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How Could Freeport’s Leverage Metrics Look in 2018?


Feb. 3 2017, Updated 10:36 a.m. ET

Freeport’s leverage metrics

Freeport-McMoRan (FCX) managed to cut its net debt by ~$8.4 billion in 2016. Other copper miners including Glencore (GLNCY) and Teck Resources (TCK) also managed to cut their debt levels through a series of transactions. 

Meanwhile, Freeport’s net debt levels could fall further this year. Let’s discuss this in perspective.

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2017 guidance

According to the slides shared by Freeport during its 4Q16 earnings call, its net debt should fall to $9.4 billion if copper prices average $2.25 per pound in 2017. However, if copper prices average $2.50 per pound in 2017, Freeport should end 2017 with net debt of $8.5 billion. To put these numbers in context, Freeport’s current market capitalization is ~$23 billion.

Freeport’s leverage metric will start to look even better in 2018 if copper prices sustain their recent gains.

Net debt-to-EBITDA

If copper prices average $2.5 per pound in 2017, Freeport will end the year with net debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) of 1.7x. This ratio is quite reasonable considering the mid-cycle leverage metrics of its mining peers (BHP) (RIO).

Freeport’s earnings may start to taper off starting in 2018, assuming current commodity prices remain steady. Freeport expects to mine higher ore grades at its Grasberg mine until 1Q18, which would have a positive impact on the company’s unit production costs over the period. 

Following this boost, we could see a rise in Freeport’s unit cash costs as its gold volumes fall. It would also be fair to assume that the unit costs at the Grasberg mine could rise after 2018. Underground mines are generally high-cost operations compared to mines above the ground.

Freeport’s Grasberg mine has been facing issues over the last couple of years. In the next article, we’ll discuss how these issues could impact the company’s 2017 guidance.


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