Freeport Announces Sales Of Chilean Copper Mines As Part Of Efforts To Reduce Debt

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Freeport McMoran Inc (NYSE:FCX) has announced that it has entered into a definitive agreement to sell its 80% ownership interest in the Candelaria and Ojos del Salado copper mines in Chile to Lundin Mining Corporation for $1.8 billion and a contingent consideration of up to $0.2 billion. The company estimates that it would realize after-tax net proceeds of approximately $1.5 billion from the transaction, excluding the contingent consideration. ((Freeport-McMoRan Announces Agreement to Sell Its Interests in Candelaria/Ojos for $1.8 Billion in Cash Plus up to $0.2 Billion in Contingent Consideration, Freeport McMoran News Release)) The focus of this transaction is to use the proceeds to pare down the company’s heavy debt burden.

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The Candelaria Mining Complex

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The Candelaria copper mining complex is located approximately 12 miles south of Copiapó in Northern Chile’s Atacama province. It accounted for around 10% of the company’s consolidated copper production of approximately 4.13 billion pounds of copper in 2013. ((Freeport McMoran’s 2013 10-K, SEC)) As on December 31, 2013, the mining complex accounted for 3.4 billion pounds in proven and probable reserves, and  around 3% of the company’s consolidated proven and probable reserves. [1] The proceeds of the sale of the mine will primarily be used for reducing the company’s debt burden.

Debt Reduction

Freeport’s total debt stood at $20.7 billion at the end of 2013. This is a steep rise from the figure of $3.5 billion that the company reported as debt at the end of 2012. [1] The company raised $10.5 billion in debt in 2013 to fund the acquisition of Plains Exploration And Production Company (PXP) and McMoran Exploration Company (MMR), both involved in oil and gas production. Freeport further assumed $6.7 billion in debt from PXP. In comparison to the $20.7 billion in debt, the company reported a paltry $2 billion in cash and equivalents at the end of 2013. ((Freeport McMoran’s 2013 10-K, SEC))

The company’s senior unsecured debt was rated ‘BBB’ with a negative outlook by Standard and Poor’s at the end of 2013. ((Freeport McMoran’s 2013 10-K, SEC)) While the company’s debt is currently investment grade, Freeport is looking to shore up its balance sheet to maintain such a rating and keep its borrowing costs low. The company is looking to reduce its total debt to $12 billion by the end of 2016.((Lundin to Buy Freeport Chile Copper Mine for $1.8 Billion, Bloomberg)) Earlier on in the year, Freeport had restructured its oil and gas portfolio through the sale of its Eagle Ford Shale assets to a subsidiary of Encana Corporation and the simultaneous purchase of some of Apache Corporation’s interests in the Deepwater Gulf of Mexico (GOM). The combined after-tax net proceeds from these transactions of approximately $1.3 billion were to be used to reduce the company’s debt. On June 30, 2014 the company’s total debt stood at $20.3 billion, with around $1.5 billion in cash and cash equivalents. [2]

Asset sales may constitute the bulk of Freeport’s efforts to pare its debt, considering the uncertain prospects of its copper mining businesses, with concerns about demand for copper weighing on prices. [3]

Copper Prices

Copper prices fell to their five-month lows recently due to concerns over weakness in Chinese demand for copper. China is the world’s largest consumer of copper, accounting for nearly 40% of the world’s demand of copper. ((Copper Ends at 5-Month Low on China Worries, Wall Street Journal)) Copper has diverse applications in industry, particularly in the manufacturing, power and infrastructure sectors. The HSBC China Manufacturing Purchasing Managers’ Index (PMI) reported a value of 50.2 in September, lower than previously expected. [4] A reading of over 50 for the Manufacturing PMI indicates growth in the manufacturing sector. Though only a monthly indicator of manufacturing activity, the lower than expected Manufacturing PMI for September could be indicative of sluggish Chinese economic growth. China’s GDP growth is expected to slow to 7.3% and 7.1% in 2014 and 2015 respectively, from 7.7% in 2013. [5] Further, a proposed structural transformation of the economy from investment and export-led growth to consumption-driven growth may lower Chinese demand for copper in the long run. ((China Premier Warns On Economic Slowdown As Data Fans Stimulus Talk, Reuters)

London Metal Exchange (LME) spot copper prices stood at levels of around $6,700 per ton at the end of September. These are sharply lower as compared to levels of around $7,200 per ton at the end of September last year. [6] Lower copper prices will negatively impact the fortunes of Freeport’s copper mining business. Copper sales accounted for 69% of Freeport’s consolidated revenues in 2013. [3]

The company management had indicated that asset sales could constitute one of the avenues for debt reduction for Freeport during its Q2 earnings conference call. [7] With cash flows from operations likely to remain subdued due to a weak copper pricing environment, asset sales may constitute the bulk of Freeport’s efforts to lower its debt.

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Notes:
  1. Freeport McMoran’s 2013 10-K, SEC [] []
  2. Freeport McMoran’s Q2 2014 10-Q, SEC []
  3. Freeport McMoran’s 2013 10-K, SEC [] []
  4. Copper Ends at 5-Month Low on China Worries, Wall Street Journal []
  5. Goldman Sachs cuts China growth forecast sharply, Market Watch []
  6. LME Copper Prices, LME []
  7. Freeport McMoran’s Q2 2014 Earnings Conference Call Transcript, Seeking Alpha []