Lower energy prices a negative for Freeport-McMoRan

In the previous part, we saw how lower copper prices negatively impact Freeport-McMoRan (FCX). Over the last couple of years, Freeport has become a major energy producer and thus impacted by lower energy prices.

Other copper producers also have energy assets. Teck Resources (TCK) has three oil sands projects in Alberta, Canada. Southern Copper Corp. (SCCO) has a portfolio of coal assets.

The above chart shows Freeport’s sensitivity to movement in prices of various commodities. Note that these are expected figures for 2015 and 2016.

As you can see, Freeport’s EBITDA (earnings before interest, taxes, depreciation, and amortization) is expected to fall by $190 million for every $5 per barrel fall in the price of Brent crude. Its operating cash flows are expected to fall by $150 million for every $5 per barrel fall in energy prices.

Freeport’s EBITDA is negatively impacted by $100 million for every $50 per ounce fall in gold prices. As we’ve already seen, Freeport produces gold from its mine in Indonesia. Gold prices have been quite volatile over the last few quarters. You can read more about the latest indicators of gold prices in our series What to watch for before investing in gold.

Newmont Mining (NEM) is the world’s second largest gold producer. It’s also a major producer of copper. It currently forms 2.33% of the Materials Select Sector SPDR (XLB).

Freeport’s earnings are also sensitive to molybdenum prices. Its EBITDA is negatively impacted by $100 million for every $1 per pound fall in molybdenum prices.

Freeport’s leverage has increased over the last couple of years since it borrowed heavily to invest in energy assets. Higher leverage ratio is generally regarded as a sign of a company’s riskiness. We’ll discuss Freeport’s leverage ratios more in the next part.