How Freeport-McMoRan Plans to Achieve Cash Break-Even in 2016



Cash break-even

Freeport-McMoRan (FCX) and Teck Resources (TCK) reported net losses in 4Q15 on a GAAP (generally accepted accounting principles) basis on massive asset write-downs. However, looking at the current challenging situation, markets are more interested in cash flow than GAAP earnings.

Generating negative free cash flow could lead to cash burn. As a result, companies may have to borrow to fund their deficits. Most copper companies are already grappling with rising debt piles. Negative free cash flows would only make things worse. In this part of the series, we’ll look at some copper producers’ 4Q15 cash flows and 2016 guidances.

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Negative free cash flows

Teck Resources generated negative free cash flow of $21 million in 4Q15. Overall, in 2015, Teck Resources’ operating cash flow fell $293 million short of its investing cash flow. Southern Copper (SCCO) also burnt $270 million cash in 2015, including a cash burn of $241 million in 4Q15.

Freeport-McMoRan’s operating cash flow fell short of its investing cash flow by a whopping $3 billion in 2015. However, Freeport managed to save the day by raising $2 billion through an at-the-market equity offering. In 4Q15, Freeport-McMoRan generated negative free cash flow of $686 million. The company ended the quarter with cash and cash equivalents of $224 million, which was low in relation to its scale of operations. Freeport has been generating negative free cash flow for the last several quarters.

Meanwhile, Freeport has given a cash flow break even guidance for 2016. This is driven by lower capital expenditure in the energy business and the expected fall in copper unit production costs.

However, to reduce their surging debt burdens, copper producers must look at means other than their operating cash flows. In the next part, we’ll explore how different copper producers plan to cut their debt levels this year.

You can consider the SPDR S&P Global Natural Resources ETF (GNR) to gain diversified exposure to international natural resources companies. BHP Billiton (BHP) forms ~4.4 % of GNR’s portfolio.


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