The Fed’s actions
The metals and mining industry is capital-intensive by nature. Companies have to borrow money to invest in plants and new mines. Note that making interest payments is a contractual liability, unlike dividends, which a company can change.
Freeport-McMoRan has addressed some of the issues related to its stretched balance sheet by selling some of its copper and energy assets. The company expects its net debt to fall to $10.7 billion by 2017’s end, even if copper prices average $2.0 per pound.
Freeport’s balance sheet looks like it’s in much better shape today than it was 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).
Impact on gold prices
Although copper is the key driver of Freeport-McMoRan’s earnings, the company’s earnings should get a leg up in the next few quarters due to higher gold (GDX) volumes from its Grasberg mine. While a rate hike is generally negative for all commodities including copper, gold is particularly impacted by interest rates. As a non-interest bearing asset, gold usually sees a price fall if interest rates rise, and vice versa.
To sum it up, a rate hike would be negative for Freeport as well as the broader mining industry. Though not many market observers expect a rate hike in November, the November meeting could offer insight into a possible rate hike in December.
Another market-moving event for Freeport’s investors could be the US presidential election. We’ll discuss this more in the next article.