Freeport-McMoRan To Run Lean In 2009

Vancouver–Freeport-McMoRan Copper & Gold (FCX-n) is making deep cuts to capital spending, nixing its dividend and chopping copper production by 5% in 2009 and by 11% in 2010.

Freeport is making the moves to help buffer it against the recent dive in copper and molybdenum prices. All told, cost-cutting measures will save the company about US$2 billion in 2009.

“We certainly do not know how long the current economic turmoil will last,” Freeport president and CEO Richard Adkerson said in a conference call. “We’re just focused on how to respond to it.”

In terms of production, Freeport’s North American operations are the hardest hit. In New Mexico, Freeport is suspending mining and

milling at the Chino copper mine, about 20 km east of Silver City. The nearby Tyrone copper mine, about 16 km south of Silver City, will see its mining rate cut by 50%.

In Arizona, about 250 km east of Phoenix, Freeport will halve mining and stacking rates at the Stafford copper mine and at Morenci, North America’s largest open-pit mine about 75 km northeast of Safford, Freeport will cut mining and milling rates by a quarter.

Freeport expects sales from its North American mines will be 1.3 billion lbs. copper for 2009, 200 million lbs. lower than it had previously forecast.

Of all its operations, Freeport’s North American ones have the highest cash costs. Freeport estimates that cash costs for two thirds of its North American production in 2009 will come in somewhere between US$1.40 and US$1.60 per lb. copper. In comparison, 75% of the company’s South American cash costs are forecast to fall below US$1.25 per lb. copper in 2009.

Bill Collier, Freeport vice-president of communications, can’t say yet how many employees will be laid off as a result of the production cuts.

“It will be some time before we can estimate how many employees will be affected, although clearly it will be a substantial number,” Collier said in an email. He says the number is difficult to pin down while Freeport considers options such as early retirement and revised working hours for some employees.

In South America, where Freeport operates four copper mines, and Indonesia, where it operates the Grasberg mining complex, Freeport will not significantly cut production.

It is, however, slashing capital spending on projects on both American continents, Africa and in Indonesia. All told, Freeport will cut 50%, or US$1.2 billion, of previously planned 2009 capital expenditures.

Earlier in November, Freeport announced the suspension of its Climax molybdenum project near Leadville, Colo., where it has so far spent about US$500 million, for savings of US$285 million. Now Freeport is adding four more to the list of major projects that will see reduced spending.

In South America, Freeport has delayed construction of the El Abra mine, a sulphide deposit 60 km north of Calama, Chile, that was expected to start pumping out around 350 million lbs. copper a year starting in 2010. The move will save Freeport US$180 million in 2009.

At Cerro Verde, which produces roughly 700 million lbs. copper a year about 30 km southwest of Arequipa, Peru, Freeport is putting on hold a US$70-million expansion that would add 30 million lbs. copper a year.

As for cost-cutting measures at Grasberg, Freeport says it will save US$70 million by deferring capital spending on development of underground orebodies.

The fourth major project seeing changes is Freeport’s 58%-owned Tenke Fungurume copper and cobalt mine in Katanga province, Democratic Republic of the Congo, slated for production in late 2009. There, Freeport will defer spending to save around US$215 million.

“We had looked at the possibility of deferring it (completely),” Adkerson said. But “to demobilize would have been expensive and we’re nearing completion.”

He said copper production at Tenke will total about 300 million lbs. a year. It will also produce about 18 million lbs. cobalt a year. Total capital costs will run around US$1.8 billion.

Shareholders will not be spared either. Freeport will cancel its US$2- per-share dividend for a total savings in 2009 of about US$755 million.

“We’ve done that in the past at Freeport,” Adkerson said. “Other resource companies have to do that to preserve liquidity.”

Not surprisingly, Freeport also announced a substantial decrease in cash flow in 2009. Assuming US$1.75-per-lb. copper, US$10-perlb. molybdenum and US$750-peroz. gold, Freeport forecasts 2009 cash flow of US$2 billion, down US$1.4 billion from 2008.

Doubling gold production at Grasberg, however, will cushion lower copper cash flows. As it digs into higher grades at Grasberg, Freeport forecasts about 1 million more oz. gold produced in 2009 than in 2008.

If Freeport does need more cash, Adkerson said it could dip into its US$1.5-billion revolving credit facility.

As for debt, he noted that in 2007 it used cash flows derived from higher copper prices to pay off about US$10 billion in debt related to Freeport’s acquisition of Phelps Dodge in 2007.

Freeport has about US$7 billion in debt remaining, most of which does not mature until 2015. Over the next two years, Adkerson sees Freeport “living within our debt structure.”

Though he added: “We are constantly monitoring the capital markets to see if there are opportunities to do an attractive financing.”

At the moment, however, he said such opportunities are scarce.

Adkerson also said Freeport has “contingency plans if copper prices go lower.”

Freeport’s share price slid US$4.23 to close at US$17.59 on news of the cuts.