Image: Freeport.
Freeport-McMoRan (FCX 5.16%) is going through a major crisis in the commodities industry, with plunging price for crude oil, copper, and other commodities hitting its most recent second-quarter results hard. Nevertheless, even though the stock price has continued to fall, Freeport executives believe that the company is on track to recover once conditions in the commodity markets start to improve. Let's look more closely at what Freeport-McMoRan's leadership said in its most recent post-earnings conference call and the five key elements of the company's future.
"[W]e're looking at all alternatives. Asset sales is potentially one. Other alternatives will be dialing back some of our operations to reflect the economics of the current environment."-- CEO Richard Adkerson
Freeport-McMoran remains committed to ensuring that its two major business are each self-supporting from a cash-flow perspective, and the need for the oil and gas business to deal with plunging crude oil prices has forced Freeport to consider some draconian measures to strengthen its cash position. The company said it had filed a registration statement for an IPO of its oil and gas business in preparation for a possible future sale of part of its ownership of the company, but in response to questions about other measures it could take, Freeport CEO Richard Adkerson kept all options on the table. Hopefully, the company can pick the least disruptive options available.
"Our board is committed to balance sheet management, and we've got a strong track record of doing that both in good times and times with weak commodity prices. ... Our company is committed to returning cash to shareholders, but increasing volumes, declining capex, really enhance our credit metrics." -- Adkerson
Freeport-McMoRan disappointed many investors earlier this year when it slashed its dividend by 85%. Yet with so much pressure on its balance sheet, Freeport has to balance the needs of its shareholders against the benefits of keeping its internal finances as healthy as possible. By cutting the dividend, Freeport has been able to preserve valuable cash that allows the company to keep operating without raising as much capital through potentially dilutive equity offerings or through increases in its already substantial debt. Freeport can only buy so much time with these measures, but that time could well be enough to last through the downward phase of this commodity cycle.
"[W]e have positive things to report. Our Morenci project, which is an important project for us, is operating at full rates. Our Cerro Verde project in Peru is progressing very well. ... We've had improved operations at Grasberg, our mining rate, our recoveries." -- Adkerson
In a low-price environment, the key to success for mining companies is to become as efficient as possible. Freeport is working hard to maximize the value of its main assets, with key successes in making the most of its copper production. Falling copper prices have only made things harder on Freeport, but as a low-cost producer, the company is better able than most to weather the downturn. In time, challenges throughout the industry could leave Freeport in a better long-term position to pick up the pieces and reap rewards from an eventual recovery.
"[W]e focused on low-risk drilling and tieback opportunities. ... We've been 10 for 10 as very successful wells since 2014. ... [O]ur cash operating margin is one of the industry's leading [figures] because our cost structure is low, [and] it continues to trend lower." -- Oil & Gas CEO Jim Flores
The oil and gas division still makes many Freeport investors feel like the company's acquisition of its energy units was a huge mistake. Yet from an operational standpoint, Freeport has reaped some solid successes from the energy business. Again, low costs probably won't be enough if still lower prices for crude oil last for years into the future. But a nearer-term turnaround could highlight the value of Freeport's low cost structure and prudent moves to manage risk as much as possible.
"None of us want to sell equity at this stock price. I mean, that's not something that any of us, as shareholders -- and as you know, we're all shareholders -- would want to do. Ultimately, the board's going to protect the balance sheet." -- Adkerson
Whether you look at an oil-and-gas unit IPO or selling regular shares of Freeport, shareholders and executives agree that now is far from an ideal time to consider raising capital. Adkerson's comments make it clear that while the company will do what it needs to do to survive, it will still keep shareholders' interests in mind as it acts.
Freeport-McMoRan has gone through a tough time, and things could remain difficult for quite a while longer. Still, Freeport executives believe they can make it through to an eventual recovery, and they're taking the moves they can to get there.
