Tuesday, 15 March 2016 00:00

Freeport-McMoRan: Liquidity Analysis And Implications

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Analysis Overview - Freeport-McMoRan (NYSE: FCX) has surged by 167% in the last two months and the rally can sustain if the company is successful in its deleveraging initiative through sale of assets. This article analyzes the potential cash inflow and outflow for the next 24 months to conclude that there are reasons to remain bullish on Freeport-McMoRan.

The chart below is an initial estimate on the company’s potential cash inflow and outflow for 2016 and 2017.

Freeport-MacMoRan Liquidity Analysis 2016 And 2017

The following estimates and assumptions are used in the analysis –

1) Freeport-McMoRan expects base case operating cash flow of $3.4 billion for 2016 and $3.5 billion for 2017. Therefore, the 24 month OCF estimate is $6.9 billion.

2) Freeport-McMoRan expects base case capital expenditure of $3.4 billion for 2016 and $2.3 billion for 2017. Therefore, the 24 month investment estimate is $5.7 billion.

3) Freeport-McMoRan has $649 million in debt maturity in 2016 and $1.8 billion in debt maturity in 2017. It is assumed that this debt is not refinanced.

4) Freeport-McMoRan has already sold 13% interest in Morenci Mine for cash consideration of $1.0 billion. The company has also agreed to offer (over time) 20.64% stake in PT-FI. Assuming the company’s valuation of $16 billion, the stake is likely to garner $3.3 billion. The estimate assumed $3.0 billion in proceeds and that the 20.64% stake is sold over the next 24 months.

Further, I have the following observations

1) Considering this outlook, Freeport-McMoRan is likely to close FY17 with liquidity of $2.9 billion. For 2018, the company has $3.4 billion in debt maturity and even if cash buffer of $1.0 billion is maintained, the company can potentially reduce debt by another $1.9 billion.

2) The company is evaluating alternatives for further asset sale or joint ventures in the copper and oil & gas segment. Therefore, over the next 24 months, the liquidity buffer can be meaningfully higher for significant debt reduction. Freeport-McMoRan is targeting $5 billion to $10 billion in debt reduction and that seems entirely likely over the next 24 months.

Cautiously Optimistic

Copper has been trending higher and oil has also gained some positive momentum in the recent past. There are several implications of relatively higher oil and copper prices –

First, the asset sale can come at a better than expected price if the upside for commodities and energy sustains.

Second, cash flow of $3.4 billion for 2016 and $3.5 billion for 2017 can change significantly with 10 cents change in copper price likely to have an impact of $550 million on the company’s EBITDA. Therefore, if price recovery continues, the cash buffer can change for positive.

However, global economic activity remains a concern and it remains to be seen if the rally for copper and oil is sustainable. From an investment perspective, I believe that small exposure can be considered at these levels, but with the stock having surged 167% in two months, a 20% to 25% correction can’t be ruled out.

 

Recent Liquidity Analysis -

1) Marathon Oil Liquidity Analysis

2) Pioneer Natural Resources Liquidity Analysis

 

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