Freeport-McMoRan: Getting It Right

Freeport-McMoRan (FCX) announced second quarter ended June 30, 2016 total revenue of $3.3 billion, down 15 percent year-over-year from $3.9 billion during the same period last year.

Freeport-McMoRan declared second quarter of 2016 adjusted net loss of $27 million or $0.02 per share compared to adjusted net income of $143 million or $0.14 per share in second quarter of 2015.

The global metals mining company reported continued year-over-year decline in both its top and bottom line primarily due to the ongoing weaker global commodity demand and pricing environment, eating into the company’s key margins while encouraging it to minimize non-core expenditures and preserve cash.

Guidance  

Freeport-McMoRan declared a total of 4.1 billion lbs copper sales for 2015 and estimates 2016 total copper sales of about 5.0 billion lbs, depicting 22 percent year-over-year growth over last year but, forecasts 4.2 billion lbs of net copper sales for the complete fiscal year 2017 and excluding the Tenke transaction.
However, gold sales illustrated 36 percent year-over-year growth from 1.25 million ozs of gold sales in 2015 to 1.7 million ozs during 2016 and further, projects 47 percent year-over-year growth in gold sales to 2.5 million ozs in 2017 over last year.

Molybdenum sales for 2017 is estimated to be 87 million lbs, an increase of 14.5 percent over 76 million lbs projected for 2016 but, indicating 15 percent year-over-year decline from 89 million lbs in 2015 to Molybdenum sales in 2016.
Freeport-McMoRan: Getting It Right
Image by Burghard / Pixabay
Further, oil & gas sales depicted a continued 5 percent year-over-year decline to an estimated 45 MMBOE in 2017 from 47.4 MMBOE expected for 2016 and projecting a 10 percent year-over-year decline from 52.6 MMBOE of oil & gas sales in 2015.

Resilient performance

In addition, despite the continuing tough global operating environment, Freeport-McMoRan is believed to have delivered attractive cash flows and EBITDA at different copper prices which signifies the robustness of the company operations that are focused on generating superior returns as the international metal pricing and average cash flow from operations recovers slowly but steadily.

The global metals mining company seems highly focused on optimizing its overall financial position by strategically lowering the near-term key metals production, considering the currently weaker international commodity pricing environment while harnessing the key benefits from the steadily improving metals pricing worldwide.

Freeport-McMoRan is expected to have high-quality copper resources in its higher mine life mining districts including, Morenci, Cerro Verde and Grasberg each of which have delivered over 56 billion lbs, approximately 62 billion lbs and 107 billion lbs of copper respectively. Importantly, Cerro Verde is believed to be a long-term provider to prospective cash flow generation by the company with project cost having reached $4.5 billion for 2015, well-within the budget assigned for the year of $4.6 billion.

The company has also delivered a superior 352 kt/d of mill rate for second quarter of 2016, up 203 percent year-over-year from 116 kt/d in second quarter of 2015 along with 85 percent year-over-year growth in the mining rate to 626 kt/d and 35 percent year-over-year decline in unit net cash cost to $1.22 per lb during the second quarter that signifies strong operational execution by the company.           

Freeport-McMoRan is keen on right-sizing its core assets position by strategically executing non-core asset sales transactions to uniquely restore the strength of its balance sheet and minimize the net debt-to-average EBITDA multiple for ‘16-’17 to about 1.4x. Some key asset sales include, Morenci, Haynesville Shale assets and other major gas and oil royalty interests that are estimated to be closed in second and third quarters of 2016.

A look at the end market

Internationally, near-term metal surpluses are believed to be smaller than estimated with fresh supplies achieved in line with the expectations, smaller disruptions compared to the recent past, estimated medium-term shortages with uncertain demand expansion and greater incentive pricing needed for developing new production.

The existing supply constraints in the copper market are supporting significant long-term growth outlook. Some major supply constraints include, approximately 4 mm tons or 19% fall in core mine supply in the forthcoming 10 years, the existing industry-leading 10 mines globally produce about 5.5 mm tons yearly, the supporting price for fresh supply is nearly $3.30/lb and finally, new mines are projected to take about 7 to over 10 years to develop.

The constrained long-term metals supply coupled with attractive cost-optimization efforts of Freeport-McMoRan are believed to drive sustainable long-term company growth while delivering attractive shareholder returns over the longer term.

Conclusion

Overall, the investors are advised to “Sell” any equity held in Freeport-McMoRan Inc. considering the company’s weaker long-term growth prospects with PEG ratio of -0.65 amid continuing falling global commodity demand and pricing environment. The profit margin of -85.28% depicts no profit but loss. Moreover, Freeport-McMoRan has an extremely weak financial position with significant total debt of $19.32 billion and smaller total cash position of $352 million only, restricting the company to continue with its daily operations profitably.
Published on Aug 22, 2016
By Vinay Singh

Copyrighted 2016. Content published with author's permission.

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