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Is Freeport-McMoRan’s 2016 Guidance a Little Ambitious?

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Freeport-McMoRan’s 2016 guidance

Freeport-McMoRan (FCX) expects to generate operating cash flows of $3.4 billion and mining EBITDA (earnings before interest, taxes, depreciation, and amortization) of $4.2 billion in 2016. Whether Freeport-McMoRan will be able to generate positive free cash flows in 2016 will ultimately boil down to commodity prices (DBB). The big question will be whether copper and energy prices have bottomed at these levels or whether there’s more downside ahead.

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Copper prices

Copper prices have been flirting around $2 per pound for quite some time now. However, in our view, there might be some more downside for copper prices. You can explore the outlook for copper prices in our series An Investor’s Guide to Freeport-McMoRan’s 2016 Outlook.

Meanwhile, unlike pure-play copper producers like Southern Copper (SCCO) and Turquoise Hill Resources (TRQ), Freeport investors also need to worry about the falling energy prices. Teck Resources (TCK) is also negatively impacted by falling energy prices due to the company’s exposure to coal.

Energy prices

The chart above shows the recent trend in Brent. Although prices are currently trading above the crucial $30 per barrel mark, further downside can’t be ruled out. Falling energy prices could not only negatively impact Freeport’s 2016 cash flow plans but also put the asset sales into limbo. Freeport-McMoRan is planning aggressive asset sales and other options to shore up its balance sheet, which we’ll explore in the final part of this series.

Any further decline in copper and energy prices could mean that Freeport would have to return to the drawing board to chalk out a fresh 2016 plan. The current guidance looks a bit ambitious looking at the downside risk to commodity prices.

Meanwhile, during the 4Q15 earnings call, Freeport tried to allay the biggest investor concern related to its huge debt burden. In the next part, we’ll discuss how Freeport plans to cut its debt by almost half—$10 billion.

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