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Possibilities for Freeport-McMoRan’s Leverage Ratios

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Freeport-McMoRan’s leverage ratios

As commodity prices have been weak for quite some time now, mining companies including Vale (VALE), BHP Billiton (BHP), and Rio Tinto (RIO) have shelved some of their capital expenditure in a bid to strengthen their balance sheets.

Together, BHP and RIO form ~6.7% of the SPDR S&P Global Natural Resources ETF (GNR).

Freeport-McMoRan (FCX) has also slashed its 2016 capital expenditure budget while announcing reductions in unit production costs. Most of the cost reductions would be achieved through curtailing high-cost mines as well as tailwinds from lower energy prices. Freeport expects unit copper cash costs to average $1.15 per pound in 2016—a 24% reduction from the current year.

However, its leverage ratios could rise further in the next couple of quarters. Let’s explore this in detail.

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Freeport-McMoRan’s leverage ratios could rise further

The chart above shows the 2015 outlook as highlighted by Freeport in a recent new release. Freeport now expects to generate operating cash flows of $3.1 billion in the fiscal year 2015.

Freeport has arrived at this estimate “assuming average prices of $2.25 per pound of copper, $1,150 per ounce of gold and $6 per pound of molybdenum and recent futures prices of $50 per barrel of Brent crude for the second half of 2015.”

Freeport-McMoRan might not be free-cash-flow positive in fiscal year 2015. Its expected operating cash flows of $3.1 billion and capex of $6.3 billion leave a funding gap of $3.2 billion.

Freeport plans to fund this gap with existing bank loan facilities as well as the expected IPO (initial public offering) of its energy business.

Taking on more debt would further strain Freeport’s already strained balance sheet. However, the company expects its balance sheet to improve significantly in 2016. We’ll discuss Freeport’s 2016 guidance in the next part of this series.

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