Freeport-McMoRan rejigs property portfolio as oil prices sink

VANCOUVER — It’s been a year of change for miner Freeport-McMoRan (NYSE: FCX) that has included a portfolio shuffle and renewed focus on a strong balance sheet and dividends. The company remains a big player in the copper and gold arena, but has also returned to its roots with more reliance on oil and gas assets.

Freeport has been involved in US$6.3 billion in natural resource deals this year, including the US$1.8-billion sale of the Candelaria-Ojos copper project to Lundin Mining (TSX: LUN; US-OTC: LUNCF) and the US$3.1-billion sale of the Eagle Ford Shale asset to Encana (TSX: ECA; NYSE: ECA). President and CEO Richard Adkerson recently presented at the Goldman Sachs Annual Global Metals & Mining Conference to provide some insight on Freeport’s strategy moving forward.

“The assets we sold were good assets. What characterized them from our perspective was the absence of the sort of growth opportunities that we see in the assets we’ve retained. For us, we were able to obtain reasonable values and take steps towards managing our balance sheet, which is a big objective of ours,” Adkerson said.

“When you live through weak commodity prices you want to preserve your liquidity and preserve your assets for long-term success. So we decided to respond by selling some assets that we hadn’t contemplated selling at the outset. We were not planning on selling Eagle Ford or Candelaria,” he added.

The influx of capital allowed Freeport to aquire Apache’s (NYSE: APA) interests in the deepwater Gulf of Mexico — including the Lucius and Heidelberg oil production development projects and 11 exploration leases — for US$1.4 billion.

Adkerson says there was “dissatisfaction by a number of investors with the oil and gas deals,” but believes the asset can add a lot of value. He reiterated that Freeport is positive on its long-term copper business, and that emphasis hasn’t changed.

“We are so optimistic about the long-term future of copper prices. Supply is constrained by geology, by environmental concerns, community issues, government issues and just physically where our new projects are located. People have to move underground in Chile and we have to move underground in Indonesia,” Adkerson said.

“That’s the two-edged sword in the copper business. One of the reasons the price outlook is so strong is because you can’t just turn on the supply tap. You have a do a hell of a lot of work to identify the resources, and how you’ll mine those orebodies,” he added.

Freeport’s capital investments reflect its reliance on the oil and gas business. Expenditures totalled $5.4 billion for the first nine months of 2014, including US$2 billion for major projects at mining operations and US$2.4 billion for oil and gas operations.

But a sudden and steep drop in crude oil prices may have the company rethinking its position. By early December West Texas Intermediate crude oil had hit a five-year low of US$66.15 per barrel.

On Dec. 3 Freeport announced it was reviewing capital expenditures and other costs in response to recent oil-price declines. The review reportedly evaluates opportunities to reduce or defer expenditures and potential partnership arrangements.

BMO Capital Markets analyst David Gagliano noted that the move “is not entirely surprising, but in our opinion, should alleviate recent investor concerns regarding Freeport’s balance sheet and dividend … despite the decline in both oil and copper prices, Freeport has ample liquidity and flexibility in its capital spending plans to more than cover its dividend through 2015, with 2016 volume growth serving as an additional buffer.”

Gagliano has a “market perform” rating on Freeport along with a US$35 price target. He adds that the rating is due to “near-term headwinds/valuation,” but the company “represents one of the most compelling longer-term (2017 and beyond) free cash flow-growth stories in U.S. metals and mining.”

Meanwhile, Scotiabank analyst Orest Wowkodaw dropped his price target on Freeport by US$2 to US$41 on Dec. 4 due to a lower oil-price forecast. But Wowkodaw has a “sector outperform” rating on the company and noted it has an “impressive near- to medium-term growth profile, very attractive relative valuation, robust dividend yield and manageable debt load.”

During the first nine months of 2014 Freeport cranked out 2.9 billion lb. copper at by-product cash costs of US$1.52 per lb., while gold production during the period totalled 871,000 oz. The company reported sales of 44.7 million barrels of oil equivalent, which is a jump from the 21.5 million reported during the first nine months of 2013.

Net income attributable to Freeport’s stock for the first nine months of 2014 totalled US$1.5 billion, or US$1.47 per share, compared with US$2 billion, or US$1.96 per share, during the comparable period last year. At the end of September the company reported a US$658-million cash position and US$19.7 billion in debt.

The company aims to produce in excess of 5 billion lb. copper by 2016, which would represent a 34% increase over three years. Freeport’s strategy focuses on exploration and development at its brownfield sites, including: a US$1.6-billion mill expansion at its Morenci mine in Arizona, a US$4.6-billion mill expansion at its Cerro Verde mine in Peru and ongoing underground development at its $2.8-billion Grasberg copper-gold complex in Indonesia.

The company has traded within a 52-week window of US$25.45 to US$39.32, and closed at US$26.43 per share at press time. Freeport has 1 billion shares outstanding for a US$27-billion market capitalization.