Miners such as Freeport-McMoRan (FCX), BHP Billiton (BHP), Teck Resources (TCK), and Southern Copper (SCCO) are impacted by the movement in interest rates. Because mining is a capital-intensive business, miners (XME) must borrow heavily to fund their expansion programs.
Meanwhile, Freeport appears to be more prepared to cope with rising interest rates than it was in 2015 when its net debt was ~$20 billion. As a result, a rate hike could still impact the company’s profitability.
Higher gold volumes
Freeport-McMoRan’s (FCX) gold volumes in fiscal 2017 are expected to rise to ~2.8 million ounces, compared to its expected volume of ~1.3 million ounces in fiscal 2016. Although copper is the key driver of Freeport-McMoRan’s earnings, its earnings could improve in the next few quarters due to higher gold volumes from the Grasberg mine.
Notably, while a rate hike is generally negative for all commodities, gold is particularly impacted by interest rates. As a non-interest bearing asset, gold prices usually fall if interest rates increase and vice versa.
Impact on earnings
Freeport-McMoRan’s earnings are sensitive to changes in gold prices. For instance, the company expects its 2017 EBITDA[1. earnings before interest, tax, depreciation, and amortization] to rise or fall by $130 million for every $50 per ounce increase or decrease in gold prices.
Gold prices have fallen significantly since Donald Trump’s election in November 2016. Lower gold prices could somewhat offset the positive impact from higher copper prices in Freeport’s 2017 earnings.
In addition to the influence by the Federal Reserve, Trump’s policies could have a significant impact on Freeport’s 2017 performance. We’ll discuss this more in the next article.