Freeport-McMoRan to run lean in 2009

Vancouver – Freeport-McMoRan Copper & Gold (FCX-N) is making deep cuts to capital expenditures, nixing its dividend and lowering copper output by 5% in 2009 and by 11% in 2010. Freeport made the moves to help buffer it against the recent dive in copper and molybdenum prices. All told cost-cutting measures will save Freeport 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 says 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 a 50% cut to its mining rate.

 

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.

 

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

 

Of all its operations around the globe 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. That compares to South American cash costs 75% of which Freeport forecasts to fall below US$1.25-per-lb. copper in 2009.

 

Bill Collier, Freeport vice president of communications, can’t say at this point 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 says in an e-mail. 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 expenditures 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 had announced suspension of its Climax molybdenum project near Leadville, Colorado, 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 sulfide 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 nets Freeport savings of 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, 30-million-lbs. copper a year expansion.

 

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

 

The fourth major project seeing changes is Freeport’s Tenke Fungurume copper and cobalt mine in Katanga province, Democratic Republic of Congo, that is 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 says. But “to demobilize would have been expensive and we’re nearing completion.”

 

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

 

Share holders 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 says, “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-per-lb. molybdenum and US$750-per-oz. 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 reserves Adkerson says it can dip into its US$1.5 billion revolving credit facility.

 

As for debt he notes 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 says he sees Freeport “living within our debt structure”.

 

Though he adds, “We are constantly monitoring the capital markets to see if there are opportunities to do an attractive financing.” At the moment, however, he says such opportunities are scarce.

 

Adkerson also says 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.