On Sale: Go Against the Grain and Follow Uncle Carl into this Beaten Down Commodity Giant

Age has not slowed down hedge fund icon Carl Icahn. At the ripe old age of 79 Icahn continues to find value and pick winners. His multi-billion dollar profits in Netflix (NASDAQ: NFLX) and Apple (NASDAQ: AAPL) proves this one-time corporate raider is up with the times. However, one area that Icahn does not get much respect in is commodities. Critics are quick to point out his sagging investments in Chesapeake Energy (NYSE: CHK) and Transocean (NYSE: RIG). That's why when Mr. Icahn bought in big in one of his latest commodity plays traders faded the Icahn-pop. Now you can own the stock at a sharp discount to prices Mr. Icahn paid.

The stock we are talking about is Freeport-McMoran (NYSE: FCX).

In a 13D filing on August 27th, Icahn disclosed a 88,000,000 share stake in FCX. Most of Icahn's stake was purchased through forward contracts at $9, $15 and $17, however we know that Icahn bought 7,596,637 shares for an aggregate purchase price of approximately $115.9 million. This suggests he paid $15.25 for the shares. The current stock price is $11.84, giving you an opportunity to own the shares for 22% cheaper than Icahn. Looking at it another way, if the stock gets back to the Icahn prices you gain 29%.

With copper near six year lows, struggling gold prices and plunging oil prices, it has been a triple whammy for Freeport. The company is trying to stem the bleeding with an aggressive cost cutting initiative.

Since late 2014, FCX has reduced its consolidated 2015 capital expenditure budget from $7.5 billion to $6.3 billion, including reductions of $700 million in oil and gas expenditures and $500 million in mining expenditures. After incorporating the August 27, 2015 announcements and the August 5, 2015 announcement of reduced oil and gas expenditures, capital expenditures for 2016 are expected to decline to a total of $4.0 billion.

While 2015 will be a cash flow negative year, 2016 looks much brighter with the announced cuts.

From the company:

Using estimated sales volumes for 2015 and assuming average prices of $2.25 per pound of copper, $1,150 per ounce of gold and $6 per pound of molybdenum and recent futures prices of $50 per barrel of Brent crude for the second half of 2015, FCX’s consolidated operating cash flows would approximate $3.1 billion in 2015. FCX plans to fund its $6.3 billion capital expenditure budget with operating cash flows, amounts available under its $1.8 billion Cerro Verde bank facility and borrowings under its $4 billion bank credit facility. In addition, the company is executing a program to raise up to $1 billion in proceeds from its previously announced at-the-market common stock offering and is considering additional opportunities to sell a minority interest in its oil and gas subsidiary. The company will continue to assess opportunities to partner with strategic investors potentially interested in investing capital with FCX in the development of its oil and gas and its mining properties. FCX has a broad set of assets with valuable infrastructure and associated resources with attractive long-term production and development potential.

Using the same price assumptions and the recent 2016 future prices of $54 per barrel for Brent crude, FCX’s operating cash flows are estimated to approximate $6.3 billion in 2016, providing cash flow for required capital investments totaling $4.0 billion, dividends and repayment of debt. Each $0.10 per pound change in copper, $5 per barrel change in Brent crude, $1 per pound change in molybdenum and $50 per ounce change in gold in 2016 would impact cash flows, before changes in working capital, by $360 million, $140 million, $70 million and $50 million respectively.

Meanwhile, the outlook for copper prices has modestly improved. This from Jefferies analyst Christopher LaFemina:

A supply response to low prices has balanced the iron ore market and is now likely to do the same in copper. The copper price outlook for the next year has modestly improved as a result, although near-term risk to copper and iron ore is still to the downside.

Jefferies recently lowered its long-term copper price forecast from $3.50 to $3.00 per pound, however this is still above the current spot price of $2.44 and FCX's own projection of $2.25.

Remember what FCX said: each $0.10 per pound change in copper prices per pound would impact cash flows, before changes in working capital, by $360 million.

While a stabilization of cooper prices provides clear upside, FCX also has a pending catalyst that could drive the stock into year end --- the pending IPO for its its oil & gas subsidiary Freeport-McMoRan Oil & Gas [pending ticker (NYSE: FMOG)]. FCX could offer up to a 19.9% stake in the oil and gas concern to the public by late 2015.

Also, it is not just Uncle Carl buying the stock. A recent Form 4 filing with the SEC showed Vice Chairman, James Flores, bought 2.2 million shares in early September. This was clearly a buy with some conviction.

With buying from Icahn and insiders, the sharp capex cuts, a return to free cash flow in 2016, stabilization of copper prices, and a pending IPO catalyst, it may be time to start nibbling on FCX.

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