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Is Freeport-McMoRan in a Sweet Spot despite Turmoil in Copper Markets?

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Aug. 25 2016, Updated 3:04 p.m. ET

Sweet spot

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

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

Lower debt levels would help FCX better endure the prolonged slump in the commodity markets. Other miners (GNR) are also trying to strengthen their balance sheets. While BHP Billiton (BHP) and Rio Tinto (RIO) have reduced their dividends, Glencore (GLNCY) has scrapped its dividend altogether.

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Gold and copper

As discussed in the previous part, higher gold volumes should help Freeport-McMoRan (FCX) tide over the turmoil in copper markets over the next few quarters. More gold production from the Grasberg mine could not have come at a better time for Freeport-McMoRan. After that, FCX investors could benefit from copper’s projected deficit. A deficit is defined as demand in excess of production.

Most analysts and miners are bullish on copper’s long-term fundamentals. Copper could be in a deficit by the end of the century. This would support copper prices as well as miners such as Freeport-McMoRan. Any increase in energy prices would be another medium- to long-term driver for FCX.

However, copper has lagged other industrial metals in 2016. You can read Why Copper Has Underperformed Other Metals This Year to explore the reasons behind copper’s underperformance.

You can also read Why Copper’s Fundamentals Are Different from Steel and Aluminum to learn about copper’s long-term outlook.

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