A Miner with a Major Surprise

01/28/2009 10:47 am EST


Jocelynn Drake

Financial Analyst, Schaeffer's Investment Research

Jocellyn Drake of Schaeffer’s Investment Research says a big mining company had a surprisingly good quarter even after taking big write-offs.

Freeport-McMoRan Copper & Gold (NYSE: FCX) [reported Monday] that it suffered a fourth-quarter net loss as it wrote down $13.1 billion in inventory and assets related to its 2007 acquisition of Phelps Dodge. The company posted a net loss of $13.9 billion, or $36.78 per share, compared with net income of $414 million, or $1.05 a share, a year earlier. The latest period included charges of $34.51 a share, mainly for write-downs of assets related to the Phelps Dodge deal.

The company has been deeply wounded by copper futures' tumble from record highs last spring as the global economy continued to weaken. In December, it slashed its capital-spending budget in half and suspended its dividend.

For 2009, FCX expects copper sales to reach 3.9 billion pounds and 3.8 billion in 2010, down 9% and 17% from its October forecast. Molybdenum sales are expected to be 60 million pounds in both 2009 and 2010, down 25% and 40% from the October view. Gold sales won't be affected by the revised forecast, and are expected to reach 2.2 million ounces in both 2009 and 2010.

However, the company managed to surprise the Street, which had expected a loss, excluding items, of $1.12 a share, on revenue of $2.84 billion.

The surprising earnings report sent the shares skyrocketing more than 13% higher Monday. (It sold off a bit, but rallied again Tuesday to close below $26—Editor.) The stock has climbed back above its ten- and 20-day moving averages, as well as resistance at the $24 level. However, the equity remains locked in a sideways channel between resistance at the $30 level and support at the $20 level. Furthermore, FCX is facing staunch resistance at its declining 20-week moving average—a trend line above which the stock has not finished [in any week] since the beginning of July.

Heading into the earnings report, investors were extremely pessimistic about the shares, and an unwinding of this skepticism could be adding some lift to FCX. The Schaeffer's put/call open interest ratio for the security rests at 0.79, which is higher than 99% of all those taken during the past year. In other words, this reading is higher than all but 1% of those taken during the past 52 weeks, pointing to heavy pessimism among short-term options players.

Even the International Securities Exchange ten-day put/call volume ratio of 0.71 is higher than 85% of those taken during past 12 months. This lofty reading points to growing skepticism among options players.

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