Freeport's (NYSE:FCX) Debt, Margins, and Earnings

Freeport-McMoRan has exploded in share price since it bottomed out at $16.80 a share on December 1, 2008, and it's worth looking briefly at their current situation as it relates to debt, margins and earnings, which may challenge the company going forward.

The one thing to keep in mind concerning Freeport and all companies with heavy exposure to the right commodities, is rising prices can forgive a lot of weaknesses, but weaknesses still affect the bottom line of a company, and performances can be better even in the best of times.

Higher commodity prices have been the norm recently, but macroeconomic circumstances are dividing up the sector some, with particular commodities sure to continue doing well, but others falling by the wayside or reaching top price levels.

As far as Freeport or any commodity company, one must continue to closely watch debt levels and their costs, operational costs, margins, and that ultimately all leads to earnings.

Over the last several years Freeport has taken on more debt even as their equity increased. The problem is the debt-to-equity ratio has also increased, which isn't a good thing for the company. That means even in a bull commodity market their debt is increasing at higher levels. This doesn't mean Freeport is in danger, but the trend isn't good. Their debt-to-equity is a little over 41 percent at this time.

This has resulted in the gross margins of Freeport being under pressure, which is something that needs to be closely watched over the next year.

Other situations to watch is the China story as it relates to commodities, as they're in the midst of battling an inflation challenge, and that will probably result in slower growth and lower imports. That could cause lower sales for companies like Freeport, although China will still grow strongly, but not at the rate they have in the recent past.

Freeport can't do anything about the macroeconomic situation, but the things they can control like debt and operational costs need to be watched closely, along with the price trends of specific commodities.

It seems the period where the majority of commodities could be counted on to rise on general demand are over, and specific commodities will have to be watched in order to determine whether or not commodity prices will overcome elements which could result in lower margins and earnings.

For Freeport, they primarily mine copper, gold, silver, molybdenum and cobalt. Of those, copper is probably the most important to watch, as gold and silver in the current economic environment could help them overcome higher debt and costs, as prices will continue rising for some time.

Copper isn't necessarily guaranteed that anymore because of the probably cutbacks in places like China, and the ongoing weakness in building of new homes in the West, including the United States.