Carl Icahn Acquires 8.46 Percent of Freeport-McMoRan; Stock Surges

Carl Icahn Acquires 8.46 Percent of Freeport-McMoRan; Stock Surges

The activist investor, Carl Icahn acquired 88 million shares or 8.46% stake in Freeport-McMoRan based on his Schedule 13D filing with the Securities and Exchange Commission (SEC).

Based on his regulatory filing, Icahn believed that the shares of Freeport-McMoran are undervalued. Freeport McMoRan is the world’s largest copper mining company.

The activist investors indicated his intention to engage in discussions with the board and management of Freeport-McMoRan regarding its capital expenditures, executive compensation practices, capital structure, and the curtailment of the company’s high-cost production operations.

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Icahn may also seek shareholder board representation on the company’s board discuss its size and composition. The activist investor and its affiliate firms have not engaged in any discussions with the board and management of Freeport-McMoRan as of August 26, 2015.

Freeport-McMoRan response to Icahn’s investment

Icahn is now the largest shareholder of Freeport-McMoran. In response to his investment, the company said it “maintains an open dialogue with our shareholders and welcomes constructive input toward our common goal of enhancing shareholder value.”

Freeport-McMoRan announced its decision to reduce its capital expenditures, production levels, operating, administrative and exploration costs in response to the declining commodity prices.

The company said its 2016 capital expenditure budget is expected to decline to $4 billion from $6.3 billion this year.

Freeport-McMoRan estimated that its mining capital expenditures will decline 25% or $700 million next year. Its copper sales are expected to drop 150 million pounds per year in 2016 and 2017. The company also estimated a 20% reduction in site production and delivery costs next year.

Richard C. Adkerson, Chairman and CEO of Freeport-McMoRan and James Flores, Vice Chairman and FM O&G CEO said, “The steps we are taking to reduce costs and capital expenditures will strengthen our financial position during a period of weak and uncertain market conditions and preserve our large resource base for improved future market conditions.”

Analysts’ reactions

Clarksons Platou Securities analysts Jeremy Sussman and Lee McMillan commented that the company’s decision to revise its capital expenditure and operating plans wasn’t a big surprise because the company already indicated last month that it would review its copper operations.

The analysts praised the management’s decision to reduce its mining capex significantly. However, the emphasized that they will remain in the sidelines because they still expect a meaningful 2015-2016 cash burn.

Sussman and McMillan maintained their Neutral rating on Freeport-McMoran and lowered their price target to $12 a share.

On the other hand, UBS analysts Brian MacArthur maintained his Buy rating on the stock with a price target of $19 per share.

Stock performance

Freeport-McMoRan’s performance was negatively impacted by the lingering decline in commodities prices. This year, the price of copper dropped 18%. The company lost more than 70% of its stock value over the past year or 53% year-to-date. Its stock traded at its highest price of $36.48 to its lowest level of $7.76 per share over the past 52 weeks.

Yesterday, the stock price of Freeport-McMoRan gained 28% after disclosing its revised capital and operating plans. Icahn’s disclosure regarding his investment in the company also helped push the stock higher.

Today, the shares of Freeport-MoMoRan are trading at $10.62 per share, up by more than 4% at the time of this writing around 11:41 AM in New York.

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