Freeport-McMoRan Q4 2015 Earnings Review: Subdued Copper And Oil Prices Negatively Impact Results

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Freeport-McMoRan Inc. (NYSE:FCX) released its fourth quarter results and conducted a conference call with analysts on January 26. [1] As expected, the steep decline in copper and oil prices over the course of the past year weighed on the company’s Q4 results. Freeport reported an adjusted net loss (which excludes the impact of one-time items such as impairment charges related to the company’s oil and gas assets) of $21 million in Q4 2015, as compared to an adjusted net profit of $267 million in the corresponding period of 2014. [2] The most important takeaway from the earnings conference call was the management’s acknowledgement of the challenging business conditions facing the company and the emphasis on managing costs, cash flows, and debt.

Decline in Copper Prices

Copper Prices in 2015, Source: LME

Freeport’s copper shipments rose to 1.15 billion pounds in Q4 2015, around 18% higher than in the corresponding period of 2014, as higher production from the expanded facilities at the Morenci and Cerro Verde mines offset production declines due to asset sales over the course of the past year. [2] However, the sharp decline in copper prices over the course of 2015, as illustrated by the chart shown above, negatively impacted the results of the company’s copper mining division. Freeport’s average realized price for copper sales stood at $2.18 per pound in Q4 2015, around 26% lower than the figure reported in Q4 2014. [3]

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The decline in copper prices was largely due to concerns over an economic slowdown in China impacting the demand for copper from the country. As copper is a metal with extensive industrial applications, the consumption of copper is strongly correlated with economic growth. Slowing economic growth in China, which accounts for roughly 40% of the global demand for copper, and is the largest consumer of the metal, has raised concerns over Chinese demand for the metal, negatively impacting copper prices. [4] With Chinese GDP growth expected to decline further to 6.3% in 2016 from 6.8% in 2015, copper prices are likely to remain subdued in 2016, as well. [5]

Decline in Oil Prices

Brent Crude Oil Prices, Source: Y Charts

The decline in oil prices over the course of the past twelve months negatively impacted price realizations and the results of the Oil and Gas division. A global supply glut created as a result of elevated OPEC and U.S. production levels in the face of weak demand, has negatively impacted oil prices. The decline in prices was reflected in Freeport’s Q4 results. Realized revenue for the Oil and Gas division declined roughly 37% year-over-year to $37.49 per barrel of oil equivalent (BOE) in Q4 2015, correspondingly lowering the division’s cash operating margin by around 44% to $21.32 per BOE. [2]

The adverse business environment created as a result of subdued commodity prices is a major cause for concern for Freeport and the management outlined various measures in response to the downturn in commodity prices in the earnings conference call.

Response to Tough Business Environment

With the preservation of cash flows an overriding concern in the current business environment, the company lowered its planned capital spending for 2016 and 2017 by 29% and 47%, respectively. [3] In addition, production adjustments and cost reductions executed by the company will allow Freeport’s copper mining operations to remain cash flow positive even if copper prices fall to $2 per pound. [3]

As a result of the sharp downturn in commodity prices, major ratings agencies are reviewing the credit ratings of companies in this space. [6] A potential ratings downgrade has heaped the pressure on Freeport to reduce its debt burden. The company is looking at various options including the potential sale of both oil and gas and copper mining assets. [1] The company is unlikely to generate the best value for either its copper mining, or oil and gas assets, under the current conditions. However, given the threat of a ratings downgrade, asset sales might be the only realistic measures that could help in reducing Freeport’s debt and possibly preserve its credit rating. Given the adverse business environment, it is going to be a tall order. We will continue to track the ongoing developments at Freeport-McMoRan as it grapples with the bleak business environment.

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Notes:
  1. Freeport-McMoRan Q4 2015 Earnings Call Transcript, Seeking Alpha [] []
  2. Freeport-McMoRan Q4 2015 Earnings Release, Freeport-McMoRan Website [] [] []
  3. Freeport-McMoRan Q4 2015 Earnings Presentation, Freeport-McMoRan Website [] [] []
  4. Copper and Aluminum Sag to Six-Year Lows on China Demand Concern, Bloomberg []
  5. World Economic Outlook, IMF []
  6. Moody’s puts 175 commodity firms on review over bleak outlook, Reuters []