Asset Sales Still in Play to Add Value for Freeport Shareholders



Asset sales

Asset sales and debt reduction have been key drivers of Freeport-McMoRan’s (FCX) 2016 performance. The company has announced asset sales of ~$4.5 billion this year. Now, as market conditions have improved somewhat, Freeport looks comfortable with its current debt levels.

Richard Adkerson, Freeport’s CEO, said during the company’s 2Q16 earnings call that it could “see the way forward, without further asset sales, without further equity sales.” However, he didn’t rule out more asset sales if they add shareholder value.

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Debt reduction

Notably, as commodity prices (DBC) have improved, and Freeport has cut down on its capital expenditure program, the company is looking to generate free cash flow in the coming quarters. Freeport expects its net debt to fall to $13.2 billion by 2017’s end, even if copper prices average $2 per pound over the period.

The company’s net debt is expected to fall to $11.8 billion if copper averages $2.25 per pound. Freeport has assumed gold’s price to be $1,300 per ounce in arriving at this figure. For oil, Freeport has made an assumption of $48 per barrel in 2H16 and $50 per barrel in 2017.

During its 2Q16 earnings call, Freeport announced an at-the-money (or ATM) equity offering of $1.5 billion. The company’s debt guidance doesn’t account for the proceeds from the proposed equity offering.

Things look comfortable

Looking at its guidance, Freeport’s debt levels could start to look quite comfortable by the end of next year. Furthermore, by saving its assets for better days, Freeport could add value for its investors when the commodity cycle turns around.

Note that while most other industrial metals are oversupplied, copper is expected to be in a deficit by the turn of the century. No wonder diversified miners such as BHP Billiton (BHP) and Rio Tinto (RIO) (TRQ) are looking at organic as well as inorganic opportunities in copper.

In the next and final part of the series, we’ll see how the Market is valuing Freeport following its 2Q16 earnings release.


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