Commodity stocks are mostly down again Wednesday. There has been much discussion about how stocks like Freeport McMoran could continue to drop. It's down another 8 percent mid-morning after dropping 4 percent on Tuesday.
The simple answer is they may have great assets but they also have huge amounts of debt. Traders and analysts are now making worst-case assumptions, in this case that "lower for longer" prices in oil and copper will make it increasingly difficult to pay the debt and leave any residual value for shareholders.
In Freeport's case, the company has about $20.7 billion in debt, cash flow (EBIDTA) of about $4.1 billion for 2015, and interest expenses of about $600 million.
For the moment, the cash flow can cover the interest expense, but as oil prices keep dropping it gets tougher.
However, they are burning a lot of cash due to very high capital requirements, so even if prices stay where they are, it's still going to be tough. Bottom line: They need a recovery in commodity prices!