Freeport-McMoRan on a broad cost-cutting spree

VANCOUVER — Freeport-McMoRan (NYSE: FCX) has been carrying out business-wide spending cuts that it calls an “aggressive response” to weak market conditions.

On Aug. 27 the company said it would reduce its mining capital budget by 25% next year and cut 10% of its U.S. mine staff, as it attempts to weather a sharp slump in copper prices.

Freeport has committed to a number of measures to meet its spending goals, including: a US$700-million reduction in mining capital expenditures in 2016; 20% year-on-year slash in operating cash costs to US$1.15 per lb.; US$50-million cut in exploration expenses; and reduced copper and molybdenum production through 2017.

Copper prices on the London Metal Exchange averaged US$3.11 per lb. last year, but dropped to an average of US$2.69 per lb. over the first half of 2015. Concerns over the health of China’s economy have led to more drops for the red metal, with copper prices sitting near a six-year low of US$2.30 per lb. at press time.

Freeport’s most recent move culminates seven months of capital slash-and-burn, with the company’s annual budget dropping from US$7.5 billion to US$6.3 billion. Freeport has cut annual capital expenditures by US$700 million in its oil and gas business and US$500 million in its mining segment. The company expects to spend even less next year, with the annual budget dropping to US$4 billion.

Freeport’s revised plans involve material reductions in mining rates at its North American operations to lower operating and capital costs. The company will suspend mining at its Miami mine in Arizona, and cut throughput rates by 50% at its Tyrone operation in New Mexico. Freeport figures the move will drop annual copper production by 150 million lb. over the next two years.

Chairman James R. Moffett and CEO James Flores stated that  steps are being taken to “strengthen [the company’s] financial position during a period of weak and uncertain market conditions, and preserve its large resource base for improved future market conditions.” Freeport reportedly remains bullish on copper over the longer term due to limitations in supplies and consistent worldwide demand.

The future of Freeport’s energy arm remains uncertain following an announcement that it was considering an initial public offering of a minority stake in its oil-and-gas division. The company picked up Plains Exploration & Production and McMoRan Exploration for a combined US$9 billion in 2013 in a bid to diversify away from base metals.

Freeport plans to fund its US$6.3-billion annual expenditure budget through operating cash flows, amounts available under its US$1.8-billion Cerro Verde bank facility and borrowings under a US$4-billion bank credit facility. In addition, the company intends to raise US$1 billion in proceeds from a recently announced stock offering.

Freeport’s production guidance for the year remains unchanged at 4.2 billion lb. copper, 1.3 million oz. gold and 53 million barrels of oil equivalent (MMBOE). The company expects to produce 5.25 million lb. copper, 1.9 million oz. gold and 59.7 MMBOE in 2016.

Bank of America Merrill Lynch analysts Oscar Cabrera and Matthew Griffiths noted in an Aug. 27 research note that “while prudent operational and capital expenditure cuts have been taken, uncertainty on [the Grasbeg project’s future] and potential source of cash to fund [oil-and-gas development] keep us cautious.” Bank of America has an “underperform rating” on Freeport and a US$12-per-share price target, and expects the company’s free cash flow to be negative US$1.1 billion through the end of 2016.

Freeport shares have traded within a 52-week range of US$7.76 to US$36.65, and jumped nearly 30% on news of the cost cutting to US$10.19. The company has 1 billion shares outstanding.

At press time, Reuters reported the union representing Chilean copper mine workers is considering action against Freeport for dismissing 700 employees — or half the workforce — from its El Abra mine. The union said multinational corporations had enough profits to get through the period of low copper prices.