While copper and gold mining giant Freeport-McMoRan (FCX 0.83%) missed earnings estimates for the second quarter, the company's results were impressive enough to send its stock soaring. Fueling the bullish buying was a combination of making progress in resolving a dispute at its crown jewel Grasberg mine in Indonesia as well as impressive improvements in two crucial financial metrics. Here's a closer look at those numbers and what they might enable the company to do in the future.
Cash continues to flow into its coffers
One number that stood out in Freeport-McMoRan's first quarter report was operating cash flow, which hit $1 billion for the quarter. That's up from $800 million in the first quarter and puts the company on pace to generate $3.8 billion of cash flow for the full year, which would put it ahead of last year's $3.7 billion total.
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That said, what's even more impressive is the fact that Freeport-McMoRan only spent $362 million on capital expenditures during the quarter, which meant it generated more than $600 million of free cash flow. Further, given its current spending pace and cash flow projections, the company is on a trajectory to generate $2.2 billion of free cash flow this year, up from $900 million last year.
Net debt continues to drop
That free cash flow is driving a noticeable improvement in the company's balance sheet. As of the end of the first quarter, the company had $4.7 billion in cash against $15.4 billion of debt, or roughly $10.7 billion of net debt, which is down from $11.8 billion of net debt at the end of last year. What's even more dramatic is the improvement from the end of 2015, when it had $20.5 billion of net debt stemming from its unbelievably bad decision to buy two oil and gas businesses in 2012.
Given the company's current forecast, its net debt could be down to just $9.6 billion by the end of this year if copper averages $2.75 per pound the rest of the way. That represents a nearly 50% improvement in the company's balance sheet in just two years. Further, it would push the company's leverage ratio to a much more comfortable 1.8 times. While that's still well below Rio Tinto's (RIO 1.66%) industry-leading 0.7 times leverage ratio, it's a vast improvement from prior years and is getting closer in line with other rivals like BHP Billiton (BHP 2.55%), which has a 1.2 times leverage ratio.
Where these numbers might lead the company in the future
Freeport-McMoRan is starting to generate a significant amount of free cash flow, which is a huge shift for a company that was hemorrhaging cash just a few years ago. Add that in with the fact that its leverage ratio is getting closer to being in line with its peers, and the company might soon find itself in the position where it can start returning cash to shareholders, including potentially reinstating its dividend.
Doing so would put the company back on the radar of income investors, who have few compelling choices in the metals and mining sector these days other than Rio Tinto and BHP Billiton. While it's impossible to predict when the company might restart the payout or how much it might pay in the future, it's worth noting that both BHP Billiton and Rio Tinto set their current payout policies at 50% of cash flow from operations. A similar policy from Freeport would not only reward long-term investors, it could help the company close the value gap between its stock and the market.
