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Why Freeport’s debt levels surged post acquisitions

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Freeport’s debt

In 2013, Freeport-McMoRan (FCX) acquired Plains Exploration & Production Company for $16.2 billion. It was a major investment by Freeport in energy assets.

Freeport also acquired Moran Exploration Company for $2.2 billion the same year. In this part, we’ll see how Freeport’s debt levels have surged post acquisitions.

Analysts closely watch leverage ratios of companies in the metals and mining space. Rio Tinto (RIO) and Vale S.A. (VALE) are among the major mining companies. The SPDR S&P Metals and Mining ETF (XME) seeks to build a diversified portfolio of these companies. Newmont Mining (NEM) currently forms 4.94% of XME.

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Rising net debt

The above graph shows how Freeport’s net debt has increased over the last few years. Net debt is total debt minus cash and cash equivalents. As you can see, Freeport’s net debt was negative in 4Q12. This basically means that the cash on Freeport’s balance sheet was more than its borrowings.

However, Freeport had to borrow heavily to acquire energy assets. This increased its debt levels in 2013, as you can see on the above graph. Freeport made these acquisitions when crude oil was trading at elevated levels. The energy business was expected to enhance Freeport’s earning capacity.

The energy business was expected to be self-funded over the long term. The business was expected to generate sufficient cash flows to meet its capital expenditure needs. However, crude oil prices crashed by 50% in the last couple of months.

Deleveraging

Freeport was planning to reduce its debt levels. However, lower crude oil prices changed the equation. But how is Freeport reacting to lower energy prices? We’ll find out in the next part.

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