On Aug 20, 2015, Zacks Investment Research downgraded mining company Freeport-McMoRan Inc. FCX to a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

Freeport posted a significant loss of $1.85 billion in the second quarter of 2015 as depressed copper and gold prices dented its bottom line. In addition to weak commodity prices, the company was hit by a huge impairment charge (of around $2.7 billion) related to its oil and gas properties, which in turn, impacted its second-quarter results.

Freeport’s copper business continues to be affected by the sluggish global economy and supply-related issues. The slowdown in China (a major market for copper) and difficult market conditions in Europe are negatively impacting copper markets. The depressed gold and copper pricing environment also remains a major concern for Freeport.

The Grasberg minerals district, Freeport’s most significant operating asset, is also exposed to Indonesian political, economic and social uncertainties. Lingering uncertainties surrounding the mine (with regards to royalties, duties, operating costs and worker strikes) may weigh on Freeport’s stock. The mine remains susceptible to strikes, which could affect production as a result of reduced capacity.

The uncertain copper pricing environment represents another concern. Uncertainty regarding inventory levels may lead to fluctuations in copper pricing. Looming oversupply in the market poses a threat to copper prices. The copper market is expected to swing to a production surplus in 2015, which would outstrip demand levels.

Freeport, in its second-quarter call, said that it is taking actions to manage costs and capital expenditures amid a difficult pricing backdrop. The company is looking to sell a part of its oil and gas assets. In June, its fully-owned subsidiary – Freeport-McMoRan Oil & Gas Inc. (FM O&G) – filed a registration with the U.S. Securities and Exchange Commission (SEC) for a potential initial public offering (IPO) of common stock.

Freeport, which is saddled with heavy debt (around $20.9 billion at second-quarter end), may also consider further sale of assets in an effort to cope with declining commodity prices.

Stocks to Consider

Better-ranked stocks in the basic materials sector include Innospec Inc. IOSP, Pretium Resources Inc. PVG, and LyondellBasell Industries N.V. LYB. While Innospec sports a Zacks Rank #1 (Strong Buy), both Pretium Resources and LyondellBasell carry a Zacks Rank #2 (Buy).

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