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Capex Cut Could Help Improve Freeport-McMoRan’s Balance Sheet

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Freeport-McMoRan’s balance sheet

Freeport-McMoRan (FCX) announced capital expenditure (or capex) cuts in response to the challenging commodities environment. Interestingly, the capex cut announcement came hours before the disclosure of Carl Icahn’s 8.5% stake in the company. We’ll discuss the implications of Carl Icahn buying a stake in Freeport later in this series.

Before we get to that, let’s explore how these capex cuts would help strengthen Freeport’s balance sheet.

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Freeport’s debt levels

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.

The above graph shows Freeport’s net debt over the last few quarters. In 2Q15, its net debt went up by $673 million and reached $20.43 billion. It ended the quarter with total cash of $466 million.

Compared to other copper producers, such as Southern Copper (SCCO) and Teck Resources (TCK), Freeport’s leverage ratios are on the higher side.

Currently, Freeport forms 2.13% of the Materials Select Sector SPDR ETF (XLB) and 2.97% of the SPDR S&P Metals and Mining ETF (XME).

Freeport was planning to reduce its debt levels. However, lower commodity prices have changed the equation. It has had to defer its debt reduction targets since commodity prices fell. It also had to slash its dividends by more than 80% in a bid to reduce cash outflows.

Would capex cuts boost the balance sheet?

Freeport has slashed its 2016 capex budget to $4 billion. The capex budget for the current year remains unchanged at $6.3 billion. In its 2Q15 earnings presentation, Freeport gave a guidance of $3.6 billion operating cash flows for the fiscal year 2015. The guidance assumed average copper prices of $2.5 per pound for the remainder of the year. Freeport had also assumed average Brent crude oil prices at $56 per barrel over this period.

As things stand today, prices of both these commodities are much less than what Freeport assumed in its 2015 operating cash flow guidance.

What would this mean for Freeport-McMoRan? We’ll find out in the next part of our series.

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