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Can a Fed Rate Hike Negatively Impact Freeport-McMoRan?

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Sep. 12 2016, Updated 1:04 p.m. ET

Fed rate hike

One of the factors driving miners’ recent downward price actions has been the growing fear of a rate hike before the end of the year. Some Fed officials have been hawkish in their stance, supporting the case for a rate hike. In this part of the series, we’ll see what a rate hike could mean for Freeport-McMoRan (FCX).

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Higher borrowing costs

The metals and mining industry is capital-intensive by nature. Companies have to borrow money to invest in plants and new mines. You should note that making interest payments is a contractual liability, unlike dividends that a company can change. Freeport-McMoRan, like other leveraged companies such as Teck Resources (TCK) and Glencore (GLNCY), is exposed to changes in interest rates.

Balance sheet issues

Freeport-McMoRan has addressed some of the issues related to its stretched balance sheet. It has announced asset sales totaling ~$4.5 billion this year. It’s worth noting that as commodity prices (DBB) 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. It expects its net debt to decline to $13.2 billion by the end of 2017, even if copper prices average $2 per pound over the period.

Freeport’s balance sheet looks like it’s in much better shape today than last year. Having said that, a rate hike would still be a negative for Freeport and other miners such as BHP Billiton (BHP) and Southern Copper (SCCO).

It’s important to note that the pro forma debt numbers mentioned above would eventually depend on commodity prices. In the rest of this series, we’ll look at the outlook for various commodities.

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