Interest coverage ratio
Earlier in this series, we explored different copper miners’ net debts. Along with absolute debt levels, it’s pertinent to look at other leverage metrics, especially those that are relative to earnings.
In this article, we’ll look at different copper producers’ interest coverage ratios. An interest coverage ratio is a company’s EBITDA (earnings before interest, tax, depreciation, and amortization) divided by its interest expenses. The interest coverage ratio measures a company’s ability to make interest payments.
Freeport-McMoRan (FCX) has an interest coverage ratio of 9.2x based on its expected 2017 EBITDA. The company’s interest coverage ratio has improved significantly for two key reasons. First, Freeport, like most other miners, cut its debt levels last year, reducing its interest outgo. Second, Freeport’s 2017 EBITDA is expected to be higher than it was in 2016 due to higher commodity prices.
Most other copper miners have also seen improvements in their interest coverage ratios for the reasons mentioned above. However, FCX’s interest coverage ratio is still the lowest compared to the other companies we’re analyzing. Southern Copper (SCCO) has the second-lowest interest coverage ratio among our copper producers under review (RIO) (BHP).
Anglo American has a high interest coverage ratio of 29x based on its estimated 2017 EBITDA. Rio Tinto (RIO) also looks quite comfortable with an interest coverage ratio of 23x.
Thanks to improved commodity markets and successful debt reduction, some miners now seem to be chasing growth. Glencore (GLNCY) has also reinstated its annual dividend, though Freeport has yet to make a call on reinstating its dividend program. You can read Is Freeport-McMoRan’s Survival Crisis Over? to find out whether the company is out of the woods.
You can also visit Market Realist’s Copper page for ongoing updates on the industry.