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Will Freeport-McMoRan’s Growth Projects Pay Off?

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Jul. 30 2015, Updated 9:05 a.m. ET

Freeport-McMoRan’s debt situation

Previously, we looked at Freeport-McMoRan’s (FCX) precarious debt situation. The company has generated negative free cash flow for five consecutive quarters. The negative free cash flows are partially due to falling commodity prices, which have negatively impacted Freeport’s earnings.

Another factor contributing to Freeport’s negative free cash flow is the massive capital expenditure (capex) Freeport is incurring.

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Capital expenditure

The above graph shows Freeport’s capex over the last few quarters. Freeport has reduced its capex budget for 2015, but it’s still quite substantial. Freeport has a capex budget of $6.3 billion in 2015. It expects to spend $3.5 billion on mining projects and $2.8 billion in the oil and gas business.

Major growth projects

Expansion of the Cerro Verde mill is a major growth project Freeport is pursuing. Freeport owns a 53.56% stake in Cerro Verde, which is located in Peru (ILF). The total project cost for this expansion is $4.6 billion. Freeport has already incurred $3.9 billion in costs.

The Cerro Verde project, which is ~87% complete, is expected to come online later in 2015. It’s expected to become the world’s largest copper concentration capacity. Freeport expects incremental annual production of 600 million pounds of copper and 15 million pounds of molybdenum after the completion of the project.

Freeport is also expected to invest $15 billion in its Grasberg mine in Indonesia (EIDO). However, this will only happen if Freeport is able to sign a long-term agreement with the Indonesian government. Rio Tinto (RIO) is Freeport’s partner in the Grasberg mine.

Newmont Mining (NEM) and Freeport are the leading copper producers in Indonesia.

In the next part, we’ll look at Freeport’s oil and gas projects.

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