Freeport-McMoRan Isn’t Done Reshuffling its Portfolio Just Yet

Photo credit: Apache.  

The Wall Street Journal reported last week that Freeport-McMoRan (NYSE: FCX  ) is looking to sell its Candelaria copper mine in Chile for several billion dollars. This would mark the company's third deal in 2014 to reshuffle its portfolio, after selling its Eagle Ford shale assets to Encana (NYSE: ECA  ) and then acquiring assets in the Gulf of Mexico from Apache (NYSE: APA  ) . With several copper growth projects in the works, and a mound of debt, Freeport-McMoRan can certainly afford to part with the mine.

Digging into Candelaria
The Candelaria copper mine is one of the company's largest mines. Last year it produced 370 million pounds of copper and 87,000 ounces of gold. However, Freeport does not see the site as one of its top world-scale mines -- the five mines it sees as having the potential to produce 1 billion pounds of copper per year, per the following slide.

Source: Freeport-McMoRan Investor Presentation (link opens a PDF).

The company instead sees investments in its Cerro Verde mine adding 600 million pounds of annual copper capacity when expansion is complete in 2016. Likewise, the expansion of the Morenci mine is expected to add 225 million pounds of annual copper capacity when it is complete this year. The company intends to add 1 billion pounds of annual copper production capacity by 2016, which represents a 37% increase in capacity from 2012. Cashing in on the recently expanded Candelaria mine makes sense given all the capacity the company is adding elsewhere.

Drilling down into the recent reshuffle
Freeport-McMoRan's top priority now is to reduce its debt after making big energy acquisitions last year. The company's total debt stands at just over $20 billion, but it wants to reduce that to $12 billion by 2016. The company took its first steps to shave off a bit of debt by selling its Eagle Ford shale assets to Encana for $3.1 billion while only paying $1.4 billion to Apache for some Gulf of Mexico assets.

Photo credit: Copyright © Encana. All rights reserved.  

These deals also contributed to Freeport's goal of establishing portfolio of assets that generate large-scale, predictable growth. That wasn't really possible in the Eagle Ford shale, where wells decline very rapidly and forced the company to invest a lot of capital just to maintain production. Freeport-McMoRan was loathe to do this given its debt load. The assets were a perfect fit for a shale-focused company like Encana, while production from Freeport's newly acquired Gulf of Mexico projects have a much more stable production profile and fit in far better in its portfolio.

The recently expanded Candelaria mine also does not have the predictable growth that Freeport wants. Furthermore, growth is limited by issues with water access. For a company with five other mines each capable of growing production to 1 billion pounds per year, Candelaria can instead be monetized while at peak value. Freeport-McMoRan can then use the cash to pay down debt and invest in growth projects.

Investor takeaway
Freeport-McMoRan is likely to continue tinkering with its portfolio with two goals in mind. Not only does the company want to reduce its debt to a more comfortable level, it also wants to own assets that will drive predictable growth. That's why we're likely to see the company continue to part ways with assets that don't fit the profile while adding resources that do

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