Freeport-McMoRan (FCX) has managed to cut its net debt by more than half over the last two years. It achieved that by exiting its energy assets and selling some of its copper assets. Freeport used its organic cash flows to strengthen its balance sheet. Other miners, including Teck Resources (TECK) and Glencore (GLEN-L), also have much-improved balance sheets now.
As of the end of 3Q17, Freeport had a net debt of $9.8 billion. Its net debt is expected to fall to $6.2 billion by the end of 2018 if copper prices average $3 per pound. That would mean a net debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) multiple of 0.8x. The leverage ratio looks pretty comfortable. But the number doesn’t account for any expected cash inflow from the Grasberg divestiture (RIO) (TRQ).
With improved leverage ratios and strong commodity prices, miners might have to take a fresh look at their capital allocation priorities. While Freeport sees debt reduction as its priority, it might also have to look at growth projects. With the expected divestment of Grasberg and falling grades at some of its other mines, Freeport might have to look at new opportunities to maintain its production profile. During its 3Q17 earnings call, Freeport listed several brownfield exploration opportunities at its American mines.
Freeport’s board of directors might take a favorable view of reinstating its annual dividend program that was suspended in 2015 in response to falling commodity prices. Glencore reinstated its dividend in 2016 when commodity prices rose sharply.
In the next and final part of this series, we’ll see how’re analysts are rating Freeport in 2018.