Freeport Announces Additional Measures To Combat Weak Commodity Pricing Environment
Freeport-McMoRan Inc. (NYSE:FCX) has announced a series of steps in order to safeguard its interests, due to the ongoing downturn in commodity prices. [1] The company has announced further reductions in capital spending for its oil and gas businesses, following on from previously announced reductions earlier in the year. Furthermore, the company has announced additional curtailments in its copper and molybdenum production, as well as the suspension of its common stock dividend. These announcements are good moves in the prevailing market conditions as the steps outlined by the management will help the company bolster its flagging cash flows. The preservation of cash flows is important for Freeport as it looks to shore up its balance sheet by lowering its debt.
Good Moves in Challenging Market Conditions
With a major credit ratings agency changing its outlook on Freeport’s debt to negative, following on from a ratings downgrade by another earlier in the year, Freeport is under pressure to lower its debt. [2] The pressure to reduce debt comes in the midst of a downturn in the prices of both crude oil and copper, with a global supply glut weighing on oil prices, and weakening Chinese economic growth and demand for copper negatively impacting copper prices.
Pricing for Copper (Left) and Brent Crude Oil (Right) over last twelve months, Sources: LME (Copper), Y Charts (Brent Crude Oil)
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Given the challenging market conditions, sales of either mining or oil and gas assets are undesirable, since the company is unlikely to get the best valuations for these assets. Freeport must try to deleverage by using its operating cash flows and only consider asset sales as a last resort. The company’s latest oil and gas capital expenditure reductions are steps in the right direction. With OPEC maintaining near-record production levels, oil prices are unlikely to rise significantly in the near term. [3] Freeport announced oil and gas capital spending reductions of 10% and 40% for 2016 and 2017, respectively, as compared to its previous guidance. [1] The company has also announced the suspension of its common stock dividend, a sensible move under current market conditions, which will help the company save around $240 million per annum in cash. [1] Furthermore, Freeport has also announced plans to shut down its Sierrita copper mine in Arizona, in addition to planned reductions to molybdenum production.
All of the aforementioned moves will help Freeport improve its liquidity position and enable the company to reduce its outstanding debt. Whether these moves are enough to help the company deal with the challenging market conditions, while preserving its credit rating, remains to be seen. However, the announcements made by Freeport will certainly help the company better align its operations with current market conditions.
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- Freeport-McMoRan Announces Further Reduction in Capital Spending, Metals Production & Suspension of Common Stock Dividend, Freeport-McMoRan Inc. News Release [↩] [↩] [↩]
- Moody’s revises Freeport’s outlook to negative; affirms ratings, Moody’s Investor Services [↩]
- As Oil Keeps Falling, Nobody Is Blinking, Wall Street Journal [↩]