Reasons to Buy Freeport-McMoRanFCX) is making smart improvements to its business. It is developing new production and adding more ore to its production and ramping up production at Cerro Verde. For example, Freeport-McMoRan has recently developed the DMLZ extension of the DOZ and at the same time has started production at the Grasberg Block Cave that should provide significant, very high-grade ore to Freeport-McMoRan going forward. In fact, the company expects the gold grades at Grasberg to increase more than 50% in 2016 from the 2015 levels.
Making smart moves
Freeport-McMoRan has ramped production at Cerro Verde with the start-up of the expansion of concentrator 2 that enhanced its mill rate to 352,000 tons a day from 116,000 tons a day in 2015.
More importantly, these costs reduction across its business are on the top of a significant drop in the capital expenditure. For instance, Freeport-McMoRan capital expenditure for the second quarter declined 48% for the mining and 51% for oil and gas on a year-over-year basis. In fact, its capital expenditure is down approximately 51% for 2016 to $3.1 billion as compared to total capital expenditure of $6.35 billion in 2015.
The good thing is that despite this considerable reduction in the production costs and capital expenditure, Freeport-McMoRan was able to increase its production level. For instance, the company expects its copper sales to grow 22% to $5.0 billion lbs, while the gold sales to increase about 36% to 1.7 million ounces in 2016, as compared to copper shares of 4.1 billion lbs and 1.25 million ounces respectively in 2015.
Selling-off non-profitable assets to strengthen its financial health
Freeport-McMoRan, in order to improve its debt structure, recently sold non-profitable assets worth $4.0 billion. This includes a sale of 13% interest in Morenci Mine for $1.00 billion in cash to Sumitomo Metal Mining and a copper mine in the Democratic Republic of Congo to China Molybdenum for approximately $2.65 billion.
Freeport-McMoRan, through this sale of non-core assets, plans to repay some of its debt that should make its balance sheet more attractive. On the same note, the company during the second quarter reduced its net debt by $1.5 billion to $19.3 billion from $20.8 billion in the first quarter of 2016. This reduction in the net debt should lower its interest expenses going forward. Looking forward, Freeport-McMoRan plans to reduce its net debt further to a level where it can focus on growth rather than dealing with maturities. Thus, it is clear from its efforts of lowering net debt that the company is heading towards the right directions that should create value for its shareholders in the long-run.
The important thing is that the company was able to generate this positive free cash flow despite a considerable asset sale as discussed above. Therefore, in my view, these efforts of generating free cash flow should enable the company to use the excess cash to trim its debt and invest in the growth going forward.
Thus, Freeport-McMoRan, in my opinion, looks very attractive on its restructuring initiatives that should create significant upside potential for the stock. It is focusing on the higher grade ore to increase its gold sales and enhancing the copper production. On the other side, it is lowering its cost structure across the business. Therefore, the investors should not disregard the stock on the recent revenue miss.
Published on Aug 15, 2016By Subhen Mittra