The Year 2016 In Review: Successful Debt Reduction Efforts And An Improvement In Commodity Prices Boost Freeport’s Prospects

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Freeport-McMoRan Inc. witnessed a considerable improvement in its business prospects over the course of 2016, as indicated by the near doubling of the company’s stock price over the course of the year.

FCX Stock Price 2016

(Source: Google Finance)

A heavy debt burden amid a weak copper and oil pricing environment left Freeport’s stock price languishing around the $7 level towards the end of last year. However, progress made by the company in reducing outstanding debt using the proceeds of asset sales has considerably improved the sentiment surrounding its stock price. Moreover, an improved outlook for copper prices going forward driven by President-elect Trump’s economic policies have further boosted the company’s prospects. In this article, we will look back at the notable developments of the year for Freeport-McMoRan and briefly look ahead to what the next year holds for the company.

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Asset Sales and Debt Reduction

With Freeport-McMoRan’s credit rating under pressure at the beginning of the year, debt reduction became a priority for the company. [1] Aided by proceeds from a string of asset sales, the company has made considerable progress on debt reduction, as illustrated by the table shown below.

FCX Debt Reduction 2016

Freeport sold off a 13% stake in its Morenci copper mine in Arizona in the first half of the year. In addition, the company sold off its African copper mining operations and Deepwater Gulf Of Mexico oil and gas assets in the fourth quarter of 2016. [2] The company also announced the sale of its Onshore California oil and gas assets earlier in the year and expects to complete the sale soon. The completion of these asset sales will help Freeport further reduce its outstanding debt towards the end of the year.

Improved Copper and Oil Pricing Environment

Copper prices have improved significantly since the U.S. presidential election held in November, as illustrated by the chart shown below.

Copper Prices Since Election

(Copper Spot Prices, Source: LME)

President-elect Trump has outlined plans for a $1 trillion revamp of domestic infrastructure. [3] This has raised the outlook for U.S. copper demand over the next few years, translating into higher prices. An increase in copper prices after several continuous years of decline in average prices will provide a far more conducive business environment for Freeport’s mining operations next year. Apart from an increase in copper prices, a recent production cut by OPEC has boosted the outlook for oil prices as well. [4] This will benefit the company’s oil and gas operations going forward.

The improvement in copper and oil prices will allow Freeport to realize higher operating cash flows and accelerate its debt reduction efforts next year. The improvement in business conditions as a result of higher commodity prices and a lower debt burden are reflected in the rise in Freeport’s stock price this year. Thus, Freeport is expected to close out the year 2016 in far better shape than it was at the beginning of the year.

Have more questions about Freeport-McMoRan? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Freeport-McMoRan

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Notes:

  1. Moody’s downgrades FCX’s ratings, assigns B1 CFR; outlook negative, Moody’s []
  2. Freeport-McMoRan Completes Sale Of Deepwater Gulf Of Mexico Properties, Freeport-McMoRan News Release []
  3. Trump’s $1 Trillion Promise vs. Congress, Wall Street Journal []
  4. OPEC Confounds Skeptics, Agrees to First Oil Cuts in 8 Years, Bloomberg []