Freeport-McMoRan (FCX, Financial) has faced some of the most difficult times in the past year with the crisis starting due to a slowdown in China and the crisis accelerating due to a sharp slide in oil prices. Not just the macro-economic factors and the oil price factor, Freeport-McMoRan has also been negatively impacted by the mining related problems in Indonesia. This article looks into the reasons why Freeport-McMoRan can still navigate through the worst crisis the company is facing in years.
As a first positive, I would like to mention that the company’s mining blockade at Freeport Indonesia has been lifted with normal operations resuming in the mine. With the employee dispute being settled and with oil prices moving marginally higher in last trade, Freeport-McMoRan surged by 6.66%. I believe that the negatives related to the issues in Indonesia have been discounted in the stock, and once all the negotiations with the government are over related to operations and investment in Indonesia, the stock is likely to move higher.
I must point out here that according to Freeport-McMoRan, 60% of the financial benefits during the period 2007-14 from Indonesia mining operation has been transferred to the government. With total financial benefits during this period amounting to $18 billion, the government has gained significantly from Freeport-McMoRan operating in Indonesia. Therefore, I assign a low probability of a significantly negative outcome for Freeport-McMoRan in Indonesia. On the contrary, once the global demand for ores surges, Freeport-McMoRan and Indonesia will be well positioned to make meaningful gains.
In the oil and gas segment, Freeport-McMoRan has responded to market conditions by lowering its capital expenditure for 2015 and 2016. For 2015, the capital expenditure currently is $1.2 billion while it has been reduced to $17 billion for 2016. The primary objective for Freeport-McMoRan at this point of time is financial prudence and I believe that the company has done well on that front. My statement is also backed by the fact that the company has completed asset sale worth $5 billion in the last one year and the company has also prepaid 2015 debt maturities and higher coupon debt.
The company’s net debt as of December 2014 still stands at $18.3 billion. However, an average cost of debt of 3.8% is not high and Freeport-McMoRan intends to invest within its cash flow means in these difficult times. The implication is that debt servicing is likely to be smooth and the debt will not increase over the next 1-2 years. On the contrary, I believe that debt is likely to decline over the next 1-2 years as asset sale proceeds will be used to repay debt and strengthen the balance sheet.
While it is too early to speculate or discuss, I also believe that if oil prices recover to some extent during 2015 and 2016, Freeport-McMoRan can sell some oil and gas assets in order to reduce debt. The company has clearly mentioned in its latest presentation that one of the key objectives in the near-term is to protect the balance sheet and liquidity. That is likely to come through further asset sale and conservative capital investment as long as copper and oil prices remain low.
In conclusion, Freeport-McMoRan has been sliding in the last 3-4 quarters due to various reasons, but the company seems committed to create shareholder value and navigate these difficult times through financial prudence. I expect the company to be successful in this challenge and I believe that the stock can be considered for gradual accumulation over the next 6-12 months.
