Interest coverage ratio
In this part of our series, we’ll look at different copper miners’ interest coverage ratios. We can define interest coverage ratios as a company’s EBIT (earnings before interest and tax) divided by its interest expenses. The ratio measures a company’s ability to make interest payments. A higher ratio is associated with lower financial leverage.
Freeport-McMoRan (FCX) has a trailing interest coverage ratio of 4.4x while the ratio is 11.8x, based on its 2018 consensus EBIT. Southern Copper’s (SCCO) interest coverage ratio is 12.3x, based on its fiscal 2018 consensus EBIT. As you can see, there’s a wide difference between Freeport’s trailing and forward interest coverage ratio, which could be due to lower absolute debt levels in 2018 compared to last year.
Secondly, 2018 could be an aberration year for Freeport, as its earnings are expected to be higher than the previous years, led by low-cost production at its Grasberg mine, which is nearing the completion of its open pit operations. See What Makes Grasberg the Crown Jewel of Freeport’s Portfolio to find out why Grasberg, where Rio Tinto (RIO) is Freeport’s partner, is a strategic asset for the company. First Quantum (FM) has a trailing interest coverage of 7.2x while Glencore’s (GLEN-L) interest coverage is 9.0x, based on its 2018 expected earnings.
Meanwhile, along with the interest coverage ratio, we should also look at the progression of net debt. In the next part of this series, we’ll see which copper miners managed to bring down their debt levels last year.