Is Freeport-McMoRan’s Energy Divestiture Good for Shareholders?



Shareholder interest

In the previous part of this series, we learned that the acquisition of energy assets put a lot of pressure on Freeport-McMoRan’s (FCX) leverage ratio. Now, with the energy assets likely to be transferred to a new entity, the company’s leverage ratios could fall. The toll that the energy business took on the company’s overall value, however, isn’t limited to Freeport’s leverage ratios.

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Freeport paid a premium for these acquisitions

Freeport-McMoRan paid a substantial premium two years ago when it acquired these energy assets. It acquired the exploration company for a cash-per-share consideration of $14.75. This was a premium of 74% over Freeport-McMoRan’s closing value on December 4, 2012, and a 31% premium over its one-month average price on that day.

As for the Plains Exploration Company, Freeport paid a premium of 39% over its December 4, 2012, closing value. This was a 42% premium over the company’s one-month average price. The chart above shows the details of these transactions.

Value destruction

Acquiring these energy assets has caused Freeport-McMoRan shareholder value to erode significantly. Since December 2012, Freeport’s share price has lost almost 50%. Its Wall Street performance has lagged that of other copper producers, including Southern Copper (SCCO) and Turquoise Hill Resources (TRQ), over the last couple of quarters.

Freeport-McMoRan reported an adjusted loss of 6 cents per share in 1Q 2015. It incurred charges of $2.3 billion after writing off the carrying value of its energy assets.

Freeport currently forms 4.1% of the SPDR S&P Metals and Mining ETF (XME) and 3.5% of the Materials Select Sector SPDR ETF (XLB).

One could argue that this is the right time to launch an initial public offering for the energy business. But has the company explored other options before deciding to divest its energy assets? We’ll discuss this in detail in the next part of the series.


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