Freeport-McMoRan (NYSE:FCX) just cut its dividend by more than 80%. That adds insult to the injury of a roughly 50% share price decline since July of last year. At this point, you have to ask yourself if this stock is worth owning.
Isn't the copper market stabilizing?
Freeport's driving business is its copper production operation, which accounted for 60% of sales in 2014. While copper prices have fallen steadily since the middle of last year, helping to explain the precipitous drop in Freeport's shares, some industry watchers believe the market is starting to stabilize.
That said, a muted market response suggests the dividend cut wasn't a big surprise, even though there were hopes the distribution, and the roughly 6% dividend yield, might hold if copper's descent abated. The dividend cut expectation wasn't due to the fact that the miner lost over $1.30 a share last year.
The real problem boils down to cash flow. Freeport had operating cash flow of $5.6 billion in 2014 but spent $7.2 billion on capital projects. That was the first time since the start of the decade that capital expenditures outdistanced operating cash flow. The dividend just adds another drain on cash flow into the mix, last year eating up $1.3 billion of cash flow above and beyond the capital expenditures.
Another symptom of the problem showed up on the balance sheet. Cash on hand fell from nearly $2 billion at the start of 2014 to under $500 million by the end of the year. Clearly, the company wasn't on a sustainable path. Cutting the dividend should save Freeport roughly $1 billion a year as it also works to pull back on capital spending, trimming that budget by about $1.7 billion in 2016. It hopes to squeeze out another $500 million in savings from other parts of the business.
Not the only sore spot
So Freeport appears to be in survival mode. But the problem is deeper than one business segement. Copper isn't the only business in which Freeport operates -- oil made up roughly 20% of its revenue last year.
While copper prices might have found a bottom, oil has also plunged (with no bottom in site just yet). In fact, even if both products stabilize at recent levels, their prices are well below what this pair fetched in mid-2014. That's about 80% of Freeport's business that is doing more poorly. It thus makes sense the company is pulling back across the board, including drastically slashing its dividend, to ensure it can pay all its bills and invest in key projects for the future.
That's a good thing on the one hand, but there's been a lot of damage done if you are a shareholder. At this point, Freeport is a prime candidate for harvesting some tax losses. That said, there's reason to like the future for its two main commodities.
For example, Freeport expects copper demand to be 28% higher in a decade, while production from the world's current mines will fall by 17%. The difference will have to be made up by new mines, suggesting increasing demand could push prices higher over the next 10 years. On the oil side, the issue now appears to be oversupply. Pulling back on spending here to preserve resource value for the future when the supply/demand imbalance corrects makes sense. Most public companies in the industry are doing the same thing. The only problem is that past investment spending is keeping oil production in the United States high; meanwhile, OPEC, a key global player, doesn't appear willing to pull back its output.
A silver lining?
But this just highlights that in the near term, anyway, Freeport could be dead money. If you have large capital losses in Freeport the dividend cut has pretty much removed any reason for owning the shares at this time. You might consider selling them, locking in the loss, and buying them back in a month or so if you still like the long-term opportunity in copper and oil.
After all, the first quarter isn't likely to provide much good news. And once you bought back in you'd, once again, have a stake in the long-term potential that Freeport offers. That said, if you don't think the future opportunity is going to materialize soon enough, you might be better off locking in the tax loss and looking for better options elsewhere.