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Is Freeport-McMoRan’s Free Cash Flow Sustainable?


Aug. 8 2016, Updated 3:04 p.m. ET

Free cash flows

Freeport-McMoRan (FCX) posted a net loss in 2Q16 due to the write-off of its energy assets. However, looking at the current challenging situation, the Market (VTV) is more interested in cash flows.

Generating negative free cash flow could lead to cash burn. As a result, companies may have to borrow to fund their deficits. Negative free cash flow will only make things worse for Freeport.

Freeport is already grappling with a huge debt pile, some of which it’s now trying to cut by selling its copper mines. Other miners such as Glencore (GLNCY) and Teck Resources (TCK) are also selling their noncore assets to survive the prolonged slowdown in commodity prices.

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Positive free cash flow

Freeport generated operating cash flow of $874 million in 2Q16, while its capital expenditure (or capex) was $833 million in the quarter. Freeport managed to generate free cash flow of $41 million in the quarter. Higher commodity prices and capex curtailments announced in 2015 helped Freeport to achieve this positive free cash flow. Notably, 2Q16 was the first time since 3Q14 that Freeport had managed to generate positive free cash flow.

The company looks optimistic about generating positive free cash flow in the coming quarters, as its capex is expected to fall further. Freeport expects its capex to be $3.1 billion in 2016 and $2.3 billion in 2017. To put this in context, the company’s capex last year was $6.4 billion.

Lower capex coupled with improvements in commodity prices should help Freeport’s balance sheet. We’ll explore this more in the next part of the series.

You can also consider the Materials Select Sector SPDR ETF (XLB) to get diversified exposure to the materials sector. Together, Freeport and Newmont Mining (NEM) form ~7.4% of XLB’s portfolio.


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