Falling commodity prices
In Freeport-McMoRan’s (FCX) 2Q15 earnings conference call, CEO (chief executive officer) Richard Adkerson remarked that “all options are on the table,” given the falling commodity prices. In this part of the series, we’ll explore what strategic alternatives Freeport might have under the present market scenario. Currently, Freeport forms 2.8% of the Materials Select Sector SPDR ETF (XLB) and 3.98% of the SPDR S&P Metals and Mining ETF (XME).
The above graph shows the recent correction in copper prices. Copper is testing its six-year lows. This has had a negative impact on the share price of all copper producers, including Southern Copper (SCCO) and Teck Resources (TCK).
Freeport’s share price is currently trading near its eight-year low. Freeport might not go for an equity issuance right now, as it could mean value destruction for Freeport investors. However, an equity issuance of Freeport’s Indonesian operations might be a possibility. Under its agreement with the Indonesian government, Freeport has to divest 30% stake in Indonesian mines to the Indonesian government or its citizens.
Asset sales could be another strategic option for Freeport. However, looking at the current market scenario, any company looking to sell commodity assets would have to settle for a lower price. Earlier, Freeport shelved its asset sales program, as it has not been able to strike deals at the expected price.
Freeport hinted at curtailing some high-cost mines as it did in 2008. Curtailing high-cost mines helps companies improve their competitive positioning on the global cost curve. Aluminum companies, including Alcoa, have shelved several of their high-cost smelters over the last couple of years.
What’s Freeport’s outlook under the current market scenario? We’ll explore this in the next part of this series.