide over amid the current challenging environment. Alcoa also has manageable debt on its balance sheet.
Outlook for Alcoa stock
Alcoa is an integrated aluminum producer with bauxite, alumina, and aluminum operations. The company’s net debt was below $1 billion at the end of 2019. Alcoa held cash and cash equivalents of $879 million. The cash would help the company meet operating expenses amid the current low commodity pricing environment. Meanwhile, Alcoa has considerable off-balance sheet liabilities in the form of pension and retirement benefits. However, over the last two years, the company has gradually lowered its pension liabilities.
Should you buy these stocks at the current prices?
Based on Thursday’s closing prices, Alcoa had a market cap of $1.1 billion and an enterprise value of $3.8 billion. On the other hand, Freeport-McMoRan had a market cap of $9.3 billion and an enterprise value of $17 billion. The company’s enterprise value is even lower than the 2016 sell-off. The current meltdown in metal prices would have a negative impact on Alcoa and Freeport-McMoRan’s 2020 earnings. However, if we think long term, the world will still need aluminum and copper after the coronavirus pandemic subsides.
Alcoa and Freeport-McMoRan
Several governments across the world might announce infrastructure investments to boost their economies. Also, there might be a stimulus for the housing and automotive sectors, which would support the demand for metals like aluminum and copper. Globally, there has been a wave of monetary easing that would support the demand after the coronavirus pandemic is controlled and normal business activity resumes. Equity markets valued Freeport-McMoRan stock at depressed valuations in early 2016. However, the company managed to sell some assets at much higher valuations than what the markets were valuing the consolidated entity.
While the coronavirus will impact the near-term earnings, it doesn’t change the value of Freeport-McMoRan and Alcoa’s assets, at least not in the long term. In my view, while Alcoa and Freeport-McMoRan could fall more from these levels and there would be volatility in the near term, both of the companies look attractive from the long-term perspective.